Accounting Company Analysis

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Executive Summary

The following is financial analysis comparing the most recent three years of data from communications company Verizon. The competitor to be compared is the most recent year of at&t. The most recent year will begin at 2010 and go as far as 2008.

This includes an analysis of both financial ratios and common size percentages. In the analysis for ratios will be included an analysis to compare industry averages. Verizon demonstrates to be favorable when comparing the competitor of at&t and the industry average in most categories. These two competitors lead in their industry of communications.

The ratios and common size statements can be found at the end of this analysis for comparison of numbers as an excel attachment.

Company Background

Verizon is a company that provides telecommunications services. The services include both voice and data networks. In the recent years the company has moved towards focusing on selling more data services such as netbooks, tablets and data cards to connect other Wi-Fi enabled devices. Amongst the voice services includes landline phone and cable where permitted. Verizon Employs over 85,000 employees nationwide and runs over 2,000 company operated stores. There are also telesales, Technical support and customer service departments nationwide in call centers. Basic company information can be found on Verizonwireless.com in the “About Us” section. The company prides itself in having “the nation’s most reliable network”. This statement is backed by many third party tests done every year. When it comes to consumer reviews, it is agreed that the company provides a reliable signal and in a real world environment they also have the fastest speeds. For the landline side, Verizon is recognized for quality in services for cable and internet. The company has adapted to the changing industry with the decline in home phone services requested in the consumer sector. In recent years Verizon purchased a spectrum referred to as LTE or Long Term Evolution. This new network is the next generation in technology to provide more reliability and faster speeds. It was purchased to have a competitive advantage upon its completion. It is set to cost one fifth to maintain compared to the current CDMA network. The data speeds are expected and have been tested to be ten times faster than the current network. The new LTE network has been launched in many markets already but is not expected to be complete until the year 2013. Operations and Products/Services

ACC222 EXTERNAL REPORTING II

The key products or services for Verizon are the data services for wireless, the cable and internet offered for communications and the landline phone services for the business sector. The competitor for Verizon is at&t. They compare the closest in the industry because both have a wireless sector and similar services for communications. Both companies have similar key services offered. Those same key services are the key managers for either company.

Both companies remain strong in the industry and compete highly. It is difficult for other competitors to do as well due to these two companies having both a wireless and landline sector. Every year they compete closely with the number of customers both companies have. In recent years Verizon purchased ALLTEL, which put them at a higher number of customers. In the past year at&t purchased T-mobile, making for now more customers than Verizon when the purchase is complete. At&t is already a combination of the old Cingular and at&t plus the landline sector. The purchase of ALLTEL had a smooth transition in combining into Verizon as far as employees, customers, billing systems and networks. The transition for T-mobile has not been determined since that process has not begun yet.

The purchase for at&t can be good through an increase in revenue. End of this year 2011 financial statements should give the debt ratio increase or decrease. This will also depend on the financial stability of the recently purchased T-mobile. It is yet to be determined how this purchase will affect them and if it will cast more to combine or keep separate. The financial stability of at&t will also show through their stock value, retained earnings, cash flows and net income after operating expense.

As of now Verizon has been known to be the leader in the industry for the quality of services they offer for both wireless and landline. They have a strong and reliable wireless network for both voice and data. Data is important for all wireless carriers because it is nearly all profit and cheaper to maintain on the network. The company expects to increase their net income in the near future based on the new technology they purchased. LTE will be completed first for Verizon and once completed it will cost about one fifth less to operate than the current CDMA network. On the landline side, the quality in the FIOS cable and internet makes the services highly desired over the standard cable options. This part is somewhat limited since it is government regulated and is only available in certain places. The key to FIOS will be to keep operating costs down in order to compete. Verizon will have the competitive advantage of quality services and operating expenses will stay down with time based on the investments made. Ratio Analysis

The Inventory Turnover ratio will measure the revenue for this kind of industry divided by the inventory. The ideal would be a higher ratio for inventory. This would mean that a lower ratio is an indication of poor sales for that period reported. Also too high of a ratio can indicate a poor management in inventory. For the three year period beginning 2010, Verizon has had an increase in their inventory ratio. For the years 2009 and 2008 they stayed steady without a major increase. From 2009 to 2010 the increase went to almost double.

The increase could be due to the increasing demand of a variety of services and the restructuring of the LTE network. Another factor may be the purchase and merger of Alltel. This merger has to have an effect on many of the ratios. Essay on accounting problems

For current year at 2010 the major competitor at&t has a relatively close inventory turnover. Verizon has a negative variance of 1.16 due to at&t having a slightly higher turnover rate. When compared to the industry both competitors are at least 28.2 variance higher. This cannot be due to poor sales since both companies are the leaders in volume for their industry. This could however be due to other companies lacking the wireline and wireless combination in the company.

The accounts receivable turnover ratio has to do with the rate at which the company collects debt owed to them. It measures how efficient company is using its assets or in this case operating revenue. The higher the ratio means the more the company has cash operations rather than on credit. The lower ratio gives a lower rate of accounts receivable. Verizon has not had a large jump with this turnover; however it has increased slightly over the past three periods of a year each. From 2008 to 2010 there has been an increased variance of .73. This increase indicates its customers taking longer to pay their bills than it has in the past.

When comparing with at&t, Verizon has a slightly lower turnover with a negative variance of .08. This demonstrates Verizon has a slightly better collection period for A/R than even the industry. The industry variance is also negative at .17. The industry has a longer pay rate for their A/R than Verizon does. The services are charged on a monthly basis with different billing periods for customers. The increase in turnover could be due to the declining economy in the past few years. The companies and industry are based in the United states.

With the Turnover for net property, plant and equipment, there is a measure of operating revenue divided by total assets. A higher turnover ratio means the company has made good use of their investments and is making money with their assets. This ratio will be looked at by investors to see how the company is effective with the investments they make. Verizon has kept steady for the past three years with a minimal variance of .01 in both positive and negative.

With a positive variance of .02, at&t has a slightly lower ratio and indicates Verizon has made better use of their assets for an increase in operating revenues. The industry average has a negative variance of .02 compared to Verizon. The industry is using their assets more effectively even though it is only a slight variance. This could be due to company volume since these two are the largest in their industry.

The return on equity ratio is the net income divided by total owners’ equity. This ratio is important to measure the performance of the company and how effective the investor money is employed. Verizon decreased from 2008 at 15.41% to 2010 at 6.61%. There was a lowering in net income for those years as well. There has also been a decrease in owners’ equity.

The variance for this ratio is the issuance of preferred dividends. This would subtract from the total net income. This could affect this ratio highly. Since Verizon has a ROE substantially lower than at&t and the industry, it can be concluded that they either have poor performance or issue more preferred dividends than the others. It very well could be the second option because Verizon is one of the few companies left that still rewards just about every employee an amount based on yearly performance for the company. These could be issued under this as well as reward the executives. The industry average has a variance of negative 13.39 which indicates a higher ratio than Verizon.

The price to earnings ratio is the market value per share divided by the earnings per share. This ratio is most important for investors when considering investing in the company. This gives them a better idea of the possible profit they will make based on the company history of earnings per share. It tells an investor how much they will make for every amount they invest. In large shares this amount can make a big positive or negative effect. The higher the ratio could mean that the investor could expect to see higher earnings growth when comparing to the current market. Verizon has increased from 12.64 to 41.02 from 2008 to 2010. The investors for Verizon can expect higher earnings in the future.

The industry average and at&t are substantially lower than Verizon offers. At&t stands at 8.36 and the industry at 10.95. Verizon stands at 41.02 and is probably expecting higher earnings based on the company acquisition/ merger and the investment on LTE. Both of which are changes that happened in recent years and are expected to increase earnings in the near future.

The variance will depend on the earnings per share number used. This includes the choice of usage of cash earnings per share, basic earnings per share, and estimated earnings per share. The use of these different numbers may give a different result and may be misleading for a possible investor.

The cash ratio includes both cash and temporary investment divided by current liabilities. The cash ratio gives us the company’s liquidity. This looks at the short term assets that are the quickest and easiest to use for possible payoffs if needed. It also does not include inventory in the case that inventory may not be able to be converted to cash quickly enough to pay for things. A higher ratio here can indicate a poor usage of assets. For this ratio there are no variances.

Verizon has decreased their cash ratio from .4 to .24 for the three year period. They have taken a little less than half of their cash ratio and invested it. This will bring higher earnings in the future and can be used to distribute among share holders.

At&t has a much lower cash ratio at .04 which can mean they take their assets and cash for more investments. They have a relatively low Cash ratio. The industry average is .38. This concludes the industry tends to keep more of its assets for cash rather than investments with possible increase in earnings. They have less of their money working for them. Verizon falls in between the two ratios but has proven to increase their investing for future earnings. The spike of .4 to .09 from 2008 to 2009 was probably the purchase of Alltel. This acquisition took a large portion of the company cash.

The debt to equity ratio includes debt divided by equity. This ratio is a leverage ratio. This is a comparison to how others have committed to the company in comparison to how much the shareholders have committed. The lower the ratio, the stronger equity in the company. This means that more investments into the company are within rather than from outside sources such creditors and suppliers. The more investors inside the company the more leverage the company will hold.

There two variations for this ratio. The first is called the tangible net worth and entails lowering the owners’ equity by taking out the intangible assets. The second variation includes the purchase of good will. A higher purchase of goodwill can lead to negative equity.

Verizon has a higher ratio and can be due to the higher levels of goodwill found in the balance sheet. At&t has half the ratio Verizon has from current year. This indicates by sight that both the competitor and the industry have more internal investment by shareholders. Analysis conclusion

Through the past three years Verizon has decreased in gross profit but not by much. They still remain above their competitor though also not by much. The net income for the three year period declined due to an increase of administrative expenses and increase in depreciation. The competitor has lower administrative expenses and calls for a higher net income from Verizon at 2.39% at most recent year and at&t at 15.98 at current year.

For the noncurrent assets the two companies come relatively close but with major differences. The competitor has a much higher percentage for goodwill while Verizon’s current ratio for wireless licenses is much higher. Verizon has about double the licenses and can result to increase of revenue through more room to rent those licenses and make money from them.

Though accounts payable have increased slightly for Verizon in the three year periods, at&t still stands at a larger common size percentage. Verizon has higher common size liabilities and lower total equity. As mentioned in the ratios section, Verizon has investments in a network expected to lower operating expense so they will have possibility for more revenue than the competitor. Verizon invested early enough where the competitor finds itself catching up.

Verizon takes its marketable securities in the short-term investments, and evaluates often to compare to market value. This is primarily important based on the declining economy in the recent years. Because they are being re evaluated constantly, they must remain as short term investments to allow for the changes. Inventory is tracked for cost on the average cost method or first-in, first-out method. The inventory includes both for landline and the wireless sector. This inventory is for sales purposes and has declined in the past year. Plant, property and equipment include developed software. Total debt increased overall for Verizon after 2007.

References

Marshall, D. H., McManus, W. W., & Viele, D. F. (2011). Accounting: What the numbers mean (9th ed.). Boston: McGraw-Hill Irwin. http://www.stock-analysis-on.net/NYSE/Company/Verizon-Communications-Inc/Financial-Statement/Liabilities-and-Stockholders-Equity http://www.netmba.com/finance/statements/common-size/

.you will also find out the following topics in coming chapters: