Ford 1
The motor company is one of Americas oldest and well-known automobile
companies. The firm produces various types of automobiles and is presently in several countries
across the globe, apart from the US. The latest available financial statement example, the 2010
annual report has been analyzed for this assignment. Financial statements are the most vital part
of any financial analysis and crucial for any investor. The performance of the organization, its
financial health, and its future course of direction can be assessed from its financial statements.
This is also the reason every publicly traded company has to produce a financial statement by
law. Although financial statements are very important, they cannot offer the complete details that
would be useful to an investor. Only looking at the financial statements may not give the
complete picture and this is why notes to the financial statements are important. The notes to
the financial statement provide detailed and more comprehensive information that clarifies the
information contained in the main financial statements like the balance sheet and income
statement (The Importance and Uses of Notes to the Financial Statements). These notes are the
most comprehensive part of any financial statement in addition to numbers; the accounts can add
comments, information, and their opinion. Professional analysts universally agree that a
thorough understanding of the notes to financial statements is essential in order to properly
evaluate a company's financial condition and performance (Loth, Richard). Like other
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organization, Ford motor companys annual report has a comprehensive list of data that will be
discussed with respect to cash, receivables, and inventory.
The cash equivalents, marketable securities, etc. are presented using the fair value. The
method for arriving at the fair value is also explained. This is important because the same cash
equivalent can be of different values, depending on the valuation method used. Some of the cash
and cash equivalents of the company are restricted in nature and shown separately as other assets
in the balance sheet. This is because some portion of the cash and cash equivalents cannot be
freely used by the company. Some cash balance has to be held against the loan from European
investment bank and there are also various escrow agreements related to insurance, customs,
environmental matters, etc. The mention of this category is important as a large portion of the
cash can be of this category, which will mean that it cannot be used by the company in operating
of financing activities. The company also holds various securities which can be called as
marketable securities. These marketable securities are both government as well as nongovernment securities. The company classifies highly liquid investments, e.g., investments that
can be converted within 90 days as cash and cash equivalents. While those with maturity period
of greater than 90 days are classified as marketable securities. It can be seen that majority of the
companys investment in securities has been in the automotive with sector the balance in the
financial services sector. However, this is because the company has 3.5% interest in Mazda as
the company was previous part of the group.
Like any other organization, Ford has to carefully monitor its accounts receivables. The
organizations main receivables are in the form of loans given to suppliers. The company also
has a financial services sector that helps people finance their car purchases. This sector too has
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receivables that are classified as consumer or non-consumer receivables. The consumer
receivables are the loans given to customers for car purchases while non-consumer receivables
are loans to wholesalers and dealers. Apart from classifying the receivables according to their
category, receivables are also classified according to their age. This is because as receivables get
more than 120 days old, they have to be considered as substandard. At present the vast majorities
of the receivables are new and can be considered as recoverable. Only a small portion of the
receivables can be considered as substandard. The dealers are also classified according to their
credit rating into various groups so that the likelihood of recovering funds can be gauged.
According to these estimates, some allowance is made for credit losses, e.g., the portion of
receivables that will not be realized. Each category of receivable has its own credit classification
based on its characteristics.
The inventory costs for a major part of the United States inventories is calculated based
on the LIFO (last in, first out) basis, while rest of the inventory cost is calculated on FIFO (first
in, first out) bases. The inventories are classified into two categories: the raw materials, work in
process and supplies constitute one category while finished products make up the other category.
The value of finished goods is slightly higher than the value of other class of inventory.
Inventory is an essential part of any manufacturing company and has to be closely monitored.
High inventory increases costs as it has to be maintained and capital remains blocked, on the
other hand, too fewer inventories could lead to a stock out situation. Thus, an analysis of notes to
the financial statements helps us understand the details behind the figures in the statements. Very
often when the notes are ignored, it can lead to an incorrect analysis of the situation. For
example, a companys receivables may seem to be within the normal limits, but in closer analysis
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of the notes, it may emerge that an immense majority of these receivables are very old and would
have to be written off.
References:
The Importance and Uses of Notes to the Financial Statements, retrieved on March 8, 2012 from
http://businessaccent.com/the-importance-and-uses-of-notes-to-the-financial-statements/
Richard Loth, 12 Things You Need to Know about Financial Statements, retrieved on March 8,
2012 from
http://www.investopedia.com/articles/basics/06/financialreporting.asp#axzz1oXjeHqeM
Ford Motors Annual Report 2010, retrieved March 8, 2012 from
http://corporate.ford.com/doc/ir_2010_annual_report.pdf