873-3443-1-PB - Journal of Business Case Studies May/June...

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Journal of Business Case Studies – May/June 2010 Volume 6, Number 3 21 A Financial Analysis Case Of Amazon.Com And Barnes & Noble With Emphasis On The Impact Of ROE Versus EPS: Accounting Case And Instructor Notes Timothy Kelley, University of San Diego, USA Judith A. Hora, University of San Diego, USA Loren Margheim, University of San Diego, USA ABSTRACT This case follows two accounting interns working for a not-for-profit organization who have been asked to perform a financial analysis of two real life companies (Amazon.com and Barnes &Noble). The interns have been asked to assist the organization with a financial statement analysis of the companies in order to help the not-for-profit make an important investment decision. The case requires the students to perform some simple ratio analyses, with a particular emphasis on how to utilize Return on Equity (ROE) and Earnings per Share (EPS) information when those values appear to provide contradictory information. In particular, one of the primary goals of this case study is to have students discover how one company (Amazon.com) can have a greater ROE, even though the competitor (Barnes & Noble) has a larger EPS and how this seemingly contradictory information should be used in financial analysis. Students will have the opportunity to consider which metric (ROE or EPS) is safe to use in cross-company comparisons and will use that analysis, in conjunction with other basic ratios, to provide a financial analysis report comparing the two companies. The case is appropriate for beginning financial accounting classes and intermediate accounting. Keywords: Return on Equity, ROE, Earnings per Share, EPS, Financial Statement Analysis INTRODUCTION ith this case, two student interns try to discover the relative merit of comparing EPS and ROE figures across two companies. The interns find that Amazon.com has a greater ROE and that Barnes & Noble has a greater EPS. The case provides financial statements for Amazon.com and Barnes & Noble so that various financial statement ratios (to compare the relative strengths and weaknesses of the two companies) can be computed. In this context, students will discover how ROE and EPS figures can be used in examining the financial health of companies and what pitfalls to avoid. THE CASE Suzy Caldwell was thrilled when she was selected for an accounting internship position with Saint Francis Orphanage for the upcoming semester. Although the position was unpaid, Suzy liked the fact that she would be giving back to the community. In addition, the position would allow her to work with employees from a Big 4 accounting firm that does a considerable amount of pro bono work for the orphanage. Suzy learned that another student, Jose Gomez, who attended a neighboring university, would also be
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873-3443-1-PB - Journal of Business Case Studies May/June...

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