Apollo Financial Statement Analysis

MEMORANDUM November 1, 2014

To: Darlene Wardlaw

From: Anderson, Olds and Watershed, CPAs

Subject: Preliminary Analysis of Financial Statements

This memo is in response to the potential problem areas we see based on Apollo’s financial statements. We have compared this year’s balance sheet, income statement and statement of cash flows to the previous year.

There are a few accounts on the balance sheet that show a significant difference from this year and last year. Accounts receivable has increased by $49,823,000 indicating a potential for error on behalf of Apollo Shoes, Inc. In addition, inventory has increased by $65,096,000 showing that Apollo has a substantial amount of inventory on hand. The short term liabilities have also increased drastically from $10,000,000 to $44,053,000.

On the income statement, we calculated a common – size financial statement which indicates the percentage of expenses to the net sales. Based on these calculations, the selling, general and administrative expenses had decreased by 16%. This calculation could be down in part because the company did not advertise for the Super Bowl in 2014. On the other hand, the operating income increased by 28%. The comparison of earnings per common share also raises a red flag because it went from $0.54 in 2103 to $9.91 in 2014.

After calculating the financial ratios, there are several ratios that show a significant percentage change from 2013 to 2014. The days’ sales in receivables and days’ sales in inventory had both increased over 300%. These were accounts that showed significant changes in the balance sheet as well. Additionally, the discriminant Z score has fallen by 4.46 points indicating that the company’s health had declined.

Apollo’s competitors, Nike and Reebok, have account balances that are substantially higher than those of Apollo and financial ratios that are similar to those of Apollo. In 2014, Reebok, who is owned...