# FIAC214 Financial Accounting

## Question:

This assignment is intended to improve students’ understanding and analytical skills on simple financial statements.

The financial statements are usually found in the section titled ‘Annual Report/Investor Relations.’ on a company’s site.

This task is meant to give you an idea of what financial accounting looks like in real life.

Complete the following tasks after you have read the annual financial report:

Give a brief description of the company (Name, year, history, background, product/service they sell in) and what year it is currently under review.

Select the most recent year.

It is easy to see which sections dominate the contents page when you flip through the report.

Who are the directors?

Include a list of three to four directors and a summary of the director’s report.

Who are the auditors

What is the opinion of the auditor?

Give a short summary of the auditor’s report

Are sales increasing or decreasing (compare the year that you choose with the one before it)?

Comment on the reason for the change in sales.

How much cash is inflow from operating activities and how much outflow?

(See the cash flow statement of the company).

What has changed in the company’s net cash flow from the prior year, both in terms percentage and money?

What was the year’s retained profit?

Is the company in possession of any loans, e.g.

Calculate the following ratios based on the Income statement, Balance sheet, and cash flow statement. Comment on the financial health the company.

Ratios of profitability

Ratios of liquidity

Ratio of asset turnover

Introduction

Domino’s Pizza, an international pizza company, has its headquarters in the United States. It is the second-largest food chain worldwide.

The annual report for 2016 shows that the company has over 13800 locations in 85 countries (Pizza 2016,).

The company is a franchise model, but also sells pizza through its own stores.

The majority of revenue comes from royalties from franchises, which is an ongoing percent of sales fees for the Dominos brand.

You can also generate revenue by selling food equipment to franchises or selling pizza through company-owned stores.

Histories

In 1960, two brothers Thomas and James purchased a small pizza shop in Y psilanti (Michigan) for \$900.

In the 1960’s and 1970s, the company opened its first pizza shop near military bases and college campuses.

In 1965, Domino’s Pizza was founded and their first franchise store opened in 1967.

In 1983, the company opened its first international store in Canada and Australia.

Thomas sold 93% to Bain Capital, LLC in 1998. The company then went public with its first offering in 2004.

Annual Report

The financial statements, discussion of financial performance, and results of operations make up the bulk of the annual reports.

Directors

The company has 7 directors.

The Chairman of the board is David A. Brandson.

J. Patrick Doyle, the President and CEO of the company, is also a director.

Other directors include Diana F. Cantor and James A. Goldman.

The director’s report to shareholders states that 2016 was a great year with an increase in same store sales and store developments both domestically and internationally.

There were 1281 new stores, and 1110 international stores opened.

Due to high order counts, delicious food and excellent service, the US saw a 10.5% increase in sales.

Innovation is a constant goal of the company, which led to five new platforms that allow customers to order food, including Apple Watch, Facebook Messenger and Google Home.

The eighth consecutive year of record-breaking profitability for franchisees in America is 2016.

On average, the EBIDTA in USA was \$130,000 per store.

The shareholder returns were strong, with the EPS rising by 24% to \$4.3 compared to 2015.

A \$600 million share buyback program was also implemented by the company.

Dividends were paid quarterly by the company for \$74 million.

It is currently operating a program for pizza theatres that it hopes to finish in 2017.

This will lead to better quality, service and cleanliness.

This company strives to be at the top of its game by taking bold actions and continually improving.

Auditors

Pricewaterhouse Coopers LLP is the auditor of the company.

The auditors believe that the financial statements accurately reflect the financial position of the company as well as its subsidiaries, as at January 1, 2017 (or January 3, 2016).

The operations results are in compliance with USA GAAP.

The notes to financial statements contain all relevant information regarding the consolidated financial statements.

The auditors found that the company had maintained an effective internal control over financial reporting for financial year 2015-16, in accordance with the Internal Control Integrated Framework (2013) by COSO (Committee of Sponsoring Organization of Treadway Commission).

In 2016, the total revenue increased 11.6% from \$2,216 millions in 2015 to \$2.472 million.

This is mainly due to an increase in revenue from company-owned stores and domestic and international franchises.

This was due to the opening of 1281 additional stores and an increase in sales from existing stores.

New technology-driven ordering platforms were introduced by the company, including zero click ordering, Apple Watch and Facebook Messenger. These platforms focus on online orders.

This led to an increase in sales.

Net Cash Flows from Operating Activities

In 2016, there was a net cash flow of \$287 million from operating activities.

In 2016, the net cash flow from operating activities decreased by \$4.5 million, i.e.

In 2015, the net cash flow was \$291.7 Million.

Retained Profit

In 2016, there was a \$1881.5 million retained deficit.

Borrowing

The company holds long-term debt in the form fixed rate notes and variable funding notes.

Below is a table showing the different ratios for the profitability, liquidity and efficiency categories.

Year

Ratio of Profitability

Margin of net profit

Return on assets

Liquidity Ratio

Current ratio

Ratio quick

Ratio of assets turnover

Ratio of leverage

Ratio of debt

Ratio of equity to debt

Analyse

In both years, the profitability of the company has remained constant.

This means that the profit margin has remained the same as the revenue.

In 2016, the return on assets increased.

Because the average assets in 2016 have declined, this is why the return on assets has increased in 2016.

The company’s profitability is excellent.

In both years, the current ratio exceeds 1

This means that current assets have sufficient liquidity to cover current obligations.

The quick ratio is also above 1. This means that the company has good liquidity.

Because the company operates under a franchise model, it does not need to invest in inventory.

The company has sufficient short-term liquidity.

At 3.3, the asset turnover ratio remains the same for both years.

This means that the company can turn its assets three times per year to generate sales.

Due to large amounts of long-term debt, the debt ratio in 2016 was higher.

High leverage is a company that has more debt than it owns.

The debt-to-equity ratio is negative, which indicates that there is a shareholder deficit.

This is due to the share buyback program that the company implemented in 2015 and 2016.

This has resulted in higher earnings per share.

The company’s financial strength is demonstrated by a share buyback, which means that it has used its excess cash to purchase back shares in the market.

Domino’s Pizza not only has high profit margins but also has good liquidity and efficiency.

Due to its cash-rich status, the company is not at risk of bankruptcy.

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