Analyzing Financial Reports
see attachments
Project 3: Analyzing Financial Reports
Start Here
You have made good progress on the Choice Hotels project.
Frank
Marinara says “Because of your good work with our client, Choice Hotels, they would like us to continue working with them on a new project. Since this is more challenging than what you did previously in an individual capacity, I am assigning you to a team that will work on this project. I will send over the project details to your team via email.”
INBOX (1 NEW EMAIL)
From: Frank Marinara, Director of Finance
To: You and Your Team
Members
Choice Hotels would now like MCS to complete a financial statement comparison with their largest competitor, Marriott International. I need your team to compare Choice Hotels’ 10-K reports that we gathered in the last project with Marriott International’s 10-K reports. The team will need to complete a vertical
financial statement analysis
using the 10-K reports from Choice Hotels and Marriott.
Choice Hotels is exploring ABC cost allocation. They have asked your team to complete the task of allocating overhead to the cost of hotel rooms.
We will need to look at Choice Hotels’ latest 10-K report and Press Release in order to complete a budget and revenue forecast.
Finally, all team members will attend a meeting with other MCS’s finance and accounting analysts to discuss the pros and cons of the strategies of the two firms.
I will need all of the above assignments done within two weeks and suggest you begin right away.
Really proud of your efforts here,
Frank
Click Step 1 to get started!
When your team submits the project, the work will be evaluated using the competencies listed below. Your team can use the list below to check the team’s work before submission.
· 1.3: Provide sufficient, correctly cited support that substantiates the writer’s ideas.
· 1.6: Follow conventions of Standard Written English.
· 3.1: Identify numerical or mathematical information that is relevant in a problem or situation.
· 3.2: Employ mathematical or statistical operations and data analysis techniques to arrive at a correct or optimal solution.
· 3.3: Analyze mathematical or statistical information, or the results of quantitative inquiry and manipulation of data.
· 3.4: Employ software applications and analytic tools to analyze, visualize, and present data to inform decision-making.
· 4.1: Lead and/or participate in a diverse group to accomplish projects and assignments.
· 4.2: Demonstrate the ability to plan and execute a project, articulating clear objectives and goals for the team.
· 4.3: Contribute to team projects, assignments, or organizational goals as an engaged member of a team.
· 4.4: Demonstrate diversity and inclusiveness in a team setting.
· 10.2: Analyze financial statements to evaluate and optimize organizational performance.
· 10.3: Determine optimal financial decisions in pursuit of an organization’s goals.
· 10.5: Develop operating forecasts and budgets and apply managerial accounting techniques to support strategic decisions.
· 12.1: Assess market risk and opportunity.
· 13.1: Identify and analyze new opportunities.
Step 1: Compare Business Performance Using Financial Statements
Choice Hotels International (NYSE: CHH) would like to know how their market share compares with Marriott International (NASDAQ: MAR), their most significant competitor in North America. This comparison will help Choice Hotels develop a strategy to gain a competitive advantage over Marriott.
You will first need to complete a financial statement analysis of both Choice Hotels and Marriott International.
Dialogue with Frank Marinara
“Use the Choice Hotels 10-K reports we gathered in the last project and compare them with Marriott International’s 10-K reports,” Frank tells your team. The team will need to find Marriott’s 10-K reports the same way you did for Choice Hotels, by accessing the Securities Exchange Commission (SEC) website.
Frank continues, “Choice has asked for advice on attracting new investors. Your team needs to complete a
vertical analysis
by comparing financial reports of the two companies.” Frank recommends
using financial ratios for analysis
and
cost-volume-profit analysis concepts
for this task. “I will email the team an Excel Workbook to complete for this project.”
INBOX (1 NEW EMAIL)
From: Frank Marinara, Director of Finance
To: You and Your Team
For this assignment, please complete the
Project 3 Excel Workbook
with information from the income statement, balance sheet, and statement of cash flow portions of Choice Hotels’ and Marriott International’s 10-K reports. The file contains instructions, an income statement template, balance sheet template, a cash flow template, and a template for the forecast. I have also posed questions for your team to answer so I can provide Choice Hotels with suggestions on improving their financial performance.
Thanks,
Frank
Attachments:
Choice Hotels Workbook.xlsx
(see attachment)
Answer the associated questions on the Income Statement, Balance Sheet, and Cash Flow worksheets within the Project 3 Excel Workbook to help Choice Hotels make sound investment decisions.
Now that you have completed Step 1, proceed to Step 2, where your team will analyze potential investment decisions.
Step 2: Analyze Cost and Investment Decisions
Choice Hotels is interested in bolstering their assets and improving their costing model to account for these assets. Choice Hotels has been building their own guest rooms and selling them to their franchise owners. The company allocates overhead costs equally to each guest room and prices them to achieve a greater profit on the higher-priced rooms. Choice Hotels is concerned that this traditional costing model may not be accurately assigning costs. For example, the selling price of one of its guest rooms, “Presidential Suite,” may not be covering its true cost. You and your team will need to apply
activity-based costing (ABC)
to advise Choice Hotels on resolving the company’s costing issue with the Presidential Suite guest room.
Also, your team will need to understand the concepts of
production cost allocation
, and
breakeven
to compare costing models. Two cost allocation methods of production are under consideration by Choice Hotels. Frank needs your team’s help in determining if overhead cost allocation (Choice’s traditional model) or ABC (a new model) is better for their business.
Using the same Project 3 Excel Workbook your team used in Step 1, complete the Cost and Investing worksheet. The worksheet contains information that will aid in comparing the cost allocation methods for building guest rooms for Choice Hotels’ franchise owners. When your team has finished, submit the workbook to the submission folder located in the final step of this project.
Then proceed to Step 3, where your team will develop a budget and forecast for Choice Hotels.
Step 3: Complete a Budget and Forecast
Frank recently informed your team that Choice Hotels also needs assistance in creating next year’s budget and developing revenue forecasts. Choice Hotels recently acquired a new hotel brand. This recent acquisition needs to be taken into consideration as your team develops the forecast. Choice Hotels recently held a press conference where the company disclosed their full-year guidance. Your team will need to use this information to develop their budget and forecast.
Using the same Project 3 Excel Workbook (see attachment) you will use in Steps 2 and 3, complete the Budget and Forecast worksheet.
Now that your team has completed Step 3, proceed to Step 4, where you will discuss strategy with other finance and accounting analysts.
Step 4: Discuss Strategy
Discussion with Colleagues
Earlier, Frank mentioned you would need to attend a meeting with other finance and accounting analysts at MCS to discuss the differences in strategy between Choice Hotels and Marriott. Both companies have a BBB debt rating from Standard & Poor’s. This is the lowest investment grade rating and indicates that both companies have been aggressive with growth, finance, and Treasury Stock purchases.
· Discuss the differences in strategy related to business growth, finance, and Treasury Stock purchases.
· Discuss the similarities in strategy.
· Discuss any strategy recommendations for Choice Hotels’ management.
Submit one original posting of at least 250
When you have finished Step 4, proceed to Step 5, where you will summarize your team’s project findings in a report to management.
Step 5: Prepare a Report to Management
At the conclusion of your project, Frank requests a report based on your team’s analysis and recommendations in the previous steps. He is planning on using this report to provide the client, Choice Hotels, with guidance on a potential changes in their strategy. This report, along with citations for any sources your team uses, should be about three to five pages. The report should highlight your team’s analysis and recommendations based on the work you and your team completed in the workbook. Be creative and use charts, graphs, or any other tools your team feels would be useful to convey your team’s analysis and recommendations.
When you and your team have completed Step 5, proceed to Step 6, where you will submit all work for Project 3.
Step 6: Submit Your Work
Final Deliverable Instructions
· Step 1: Complete Income Statement, Balance Sheet, and Cash Flows worksheets
· Step 2: Complete Cost and Investing worksheet
· Step 3: Budget and Forecast worksheet
· Step 4: Discuss and Compare Choice Hotels and Marriott Strategies. Write at least 250 words.
· Step 5: Report to management (3-5 pages)
Project Resources
Financial Statement Analysis
Financial statement analysis provides information to those interested in the financial condition and operating results of a company. When financial statement items are considered individually, they usually will have a limited significance. A better perspective is gained when comparisons are made with previous statements, other businesses, and industry averages. The main purpose of conducting financial analysis is to measure profitability and solvency. A business that is not able to make interest payments will experience difficulty in obtaining credit. This situation could lead either to reduced profitability or bankruptcy. A company with lower than average earnings may also find credit harder and more expensive to obtain.
Analytical Procedures
Most analytical measures are expressed as percentages or ratios, allowing for easy comparison with other businesses regardless of size. Horizontal and vertical analyses express entire financial statements in percentages. The horizontal analysis is an analysis of the rate of change in items of financial statements from year to year. The vertical (or common size) analysis presents each item as a percentage of total assets for the balance sheet and sales for income statement. When using these analytical measures, one should take the following factors into consideration:
· industry trends
· changes in price levels
· future economic conditions
Current Position Analysis
A current position analysis is used to measure the ability of a firm to meet its current (and noncurrent) obligations. Three popular methods of analysis include the following:
· determining working capital
· current ratio
· quick ratio
The primary users of current position analysis are creditors. Working capital information is less meaningful than current or quick ratios. These ratios must be compared with other firms in the same industry to see if they are in line.
Accounts Receivable Analysis
An accounts receivable analysis is used to measure a firm’s solvency. The size and composition of accounts receivable is under continuous change, and therefore must be watched closely. Since funds tied up in accounts receivable yield no benefits or interest, it is best to keep this balance to a minimum. The quicker a firm is able to turn over its accounts receivable, the lesser the risk of loss from uncollectible accounts. In addition, the firm has the option to put these funds into more productive uses.
Two commonly used methods to analyze accounts receivable are (1) accounts receivable turnover and (2) the number of days’ sales in receivables (or days sales outstanding).
Both methods measure a firm’s ability to generate sales and quickly collect its accounts receivable. A lower number of days’ sales in receivables indicates a firm is collecting receivables quicker. Both of these measures must be compared with other firms in the same industry.
Inventory Analysis
A business should maintain an adequate inventory balance to meet demands of its operations, but at the same time keep this balance to a minimum. When a firm has excess inventory, it will have higher operating expenses, reduced solvency, increased risks of losses due to price declines and obsolescence, and limited chances to take advantage of more favorable investment opportunities. Two measures commonly used to assess inventory management efficiency are (1) inventory turnover ratios and (2) the number of days’ sales in inventory.
These figures must be compared with industry averages to properly evaluate inventory management.
Solvency Analysis: Long-Term Liabilities
The following methods are commonly used to evaluate the safety of long-term creditors:
· ratio of shareholders’ equity to liabilities (debt-to-equity)
· ratio of plant assets to long-term liabilities
· operating income divided by interest expense, as well as other payments (known as times-interest-earned or coverage ratios)
For all these methods of analysis, the higher the number, the greater the amount of safety. This information is used by investors, creditors, shareholders, and management. It indicates the ability of a firm to meet its financial obligations.
Profitability Analysis
Profitability analysis measures the ability to generate income. Common measures used include the following:
· profit margin—sales divided by net income
· total assets turnover—ratio of net sales to total assets
· return on assets—net income divided by total assets
· return on equity—net income divided by either shareholders’ total equity or common stock only
· earnings per share of common stock
· dividends per share of common stock
In addition, investors use the price-earnings ratio and dividend yield.
Review of Analytical Measures
Analytical measures are used to assess solvency and profitability. The type of analytical measure chosen usually is dependent on the following factors:
· the size of the company
· its capital structure
· the type of business activity
Analytical measures are useful for evaluating the financial results of a business and the performance of management. They are also used to predict future performance.
Corporate Annual Reports
Corporate annual reports contain information that summarizes the activities of the past year, and the future plans of the company. No standard or required format exists. However, annual reports must by law provide accurate financial statements. Most annual reports contain the following sections:
· financial highlights
· management report
· president’s letter
· an independent auditor’s’ opinion
· historical data
Common Ratios
The two tables below depict the practical use of some common financial ratios and the results of ratio analysis.
Common Financial Ratios |
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Ratio |
Calculation |
Question it helps to answer |
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Net income margin |
Net income / total Income |
How much income is used up by expenses? |
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Return on assets |
Net income / total assets |
How big is the income supporting the assets? |
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Return on net worth |
Net income / net worth |
How big is income relative to net worth? |
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Debt to assets |
Total debt / total assets |
How much asset value is financed by debt? or how much asset value is there to satisfy debt?
|
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Total debt |
Total debt / net worth |
How large is debt relative to net worth? |
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Interest coverage |
Income before interest / interest expense |
How well does income cover interest expense? |
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Cash flow to income |
Net cash flow / net income |
How much do payments for investments and financing take from income? |
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Cash flow to assets |
Net cash flow / total assets |
How much cash flow supports assets? |
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Free cash flow |
Free cash flow / net cash flow |
How much cash is left to invest after covering living expenses and debt repayments? |
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Results of Ratio Analysis |
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Better as it gets… |
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Net income / total income |
Bigger will be < 1 |
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Bigger | |||||
How much asset value is financed by debt? or how much asset value is there to satisfy debt? |
Smaller Should be <1 |
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Bigger Will be >1 |
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Instructions
1
-K
In Project
, you will learn how to access US Securities and Exchange Commission public information about companies. You will also learn how to calculate and analyze ratios, analyze and make decisions based on cost, and develop a sales forecast and budget.
Start by looking up the 10-K for Choice Hotels (CHH) for year 2019 on the SEC website. Follow these steps:
1. Go to www.SEC.gov.
2. At the top on the right, click Company Filings.
3. In the fast search box, enter the Ticker Symbol for Choice Hotels, CHH.
. Click Search
. EDGAR search results will appear. Notice the name and address for Choice Hotels. Also notice the box that reads Filter Results: Filing
. Enter “10-K” and click Search.
. You should see a 10-K with a filing date of 2020-03-02. This is the latest available at the time this project was developed.
. Repeat 1 through 6 for
(MAR) for year 2019 on the SEC website. You should see a 10-K with a filing date of 2020-02-27. This is the latest available at the time this project was developed.
. There are two available formats of this 10-K data, and we will use the Documents to answer the questions. You will use the data provided in the worksheets to complete the Ratio Analysis and to answer related questions.
9. Complete the financial statements by filling in the Excel formulas for each grey box.
10. Answer all questions on each tab in this workbook.
Note: Quarterly Financial Statements are not audited. Only annual financial statements are audited by a public accounting firm.
Income Statement.v2
Common Size Income Statements | 12 Months Ended | Consolidated Statements of Income – USD ($) | ||||||||||||||||||||||||||||||||||||||||||||||
Dec. 31, 2019 | % of | Total | Dec. 31, 2018 | Total revenues | Dec. 31, 2017 | |||||||||||||||||||||||||||||||||||||||||||
REVENUES | ||||||||||||||||||||||||||||||||||||||||||||||||
Royalty fees | $388,15 | 1,000 | $ 376,676,000 | $ 341 | Base management fees | $ 1,180 | $ 1,140 | $ 1,102 | ||||||||||||||||||||||||||||||||||||||||
Initial franchise and relicensing fees | $27,48 | 9,000 | $ 26 | $ 23,038,000 | Franchise fees | $ 2,006 | $ 1,849 | $ 1,586 | ||||||||||||||||||||||||||||||||||||||||
Procurement services | $6 | 1,429,000 | $ 5 | $ 4 | Incentive management fees | $ 6 | $ 649 | $ 60 | ||||||||||||||||||||||||||||||||||||||||
Marketing and reservation system | $577,426 | $ 543,677,000 | $ 499,6 | 25 | Gross fee revenues | $ 3,823 | $ 3,638 | $ 3,295 | ||||||||||||||||||||||||||||||||||||||||
Owned Hotels | $20, | 28 | $ | – 0 | $ – 0 | Contract investment amortization | $ (62) | $ (58) | $ (50) | |||||||||||||||||||||||||||||||||||||||
Other | $40,043 | $ 42,791,000 | $ 36,438,000 | Net fee revenues | $ 3,761 | $ 3,580 | $ 3,245 | |||||||||||||||||||||||||||||||||||||||||
$1,114,820 | $1,041,304,000 | $941,297,000 | Owned, leased, and other revenue | $ 1,612 | $ 1,635 | $ 1,752 | ||||||||||||||||||||||||||||||||||||||||||
OPERATING EXPENSES: | Cost | $ 15,599 | $ 15,543 | $ 15,455 | ||||||||||||||||||||||||||||||||||||||||||||
Selling, general and administrative | $168,833 | $ 170,027,000 | $ 16 | $ 20,972 | $ 20,758 | $ 20,452 | ||||||||||||||||||||||||||||||||||||||||||
Depreciation | $18,828 | $ | 14,3 | 30,000 | $ | 6,680,000 | OPERATING COSTS AND EXPENSES | |||||||||||||||||||||||||||||||||||||||||
$579,139 | $ 534,266,000 | $ 479 | Owned, leased, and other-direct | $ 1,316 | $ 1,306 | $ 1,411 | ||||||||||||||||||||||||||||||||||||||||||
$14, | 44 | Depreciation, amortization, and other | $ 22 | $ 229 | ||||||||||||||||||||||||||||||||||||||||||||
Total operating expenses | $781,248 | $ 7 | $ 651,901,000 | General, administrative, and other | $ 938 | $ 927 | $ 921 | |||||||||||||||||||||||||||||||||||||||||
Impairment of goodwill | -$3,097 | $ ( | 4,289,000 | Merger-related costs and charges | $ 13 | $ 155 | $ 159 | |||||||||||||||||||||||||||||||||||||||||
Impairment of long-lived assets | -$7,259 | Reimbursed expenses | $ 16,439 | $ 15,778 | $ 15,228 | |||||||||||||||||||||||||||||||||||||||||||
Loss on sale of business | -$4,674 | $ 19,172 | $ 18,392 | $ 17,948 | ||||||||||||||||||||||||||||||||||||||||||||
Gain on sale of assets, net | $100 | $ 8 | $ 257 | OPERATING INCOME | $ 1,800 | $ 2,366 | $ 2,504 | |||||||||||||||||||||||||||||||||||||||||
Operating income | $318,642 | $318,474,000 | $289,653,000 | Gains and other income, net | $ 154 | $ 194 | $ 688 | |||||||||||||||||||||||||||||||||||||||||
OTHER INCOME AND EXPENSES, NET: | Interest expense | $ (394) | $ (340) | $ (288) | ||||||||||||||||||||||||||||||||||||||||||||
$46,807 | $ 45,908,000 | $ 45,039,000 | Interest income | $ 38 | ||||||||||||||||||||||||||||||||||||||||||||
-$9,996 | $ (7,452,000) | $ (5,920,000) | Equity in earnings | $ 103 | ||||||||||||||||||||||||||||||||||||||||||||
Loss on extinguishment of debt | $7,188 | INCOME BEFORE INCOME TAXES | $ 1,599 | $ 2,345 | $ 2,982 | |||||||||||||||||||||||||||||||||||||||||||
Other (gain) loss | -$4,862 | $ 1,437,000 | $ (3,229,000) | Provision for income taxes | $ (326) | $ (438) | $ (1,523) | |||||||||||||||||||||||||||||||||||||||||
Equity in net (income) loss of affiliates | $9,576 | $ 5,323,000 | $ 4,546,000 | NET INCOME | $ 1,273 | $ 1,907 | $ 1,459 | |||||||||||||||||||||||||||||||||||||||||
Total other income and expenses, net | $48,7 | 13,000 | $45,216,000 | $40,436,000 | EARNINGS PER SHARE | |||||||||||||||||||||||||||||||||||||||||||
Income before income taxes | $269,929 | $273,258,000 | $249,217,000 | Earnings per share – basic | $ 3.83 | $ 5.45 | $ 3.89 | |||||||||||||||||||||||||||||||||||||||||
Income taxes | $47,051 | $ 56,903,000 | $ 126,890,000 | Earnings per share – diluted | $ 3.80 | $ 5.38 | $ 3.84 | |||||||||||||||||||||||||||||||||||||||||
Net income | $222,878 | $216,355,000 | $122,327,000 | |||||||||||||||||||||||||||||||||||||||||||||
Basic earnings per share: | ||||||||||||||||||||||||||||||||||||||||||||||||
Basic earnings per share (in dollars per share) | $4.00 | $ 2.16 | ||||||||||||||||||||||||||||||||||||||||||||||
Diluted earnings per share (in dollars per share) | $3.98 | $ 2.15 | ||||||||||||||||||||||||||||||||||||||||||||||
Questions: | ||||||||||||||||||||||||||||||||||||||||||||||||
1. What are two accounts in the Choice Hotels income statement that show the biggest change over the past 3 years? What information in the 10-K report helps to explain these changes? | ||||||||||||||||||||||||||||||||||||||||||||||||
2. What are two accounts in the Marriott income statement that show the biggest change over the past 3 years? What information in the 10-K report helps to explain these changes? | ||||||||||||||||||||||||||||||||||||||||||||||||
3. Which of the two companies has the financially stronger income statement? Explain your rationale thoroughly. |
Balance Sheet
Common Size Balance Sheets | ||||||||||||||
Consolidated Balance Sheets – USD ($) $ in Thousands | % of | Total assets | Consolidated Balance Sheets – USD ($) $ in Millions | |||||||||||
Current assets | ||||||||||||||
Cash and cash equivalents | $33,766 | $ 26,642 | Cash and equivalents | $ 225 | $ 316 | |||||||||
Receivables (net of allowance for doubtful accounts of $18,482 and $15,905, respectively) | $141,566 | $ 138,018 | Accounts and notes receivable, net | $ 2,395 | $ 2,133 | |||||||||
Income taxes receivable | $11,126 | $ 10,122 | Prepaid expenses and other | $ 252 | $ 249 | |||||||||
Notes receivable, net | $25,404 | $ 36,759 | Assets held for sale | $ 255 | ||||||||||
Other current assets | $24,727 | $ 32,243 | Total current assets | $ 3,127 | $ 2,706 | |||||||||
$236,589 | $243,784 | Property and equipment, net | $ 1,904 | $ 1,956 | ||||||||||
Property and equipment, at cost, net | $351,502 | $ 127,535 | Intangible assets | |||||||||||
Operating lease right-of-use assets | $24,088 | Brands | $ 5,954 | $ 5,790 | ||||||||||
Goodwill | $159,196 | $ 168,996 | Contract acquisition costs | $ 2,687 | $ 2,590 | |||||||||
Intangible assets, net | $290,421 | $ 271,188 | $ 9,048 | $ 9,039 | ||||||||||
$103,054 | $ 83,440 | Goodwill and intangible assets, net, total | $ 17,689 | $ 17,419 | ||||||||||
Investments, employee benefit plans, at fair value | $24,978 | $ 19,398 | Equity method investments | $ 577 | $ 732 | |||||||||
Investments in unconsolidated entities | $78,655 | $ 109,016 | $ 117 | $ 125 | ||||||||||
Deferred income taxes | $20,747 | $ 30,613 | Deferred tax assets | $ 171 | ||||||||||
Other assets | $97,442 | $ 84,400 | Operating lease assets | $ 888 | ||||||||||
$1,386,672 | $1,138,370 | Other noncurrent assets | $ 595 | $ 587 | ||||||||||
Current liabilities | $ 25,051 | $ 23,696 | ||||||||||||
Accounts payable | $73,449 | $ 73,511 | ||||||||||||
Accrued expenses and other | $90,364 | $ 92,651 | Current portion | $ 977 | $ 833 | |||||||||
$71,594 | $ 67,614 | $ 720 | $ 767 | |||||||||||
Liability for guest loyalty program | $82,970 | $ 83,566 | Accrued payroll and benefits | $ 1,339 | $ 1,345 | |||||||||
Current portion of long-term debt | $7,511 | $ 1,097 | $ 2,258 | $ 2,529 | ||||||||||
Total current liabilities | $325,888 | $318,439 | $ 1,383 | $ 963 | ||||||||||
Long-term debt | $844,102 | $ 753,514 | $ 6,677 | $ 6,437 | ||||||||||
Long-term portion | $112,662 | $ | 110 | $ 9,963 | $ 8,514 | |||||||||
Deferred compensation and retirement plan obligations | $29,949 | $ 24,212 | $ 3,460 | $ 2,932 | ||||||||||
Income taxes payable | $26,147 | $ 26,276 | Deferred tax liabilities | $ 290 | $ 48 | |||||||||
Operating lease liabilities | $21,270 | Deferred revenue | $ 840 | $ 731 | ||||||||||
$46,698 | $ 52,327 | Operating Lease liabilities | $ 882 | |||||||||||
Other liabilities | $3,467 | $ 37,096 | Other noncurrent liabilities | $ 2,236 | $ 2,372 | |||||||||
Total liabilities | $1,410,183 | $1,322,142 | Total Liabilities | $ 24,348 | $ 21,471 | |||||||||
Commitments and Contingencies | Shareholders’ equity | |||||||||||||
Common stock, | $0 | $951 | $ 951 | Class A Common Stock | ||||||||||
Additional paid-in-capital | $231,160 | $ 213,170 | $ 5,800 | $ 5,814 | ||||||||||
Accumulated other comprehensive loss | -$4,550 | $ (5,446) | Retained earnings | $ 9,644 | $ 8,982 | |||||||||
Treasury stock, at cost | -$1,219,905 | $ (1,187,625) | $ (14,385) | $ (12,185) | ||||||||||
$968,833 | $ 795,178 | $ (361) | $ (391) | |||||||||||
Total shareholders’ deficit | -$23,511 | -$183,772 | Total shareholders’ equity | $ 703 | $ 2,225 | |||||||||
Total liabilities and shareholders’ deficit | Total liabilities and shareholders’ equity | |||||||||||||
1. What are two accounts in the Choice Hotels balance sheet that show the biggest change over the past 2 years? What information in the 10-K report helps to explain these changes? | ||||||||||||||
2. What are two accounts in the Marriott balance sheet that show the biggest change over the past 2 years? What information in the 10-K report helps to explain these changes? | ||||||||||||||
3. Which of the two companies has the financially stronger balance sheet? Explain your rationale thoroughly. |
Cash Flow
Common Size Statements of Cash Flow | ||||||||
Consolidated Statements of Cash Flows | % of Total Revenue | Consolidated Statements of Cash Flows – ($ in Millions) | ||||||
CASH FLOWS FROM | OPERATING ACTIVITIES | |||||||
$ 222,878,000 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile to cash provided by operating activities: | |||||||
Depreciation and amortization | $ 18,828,000 | $ 403 | $ 284 | $ 279 | ||||
Depreciation and amortization – marketing and reservation system | $ 17,294,000 | 19,597,000 | 20,609,000 | Share-based compensation | $ 187 | $ 184 | $ 181 | |
Franchise agreement acquisition cost amortization | $ 7,992,000 | 9,239,000 | 7,191,000 | $ (200) | $ (239) | $ 887 | ||
$ 3,097,000 | $ 520 | $ 298 | ||||||
$ 7,259,000 | $ (195) | $ (152) | $ (185) | |||||
$ 4,674,000 | Merger-related charges | $ 86 | $ (124) | |||||
Loss on debt extinguishment | $ 7,188,000 | Working capital changes | $ (273) | $ (76) | $ (30) | |||
Gain on disposal of assets, net | $ (2,103,000) | -56,000 | -237,000 | (Gain) loss on asset dispositions | $ (147) | $ (194) | $ (687) | |
Provision for bad debts, net | $ 8,240,000 | 10,542,000 | 5,514,000 | $ 294 | $ 107 | $ 149 | ||
Non-cash stock compensation and other charges | $ 17,615,000 | 15,986,000 | 22,857,000 | Net cash provided by operating activities | $ 1,685 | $ 2,357 | $ 2,227 | |
Non-cash interest and other investment (income) loss | $ (4,010,000) | 3,695,000 | -772,000 | INVESTING ACTIVITIES | ||||
$ 9,810,000 | -3,510,000 | 57,106,000 | Capital expenditures | $ (653) | $ (556) | $ (240) | ||
Equity in net losses from unconsolidated joint ventures, less distributions received | $ 12,562,000 | 7,389,000 | 6,579,000 | Dispositions | $ 395 | $ 1,418 | ||
Franchise agreement acquisition cost, net of reimbursements | $ (38,944,000) | -52,929,000 | -30,638,000 | Loan advances | $ (13) | $ (93) | ||
Change in working capital and other, net of acquisition | $ (21,824,000) | -2,031,000 | 40,158,000 | Loan collections | $ 51 | |||
$ 270,556,000 | $ 242,896,000 | $ 257,374,000 | $ (47) | $ (10) | $ (61) | |||
CASH FLOWS FROM INVESTING ACTIVITIES | Net cash (used in) provided by investing activities | $ (284) | $ (52) | $ 1,211 | ||||
Investment in property and equipment | $ (57,342,000) | -47,673,000 | -23,437,000 | FINANCING ACTIVITIES | ||||
Investment in intangible assets | $ (6,699,000) | -1,803,000 | -2,517,000 | Commercial paper/Credit Facility, net | $ (129) | |||
Proceeds from sales of assets | $ 10,585,000 | 3,053,000 | 1,000,000 | Issuance of long-term debt | $ 1,397 | $ 1,646 | ||
Asset acquisition, net of cash acquired | $ (168,954,000) | -3,179,000 | Repayment of long-term debt | $ (835) | $ (397) | $ (310) | ||
Proceeds from sale of unconsolidated joint venture | $ 8,937,000 | Issuance of Class A Common Stock | ||||||
Business acquisition, net of cash acquired | -231,317,000 | Dividends paid | $ (612) | $ (543) | $ (482) | |||
Payment on business disposition, net | $ (10,783,000) | Purchase of treasury stock | $ (2,260) | $ (2, | 850 | $ (3,013) | ||
Contributions to equity method investments | $ (27,828,000) | -9,604,000 | -50,554,000 | Share-based compensation withholding taxes | $ (148) | $ (105) | $ (157) | |
Distributions from equity method investments | $ 10,241,000 | 4,569,000 | $ (8) | |||||
Purchases of investments, employee benefit plans | $ (3,175,000) | -2,895,000 | -2,447,000 | Net cash (used in) provided by financing activities | $ (1,508) | $ (2,374) | $ (3,896) | |
Proceeds from sales of investments, employee benefit plans | $ 2,217,000 | 2,825,000 | 2,245,000 | DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH | $ (107) | $ (69) | $ (458) | |
Issuance of notes receivable | $ (20,722,000) | -36,045,000 | -19,738,000 | CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, beginning of period (1) | $ 360 | $ 429 | ||
Collections of notes receivable | $ 14,231,000 | 4,997,000 | 655,000 | CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, end of period (1) | $ 253 | |||
Other items, net | $ (1,875,000) | -1,040,000 | 109,000 | Restricted cash | ||||
Net cash used in investing activities | $ (251,167,000) | $ (321,252,000) | $ (90,115,000) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds from issuance of long term debt | $ 422,376,000 | 9,037,000 | ||||||
Net (repayments) borrowings pursuant to revolving credit facilities | $ (72,400,000) | 20,600,000 | -115,003,000 | |||||
Principal payments on long-term debt | $ (256,809,000) | -603,000 | -660,000 | |||||
Debt issuance costs | $ (3,936,000) | -2,590,000 | ||||||
Purchases of treasury stock | $ (50,638,000) | -148,679,000 | -9,807,000 | |||||
$ (48,089,000) | -48,715,000 | -48,651,000 | ||||||
Proceeds from transfer of interest in notes receivable | $ (24,409,000) | 173,000 | 24,237,000 | |||||
Proceeds from exercise of stock options | $ 21,410,000 | 41,360,000 | 14,107,000 | |||||
Net cash used in financing activities | $ (12,495,000) | $ (129,417,000) | $ (135,777,000) | |||||
Net change in cash and cash equivalents | $ 6,894,000 | -207,773,000 | 31,482,000 | |||||
Effect of foreign exchange rate changes on cash and cash equivalents | $ 230,000 | -921,000 | 1,391,000 | |||||
Cash and cash equivalents at beginning of period | $ | 26,642,000 | 235,336,000 | 202,463,000 | ||||
Cash and cash equivalents at end of period | $ 33,766,000 | |||||||
Cash payments during the year for: | ||||||||
Income taxes, net of refunds | $ 41,859,000 | 77,357,000 | 39,181,000 | |||||
Interest, net of capitalized interest | $ 48,179,000 | 43,254,000 | 42,405,000 | |||||
Non-cash investing and financing activities: | ||||||||
Dividends declared but not paid | $ 12,535,000 | 11,977,000 | 12,185,000 | |||||
Investment in property, equipment and intangibles acquired in accounts payable and accrued liabilities | $ 959,000 | 5,949,000 | 1,099,000 | |||||
Seller-financing to purchaser | $2,000,000 | |||||||
1. What were the two largest cash outflows for each company over the 3-year period? | ||||||||
2. Why did Marriott have a cash inflow in 2017 from investing activities? Hint: See 10-K Report. | ||||||||
3. What are the most significant trends for both companies? | ||||||||
4. Can you check that CF(operations) + CF(financing) + CF(investing) is equal the the change of Cash position from one year to the other. What does it tell you? (open) |
Cost and Investing.v2
Choice Hotels Sales, Production, and Cost Information | Overhead Costs | ||||||||||||||
Room Type | Standard | Junior | Presidential | ||||||||||||
Volume | 150 | $3,200,000 | |||||||||||||
Price | $140,000 | $240,000 | $1,0 | 50,000 | Maintenance | $1,800,000 | |||||||||
Unit costs | Purchasing | $320,000 | |||||||||||||
Direct materials | $30,000 | $92,000 | $310,000 | Inspection | $850,000 | ||||||||||
Direct labor | $54,000 | $85,000 | $640,000 | Indirect materials | $490,000 | ||||||||||
Manufacturing overhead | Supervision | $1,700,000 | |||||||||||||
Supplies | $190,000 | ||||||||||||||
Total unit cost | $114,000 | $207,000 | $980,000 | Total manufacturing overhead cost | $8,550,000 | ||||||||||
Unit gross profit | $26,000 | $33,000 | $70,000 | Note: Manufacturing overhead costs are fixed. They do not vary with the volume of manufacturing activity. | |||||||||||
Direct labor hours | 1,200 | 1,300 | 5,940 | ||||||||||||
Rate per hour | $45.00 | $65.38 | $107.74 | ||||||||||||
1. The cost-allocation system Choice Hotels has been using allocates over 90 percent of overhead costs to the | Standard | Junior Suite | |||||||||||||
Total manufacturing overhead (MOH) costs | |||||||||||||||
Room Type | MOH per unit | # of Rooms | Total Overhead | % of total Overhead | |||||||||||
0.0 | 0% | ||||||||||||||
2. Choice Hotels’ production manager proposes allocating overhead by direct labor hours instead, since the different models require different amounts of labor. How much overhead would be allocated to each guest room (per unit and in total) using this method? Show all supporting calculations. | |||||||||||||||
Labor Hours | Units | Total labor Hours | Total Cost of labor | Labor cost per unit | % of total labor | % of overhead per unit | ABC Allocated Costs based on | Direct Labor | |||||||
Totals | $0.00 | 0.00% | |||||||||||||
TOTAL MOH | |||||||||||||||
TOTAL LABOR HOURS | |||||||||||||||
ALLOCATED HOURLY LABOR RATE | |||||||||||||||
3. Choice Hotels’ controller developed the following data for use in activity-based costing: Complete the calculations to help you answer the questions below. | |||||||||||||||
Amount | Cost driver | Presidential Suite | Sum of Cost Drivers | Cost per cost driver | Costs for Standard Guest room | Costs for Junior Suite | Costs for Presidential Suite | Check | |||||||
Square feet | 110,000 | ||||||||||||||
180,000 | 143,000 | 148,500 | 47 | 1,500 | |||||||||||
# of purchase orders | 2,500 | ||||||||||||||
# of inspections | 3,500 | 5,350 | |||||||||||||
Indirect Materials | Units manufactured | 285 | |||||||||||||
Manufacturing overhead cost per unit | |||||||||||||||
Answer Questions 3 to 10 Below: | Allocation Basis | Activity Based Costing | |||||||||||||
Cost Driver | |||||||||||||||
4. Calculate the cost of one Presidential Suite using activity-based costing. | Square ft. | ||||||||||||||
Direct Materials | Direct labor hrs. | ||||||||||||||
# purchase orders | |||||||||||||||
ABC | Allocated Overhead Cost | ||||||||||||||
Total Manufacturing Cost | # of units | ||||||||||||||
5. At the current selling price, is the company covering its true cost of production of the Presidential Suite? Briefly discuss | |||||||||||||||
6. Assume that the Presidential Suite has the same profit margin as the standard guest room. What should its selling price be? Show all calculations. | |||||||||||||||
Margin | |||||||||||||||
Sales Price | |||||||||||||||
Direct Materials | |||||||||||||||
Direct Labor | |||||||||||||||
ABC MOH | |||||||||||||||
Less Total MOH | |||||||||||||||
Gross Profit | |||||||||||||||
Cost Margin | |||||||||||||||
New Selling Price | |||||||||||||||
7. Based on your response to question 6, what is the unit volume breakeven? | |||||||||||||||
Variable Cost | |||||||||||||||
Unit Contribution | |||||||||||||||
Fixed Cost | |||||||||||||||
Breakeven | |||||||||||||||
8. What should Choice Hotels do if the price of the Presidential Suite cannot exceed $1,050,000? | |||||||||||||||
Choice Hotels has contracted with a mid-size furniture manufacturer for the production of guestroom furniture for three models of guest rooms: the standard guest room, Junior Suite, and Presidential Suite.
The Standard Guest Room comes with basic furniture, bathroom plan, and amenities. It sells for $140,000 to franchise hotels.
The Junior Suite model is larger and includes an enhanced furniture selection, upgraded bathroom fixtures, more comfortable bedding. The guest room is considered an upgrade from the standard guestroom model. The Junior Suite sells for $240,000 to franchise hotels.
The Presidential Suite model is a custom-made guest room with floors and walls constructed from specialty wood. The drapes are made from the traditional flax-based canvass. It has the look and feel of a room in the White House, with modern comforts and security. The Presidential Suite sells for $1,050,000 to franchise hotels. Workers who build the Presidential Suite are specialized craftsmen. They earn twice the hourly rate of those working on the Standard Guest Room and Junior Suite models. The labor rate is fully burdened to include benefits.
Most of Choice Hotels’ guest room sales come from the Standard Guest Room and the Junior Suite, but sales of the Presidential Suite model have been growing. The company’s sales, production, and cost information for last year is provided to the right.
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http://investor.choicehotels.com/financial-performance-and-presentations?item=46