ACC4013-AyeshehAlRabeeah-10KFinancialAnalysisAssignment

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Nov 24, 2024

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Complete the instructions below and answer all questions. Obtain the most recently filed form 10-K for L Brands, Inc. for the fiscal year ended February 2, 2019. The form 10-K is the annual report which provides a comprehensive overview of the company for the past year. Questions: 1. In Item 1A, what are at least five risk factors that management has identified for the Company? For three of the risks you identified, describe how it could affect the financial statements, including what significant accounts and the related relevant assertions. I. The seasonality of their business. II. Ability to protect reputation and brand images. III. Ability to grow through new store openings and existing store remodels and expansions. IV. Their ability to successfully expand internationally and related risks. V. Their independent franchise, license, and wholesale partners.  The seasonality of their business. Any decrease in sales or margins during seasonal fluctuations in net sales and operating income period could have a material adverse effect on results of operations, financial condition, and cash flows for a business. Seasonal fluctuations also affect cash and inventory levels since business usually order merchandise in advance of peak selling periods and sometimes before new fashion trends are confirmed by customer purchases.  Ability to protect reputation and brand images The company’s ability to maintain its reputation is critical to their brand images. Reputation could be jeopardized if the firm fail to maintain high standards for merchandise quality and integrity. As a result, there will be adverse effect on company’s results of operations, financial condition, and cash flows, as well as require additional resources to rebuild its reputation.  Ability to grow through new store openings and existing store remodels and expansions . The company’s continued growth and success will depend in part on its ability to open and operate new stores and expand and remodel existing stores on a timely and profitable basis. Accomplishing its new and existing store expansion goals will depend upon several factors, including the ability to partner with developers and landlords to obtain suitable sites for new and expanded stores at acceptable costs, the hiring and training of qualified personnel and the integration of new stores into existing operations. This risk could have a material adverse effect on firms’ ability to grow and results of operations, financial condition, and cash flows 2. In Item 7 (Management’s Discussion and Analysis of Financial Conditions and Results of Operations, or MD&A), how has management assessed their working capital and capitalization? Why is working capital important to external stakeholders/ users of the financial statements?

 The company fund its operations through a combination of available cash and cash equivalents and cash flows generated from operations. In addition, its credit facilities are available for additional working capital needs and investment opportunities. In Item 7, the assessment has been done as shown in the table that provides a summary of our working capital position and capitalization as of February 2, 2019, February 3, 2018 and January 28, 2017  Proper management of working capital helps in paying regularly returns to shareholders. The availability of sufficient funds helps the organization in a timely and orderly payment of dividends. It helps in gaining the confidence of shareholders and makes them happy. 3. Also, in the MD&A, what does the Company state as the outlook for their credit rating? Why is this important to external stakeholders/ users?  Outlook: Stable (Moody’s) and Negative (S&P)  A good credit rating improves credibility and indicates a good history of paying back loans on time in the past . It helps banks and investors decide about approving loan applications and the rate of interest offered. 4. How does the Company value its inventory? How are related inventory loss adjustments recorded by the Company?  Inventories are principally valued at the lower of cost or net realizable value, on a weighted-average cost basis.  The company record inventory loss adjustments for estimated physical inventory losses that have occurred since the date of the last physical inventory. These estimates are based on management’s analysis of historical results and operating trends 5. Who audited the consolidated financial statements for L Brands, Inc.? Where are the auditors located, and what was the report date?  Ernst & Young LLP  Grandview Heights, Ohio  March 22, 2019 6. Did L Brands, Inc. receive an unmodified audit opinion or a modified audit opinion on the financial statements?  Unmodified opinion. The auditor concluded that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework and are a true reflection of the company’s financial position. 7. According to the Company’s Consolidated Balance Sheet, what is the percentage fluctuation in the following balance sheet line items: cash and equivalents, property and equipment (net), trade names, current debt, accrued expenses and other, income taxes (indicate whether it is a percentage increase or decrease). As an

auditor, if you are required to investigate any fluctuations greater than $20 million AND 10%, which accounts will you follow-up on?  Cash and Equivalents: = {(1515-$1413)/1515} *100 =6.7% Decrease.  Property and Equipment (Net): = {(2893-2818)/2893} *100 =2.6% Decrease  Trade Names: = {(411-411)/411} *100 =0% No change  Current Debt = {(87-72)/87} *100 =17.2% Decrease  Accrued Expenses and Other = {(1082-1029)/1082} *100 =4.9% Increase  Income Taxes {(198-121)/198} *100 =38.9% Decrease As an accountant, I will follow on the following accounts with fluctuations greater than $20 million and 10%:  Current Debt  Income taxes 8. In the Company’s Consolidated Statement of Cash Flows, what was the greatest source (use) of cash in the investing activities? In the financing activities? Indicate the line item and amount.  Investing activities: Capital Expenditures ($629M in 2018, $707M in 2017, and $ 990M in 2016)  Financing activities : Dividends paid ($666M in $2018M, $686M in 2017, and $1,268M in 2017 9. What is the Company’s fiscal year end date? How is this determined?  February 2, 2019. As stated in (Part 1, item 1), the company’s Fiscal year ends on the Saturday nearest to January 31. 10. In Note 2 (New Accounting Pronouncements), what accounting standard change was most recently adopted by the Company?  Goodwill. It was effective beginning in fiscal 2020, with early adoption permitted.

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11. In Note 3 (Revenue Recognition), what does the Company define as “deferred revenue”? What was the balance of deferred revenue as of year-end? What would the deferred revenue balance have been had the Company still recorded deferred revenue under the prior accounting standard? Why is this important to disclose in the financial statements? Also, does Note 3 discuss the allowance for doubtful accounts or uncollectibility?  Deferred revenue primarily relates to gift cards, loyalty and private label credit card programs and direct channel shipments, which are all impacted by seasonal and holiday- related sales patterns.  The balance of deferred revenue was $331 million as of February 2, 2019  The Company's deferred revenue balance would have been $287 million as of February 2, 2019, under accounting standards in effect prior to the adoption of the new standard  By reporting deferred revenue on the liability side of the balance sheet, the company avoids reporting unearned income in the asset. Thus, it avoids overvaluing the company's net worth.  Allowance for doubtful accounts or un-collectability is also discussed in Note 3. It is noted that Accounts receivable, net from revenue-generating activities were $150 million as of February 2, 2019, and $144 million as of the beginning of the period upon adoption of the new standard. 12.Were there any acquisitions or divestitures in the current year? If so, explain. In 2019, the business had divestiture and acquisition as follows: Divestiture- The disposal of company's assets or a business unit through a sale, exchange, closure, or bankruptcy .  On January 6, 2019, the company completed the sale of the La Senza business to an affiliate of Regent LP, a global private equity firm.  In January 2019, the company closed all of its Henri Bendel stores and the e-commerce website. Acquisition- Purchases most or all of another company's shares to gain control of that company  In April 2016, the company reacquired the franchise rights to operate Victoria's Secret Beauty and Accessories stores in Greater China, including 26 stores already open at the time of acquisition 13. What was the largest component of property and equipment? What was the percentage of the total gross balance? Does this make sense based on the nature of the Company’s business and operations (RETAIL)? Explain.  Fixtures, Software and Equipment  Percentage of total gross balance is 33.7%  I think it make sense because In addition to in-store experience, L-Brands strive to create a customer-centric digital platform that integrates the digital and physical brand experience. Company’s digital presence, including social media, websites and mobile applications, allows the firm to get to know its customers better and communicate with them anytime and anywhere

14. For this company, briefly describe what would be the best way for an auditor to test the existence of inventory?  company’s physical inventory observation- The audit team should perform test counts by selecting items from the inventory listing and physically locating the item in the warehouse. 15.Was goodwill impaired this year? How can you tell?  The Company tests for goodwill impairment at the reporting unit level. The Company's reporting units with goodwill balances at February 2, 2019 were Victoria's Secret, Bath & Body Works and Greater China 16. What is the percentage decrease in Federal Income Tax Rate and Effective Tax Rate, year-over-year? Why was there such a drastic decrease in tax rates?  Federal Income Tax Rate (12.7%, 1.3%)  Effective Tax Rate (0.2%, 6.6%)  Tax rate decreased because of the company’s tax-free income, tax deductions and credits, and the proper use of a tax deferral. 17. Do the Company’s footnotes explicitly state any ongoing contingencies or commitments? How would the auditors test for such items (inquiry, observation, reperformance, inspection, or all of these? Who would be the point of contact for the audit team to investigate these with?)?  The Company explicitly state that it is subject to various claims and contingencies related to lawsuits, taxes, insurance, regulatory and other matters arising out of the normal course of business.  It is also committed to various leases. For example, as of February 2, 2019, it operates 147 retail stores located in leased facilities, primarily in malls and shopping centers, throughout the Canadian provinces. These lease commitments consist of store leases with initial terms of 5 to 10 years expiring on various dates between 2019 and 2030.  To test for Contingencies and commitments, auditors usually ask management to write a statement acknowledging they disclosed all known contingent liabilities . 18. Other than Q4, what quarter had the highest operating income (unaudited)? Based on the nature of the Company’s business and operations, does this make sense? Explain.  Quarter 2 ($228 M in 2018 and $301M in 2017)  This makes sense because for 2018;  Operating income includes the effect of $20 million ($15 million after-tax) of Henri Bendel closure costs.  Operating income includes the effect of a pre-tax loss of $99 million ($55 million after-tax) related to the divestiture of La Senza. 19.Who signed the Company’s Section 302 Certification?

 Stuart B. Burgdoerfer, Executive Vice President and Chief Financial Officer 20. During the Company’s earning call (February 28, 2019), the L Brands management team announced that Victoria’s Secret was closing 53 stores during the coming year. This comes after the Company closed 30 stores during 2018. Is this information disclosed in the form 10-K? Do the store closures indicate a going concern issue for the Company, why or why not?  This information would appear in the form 10-k for the year ending 2020  Closure of stores will lead to reduction in sales for the company, hence it is a going concern issue. 21. If you search the internet for L Brands to obtain their MOST RECENT financial statements (for the year ending 2022), what do you find?  There is no L Brands’ financial statement for the year ending 2022. The most recent available financial statement is for the year ending 2021.

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ACC4013-AyeshehAlRabeeah-10KFinancialAnalysisAssignment

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