OVERVIEW OF FINANCIAL REPORTING, FINANCIAL

Financial Reporting, Financial Statement Analysis and Valuation, 10e James Wahlen, Stephen Baginski, Mark Bradshaw (Solutions Manual, All Chapters. 100% Original Verified, A+ Grade) 1 / 4

1-1 © 2023 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER 1

OVERVIEW OF FINANCIAL REPORTING, FINANCIAL

STATEMENT ANALYSIS, AND VALUATION

Solutions to Questions, Exercises, Problems, and Teaching Notes to Cases 1.1 Porter’s Five Forces Applied to the Air Courier Industry.Buyer Power. Air courier services are a commodity. Firms in the industry offer similar overnight or two-day deliveries. Firms also provide opportunities to track shipments. Business customers can negotiate favorable shipping terms based on the volume of shipments. Thus, buyer power among large corporate customers is high.Supplier Power. The principal inputs are labor services, equipment, and information systems. Except for pilots and some information-processing specialists, the skill required to offer air courier services is relatively low. Therefore, competition for jobs reduces supplier power. The principal items of equipment are airplanes, trucks, and sorting equipment. The number of suppliers of this equipment is relatively small, but the equipment offered is largely a commodity. Thus, equipment supplier power is relatively low. Information systems are critical to scheduling, tracking, and delivering parcels. Hiring individuals with the education and skills needed to design and maintain this information system is not difficult because these skills and education are not unique. Thus, supplier power is low.Rivalry among Existing Firms. Seven air couriers now carry a 90% market share.FedEx and UPS have the largest market shares and compete heavily. Smaller firms compete more in particular geographical or customer markets. Thus, rivalry is relatively high.Threat of New Entrants. The cost of acquiring equipment, developing national and international delivery networks, and overcoming entrenched firms in an already-crowded market makes the threat of new entrants low.Threat of Substitutes. The main threat to transportation of letter parcels is digital transmission, and that threat is high. The threat of substitutes for transportation of packages is low.

1.2 Economic Attributes Framework Applied to the Specialty Retailing Apparel Industry.Demand. Firms attempt to compete on design, colors, and other product attributes, but apparel is largely a commodity. Demand is somewhat cyclical with economic 2 / 4

1-2 © 2023 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Chapter 1 Overview of Financial Reporting, Financial Statement Analysis, and Valuation conditions; customers tend to delay purchases or trade down during economic downturns. Demand is seasonal within the year. Demand grows at the growth rate in population, which suggests that apparel retailing is a relatively mature market. To the extent that retailers can generate customer loyalty, demand is not highly price- sensitive. However, given the similarity of product offerings across firms, firms cannot price their goods too much out of line with those of their competitors.Supply. In most markets, there are many firms selling similar apparel. The barriers to entry are not particularly high because an apparel line and retail space are the most important ingredients.Manufacturing. The manufacturing process is labor-intensive. The manufacturing process is relatively simple, and firms source their apparel from Asia, which has low wages.Marketing. Because of the large number of suppliers selling similar products, apparel-retail firms must stimulate demand with attractive store layouts, colorful product offerings, and various sales promotions.Investing and Financing. Firms must finance inventory, usually with a combination of supplier and bank financing. The risk of inventory obsolescence is somewhat high if the product offerings in a particular season do not sell. Firms tend to rent retail space in shopping malls, so they need to engage in extensive long-term borrowing.

1.3 Identification of Commodity Businesses.Dell. Dell’s products—computers, servers, and printers—are commodities. Dell tends not to develop the technologies underlying these products. Instead, it purchases the components from firms that develop the technologies (semiconductors and computer software). Dell’s direct-to-customer marketing strategy is not unique, but the extent to which Dell performs this strategy better than anyone else in the industry gives it a competitive advantage. Its size, purchasing power, quality control, and efficiency permit it to operate as a low-cost provider.Southwest Airlines. Airline transportation is a commodity service in the sense that seats on one airline cannot be differentiated from seats on another airline.Southwest Airlines’ strategy is to be the lowest-cost provider of such services, thereby differentiating itself on low prices.Microsoft. The basic idea of a commodity product is that the product offerings of one firm are so similar to those of other firms that customers can easily switch to competitors’ products if price becomes an issue. The technological attributes of 3 / 4

1-3 © 2023 Cengage Learning ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 1 Overview of Financial Reporting, Financial Statement Analysis, and Valuation

computer software are duplicated relatively easily, a commodity attribute. However, Microsoft’s size permits it to invest in new technology development and keep it on the leading edge of new technologies. Microsoft also has a huge advantage in terms of installed base, meaning that most customers almost have to purchase its software to be able to use application programs and to communicate with other computer users. Thus, its products are inherently commodities, but Microsoft is able to overcome some of the disadvantages of commodity status.

Johnson & Johnson. Johnson & Johnson operates in three business segments: consumer health care, pharmaceuticals, and medical equipment. It derives the majority of its revenue and profits from the latter two industries. Patents protect the products of these two industries, which give the firm a degree of market power.Until another firm creates a new product that dominates the patented product of Johnson & Johnson, its product is not a commodity. However, rapid technological change makes most products obsolete before the end of the patent’s life. Johnson & Johnson’s products probably have fewer commodity attributes than the other three firms in this exercise.

One of the purposes of this exercise is to illustrate that firms can pursue product differentiation strategies and low-cost leadership strategies and, if performed well, can gain “most admired status.”

1.4 Identification of Company Strategies. The strategies of Home Depot and Lowe’s are marked more by their similarities than by their differences. Both firms sell to the do-it-yourself homeowner and the professional builder, plumber, or electrician at competitively low prices. Their in-store product offerings are similar, roughly evenly split between building materials, electrical and plumbing supplies, hardware, paint, and floor coverings. Their store sizes are approximately the same. Both use sales personnel with expertise in a particular home improvement area to offer advice to customers. Both rely on third-party credit cards for a large portion of their sales to customers. They are similar in size in terms of number of stores, which are located primarily throughout North America.

1.5 Researching the FASB Website. The answer will change over time as the FASB updates its activities. The purpose of the exercise is to familiarize students with the FASB website and the kinds of information they can find there.

1.6 Researching the IASB Website. The answer will change over time as the IASB updates its activities. The purpose of the exercise is to familiarize students with the IASB website and the kinds of information they can find there.

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