Background information and terminology in internet cybersecurity

Accounting

The role of financial statements in investing is that they provide a consistent format that can be used by potential investors and other stakeholders to evaluate a company. There are several components that facilitate this happening. For publicly-traded firms, Generally Accepted Accounting Principles (GAAP) play a key role in the creation of financial statements. GAAP is a common set of accounting principles and procedures that companies use to compile their financial statements (Investopedia, 2012). With companies having to produce their statements according to a common set of criteria, the information is easier to compare not only between different years at the same company, but also against other firms in the industry and all other publicly-traded firms.

The IFRS is essentially the international version of GAAP. Financial statements in many countries, especially those in Europe, are produced according to IFRS. There are a many areas where GAAP and IFRS diverge, so analysts need to be aware of these differences. The process of switching from GAAP to IFRS in the United States is underway. This convergence process is one of the major issues in public accounting right now (AICPA, 2011).

The annual report is a document produced by the company for its shareholders and other external stakeholders. The contents of the annual report are divided into two parts. The first part is the content produced by the company, none of which is mandatory, but which discusses the business and results. The second part is the 10-K. Some companies forgo the annual report entirely, and only publish the 10-K. The 10-K is mandatory, and is published according to a format approved by the Securities Exchange Commission. The financial statements that are compiled according to GAAP are published in the 10-K, along with information about the business and notes to the financial statements.

Liquidity is an entirely separate issue. Liquidity refers to the degree to which the company can meet its debt obligations. This is one of the many concepts that are analyzed with the financial statements. Liquidity is of key concern to regulators, creditors, shareholders and other stakeholders. In general, liquidity measures are calculated using the balance sheet.

Part II: Revlon is an American firm, headquartered in New York, and produces financial statements according to GAAP. Revlon's 10-K for the fiscal year 2011 is going to be used in this report. Beiersdorf is a German firm based in Hamburg. It produces financial statements according to IFRS. The company's 2011 Annual Report is going to be used as the basis of this report.

There are some minor differences in the layouts of the statements. Beiersdorf has its equity above the liabilities, and long-term assets above current assets, and this order is reversed in the Revlon statements. The differences, however, are more in the way that the statements are constructed. With respect to the income statements, probably the biggest difference is that the IFRS statements from Beiersdorf do not have as comprehensive a breakdown after the net income line. On Revlon's income statement there is a significant amount of per share information (dividends, EPS, diluted income, and this information is either omitted or reflected differently on the Beiersdorf statements. There are also some minor structural differences on the cash flow and shareholders' equity statements, for example Revlon's equity statement covering more years in the past than Beiersdorf's.

For Revlon, I think that cash flow from operations is a better measure of the company than net income. The former is quite steady over the three years, while the net income has dramatic swings. However, the spike in net income in FY2010 was attributable to a "Benefit from income taxes," therefore an unusual item. Because of unusual items, the cash flow from operations is often a superior indicator. For Beiersdorf, there were no unusual items so there is not a dramatic difference in trend between cash flow from operations and the net income.

Revlon's business is fairly steady, so predictions for that company would involve an assumption that this stable performance will continue. I believe net sales will be around $1.4 billion this year for Revlon, and net income (outside of unusual expenses) will be around $55-60 million. For Beiersdorf, sales are also steady and it is predicted that trend will continue as well. I predict sales of around €5.65 billion. From that, I think that little will change on Beiersdorf's balance sheet, so equity will grow slightly to €3.05 billion and the company will not need to take on any additional debt.