Financial Accounting Project: Dialogue with Frank Marinara

Project 2: Accounting for Managers
Step 1: Review Financial Statements

As you start your second month of work at Maryland Creative Solutions, LLC (MCS), the senior partner, Frank Marinara, has been pleased with your work as an economic analyst. He would like to turn your attention to a corporate accounting project. Here are the details:

Dialogue with Frank Marinara

“I wanted to meet today about assigning you a corporate accounting project. It is necessary to understand the client’s accounting and strategy before we can consider recommendations.

Choice Hotels’ accounting is audited by Ernst & Young LLP. This same firm audits their internal controls. As a result of the Sarbanes-Oxley Act of 2002 (SOX), Choice Hotels must rely on a different firm for accounting advice, and it will likely use one of the other big four accounting firms.

I am handing down this assignment from our managing director, Elisa Izuki, who heads the accounting projects group in MCS. She has asked for a complete review and ratio analysis of the most recent 10-K annual financial statements for Choice Hotels International, Inc. 

“Speaking of financial statements,” Frank adds, “the most common financial statements are the income statementbalance sheet, and statement of cash flows. While you are at it, you should know a bit about accounting conventions and standards in the United States.”

Your goal is to develop an understanding of the business of Choice Hotels using the 2018 annual report that the company files with the Securities and Exchange Commission (10-K). I recommend you analyze the 10-K financial reports using accounting and finance ratios after you read key parts of the Document.

Ratio analysis is especially difficult because Choice Hotels is one of the largest hotel franchisors in the world. The company does not sell any products and has no inventory, and because of this, some traditional analyses does not apply.

Also, the company has had and continues to have an aggressive Treasury stock repurchase program, and this has caused negative equity on the balance sheet. Many companies have had stock repurchase programs in recent history. Choice Hotels has been among the most aggressive in Treasury stock repurchase programs. The negative equity means that we cannot use ratios like Return on Equity and Debt to Equity. Fortunately, there are other ratios we can use.

Choice Hotels’ management recently completed a large acquisition. You need to understand what was acquired. 

The first part of the 10-K Document has useful information that describes the business, the risk factors, and Management’s Discussion and Analysis of Financial Condition and Results of Operations. This information is beneficial to your analysis. 

Analysts use the Notes to Consolidated Financial Statements in the 10-K Document to evaluate the riskiness of the debt. The notes also state that Choice Hotels has an investment grade credit rating. However, the interest rates seem high compared to our other clients. Both Standard & Poor’s and Moody’s rate Choice Hotels’ debt as the lowest investment grade BBB- and Baa3 with a stable outlook.

I’ll send over an Excel workbook with questions for you to complete. These questions require an understanding of the client, its strategy, and appropriate ratios. Please read the questions carefully and submit all deliverables. That is it for now. Please reach out should you have any questions.”

After you have completed your review of Choice Hotels’ financial reports, you will need to complete a horizontal analysis.

To complete your assignment for Elisa and Frank, perform the following tasks during Week 3:

  • Download the Project 2 Excel Workbook that MCS developed in house, read the instructions page carefully, and review the most recent Choice Hotels’ 10-Q reports and two recent 10-K reports found on the SEC website. The link to the report is embedded within the Project 2 Excel Workbook.
  • Perform a horizonal analysis by completing the Income Statement and Balance Sheet worksheets within the Project 2 Excel Workbook.
  • Answer the questions in the Income Statement, Balance Sheet, and Cash Flow worksheets within the Project 2 Excel Workbook.
  • Submit your Project 2 Excel Workbook for feedback to the submission folder located in the final step of this project.

Now that you have completed Step 1, proceed to Step 2, where you will evaluate business operations of Choice Hotels based on the completion of a ratio analysis. 

Step 2: Evaluate Business Performance Using Ratio Analysis

MCS asks that analysts review the financial health of the client’s business by completing ratio analysis. Frank explains that Choice Hotels has an aggressive strategy to grow revenues and stock price. The company does this by accepting ratios that might be outside normal industry ranges.

Ratio analysis is an analytical tool for understanding financial results and trends over time, and for providing key indicators of organizational performance. Typically, ratios are calculated by using data from the income statement, balance sheet, and statement of cash flows. This information can be found in the 10-K Document. MCS uses a customized worksheet to report ratio calculations, results, analysis, and recommendations for clients.

Financial ratios are used for many types of businesses in various industries. For a hospitality business such as Choice Hotels, you have selected a set of financial accounting ratios that are most appropriate for the client.

Frank stops by your office to give a few pointers:

Dialogue with Frank Marinara

“Choice Hotels would like us to look at their balance sheet and provide them with guidance on what they should or should not do to better manage their assets.

“Balance sheet ratios like the fixed-asset turnover ratio are commonly used in the valuation of inventory,” he adds. Other balance sheet ratios include working capital.”

Your ratio calculations should be completed in the Ratio Analysis worksheet in the Project 2 Excel Workbook.

Complete the workbook with data from the Income Statement, Balance Sheet, and Statement of Cash Flows worksheets. As part of your analysis of Choice Hotels’ strategy, you will also need to answer a few questions in the worksheet.

When you have finished, submit the workbook to the submission folder located in the final step of this project.

When you have completed Step 2, proceed to Step 3, where you will discuss accounting ethics.

Step 3: Participate in Discussion of Accounting Ethics

Choice Hotels requires high levels of integrity, honesty, and transparency in the development of financial reports. They must ensure compliance with the standards articulated by international bodies like the Financial Accounting Standards BoardGenerally Accepted Accounting Principles (GAAP), and the International Financial Reporting Standards (IFRS) Board.

Before 2002 and prior to SOX there were a number of high profile frauds in public companies.  Enron, WorldCom, Tyco, and Sunbeam come to mind. These companies had CEOs prosecuted for fraud under mail fraud and securities laws. 

In 2002 SOX became law.  During the following 8 to 10 years, Congress and dozens of accountants claimed that SOX had dramatically increased the penalties for fraud. That was true in theory but not in the real world.

Since SOX became law in 2002, only one CEO, Richard Scrushy, has been prosecuted under SOX. He was acquitted! 

None of the CEOs who participated in mortgage securities fraud during the 2008 financial crisis, went to jail or even get prosecuted.

Calendar Invite

Event: MCS Special Retreat: Ethics in Focus

Location: Executive Room

Meeting Organizer: Elisa Izuki

The managing director, Elisa Izuki, would like you and your team of MCS consultants to develop an appreciation for ethical accounting standards and the need for objectivity in your analysis. With that in mind, she invites all the consultants working on the Choice Hotels project to an offsite company retreat. During the retreat, a considerable amount of time is devoted to a discussion of topics related to accounting ethics.

Assuming you and your colleagues are attending the retreat, go to the Accounting Ethics Discussion, and complete the following tasks:

  • Discuss why integrity, honesty, and transparency are essential in financial reporting. Give credit to any sources or real-world examples you use to support your statements.
  • GAAP are the general rules, regulations, and guidelines that accountants in the United States follow to ensure their practices are legal and ethical. Explain to your colleagues why GAAP is so useful. Give credit to any sources or real-world examples you use to support your statements.
  • Later in the week, after you are back in your office, you have a follow-up discussion with your MCS colleagues in an effort to summarize the key lessons you have learned from your discussion on ethics in finance and accounting at the past weekend’s retreat. Respond to your colleagues’ original discussion posts and give credit to any sources you use to support your statements.

During Week 4, submit one original posting of at least 250 words in the Accounting Ethics Discussion by Saturday and any responses to other discussion participants that add new information by Tuesday. See MBA discussion guidelines.

When you have finished Step 3, proceed to Step 4, where you will present your recent findings from Steps 1 to 3 in an executive summary.

MBA Discussion Guidelines

Throughout the MBA program, you will be asked to participate in discussions. Assigned discussions, both individual and group work, are part of the process of developing your project deliverables.

In general, address your discussion posts to your classmates, rather than the instructor. Do not attach files; use only the discussion textbox. Your posts do not need the structure or format of formal business memos or reports. These discussions should be an informal exchange of ideas with your peers. You should, of course, still adhere to the norms of standard written English.

To receive the maximum benefit, you should participate in accordance with the guidelines provided below.

  • timeliness
    • initial posting(s) submitted by 11:59 PM ET on Saturday
    • response(s) to other discussion postings submitted by 11:59 PM ET on Tuesday
  • proper citation
    • cite sources any time you quote or paraphrase an idea or evidence from another work
    • use APA citation style (example below)
  • meaningful engagement
    • posts contribute to substantive scholarly discussion
    • student demonstrates professionalism in interaction with peers
    • posts critically discuss topics presented in the current week and, when appropriate, in previous weeks
    • posts are grounded in the theories and concepts presented in the course

Example:

Based on the UMUC library’s guidance on APA citations, including guidance on how to cite content from the UMUC online classroom, please use the following format for classroom resources with no author or no date:

Title of resource. (n.d.). Document posted in University of Maryland University College Course Name Course Number online classroom, archived at: hyperlink

SWOT analysis. (n.d.). Document posted in University of Maryland University College MBA 610 2182 online classroom, archived at: https://lti.umgc.edu/contentadaptor/page/topic?keyword=SWOT%20Analysis

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