FINANCIAL STATEMENTS

Introduction to Financial Statements

Financial statements are the official records of a companys financial performance and business activities over a certain period (Kramer & Johnson, 2009). Financial statements serve stakeholders in different ways. Investors use them to assess a companys profitability and decide whether or not to invest in it (Kramer & Johnson, 2009). Lenders may also use them to assess whether the business is a going concern and hence, whether or not to extend credit facilities (Kramer & Johnson, 2009). Labor unions could also use the information presented in financial statements as a basis for negotiations with management (Kramer & Johnson, 2009). Finally, a companys owners and management use financial statements to assess financial performance, determine profitability, see whether the business is a going concern and as a basis for planning such as determining how much to pay in bonuses to employees (Kramer & Johnson, 2009). All the information needed to make these decisions can be found from items in the financial statements and in the accompanying notes to the accounts (Kramer & Johnson, 2009).

The Four Basic Financial Statements

There are four fundamental financial statements: the income statement, balance sheet, cash flow statement, and the statement of changes in equity (Kramer & Johnson, 2009). The balance sheet is a statement showing a companys assets and liabilities as at a given date (Kramer & Johnson, 2009). The income statement is a list of a companys total expenses and incomes and the resultant surpluses or deficits (Kramer & Johnson, 2009). The cash flow statement is a list of the cash outflows from investment and operating activities and the cash inflows over a given period (Kramer & Johnson, 2009). Finally, the statement of equity shows the changes in shareholder equity throughout a given period (Kramer & Johnson, 2009). For this training, we will be focusing on the income statement and balance sheet as these are the most relevant statements to us.

Urban Outfitters: Nature of Business

It is important to briefly understand the nature of Urban Outfitters business so as to better understand the financial statements. Urban Outfitters core business involves wholesale business selling and general consumer retail through mobile applications, catalogs, websites, and physical stores. As of January 2016 and 2017, the company operated 572 and 606 stores globally, including 484 and 515 stores in the United States (SEC, 2018). The company prepares consolidated financial statements, which bring together the business operations of all branches and subsidiaries, with a fiscal year ending 31st January every year.

The Balance Sheet and Its Constituent Items

The balance sheet summarizes a companys liabilities, assets, and shareholders equity (Welc, 2020). As such, it shows the companys financial position at a given time.

Assets are the business economic resources, which may be either tangible or intangible ad current or non-current. Current assets are liquidated, used, traded, sold within one year, in most cases through normal business operations, and can be easily converted into cash (Welc, 2020). Non-current or fixed assets, on the other hand, are long-term assets that are used for over one year (Welc, 2020).

Fig 1: Urban Outfitters Inc. Balance Sheet 2016 2017

(Source: SEC, 2018, F-3_

The companys currents assets include:

i) cash and cash equivalents this is the total value of cash at hand, in the bank, and investments that are highly liquid with less than three months maturity

ii) marketable securities the value of securities with maturities equal to or less than 1 year, recorded at the amortized cost, which is the fair value

iii) inventory the value of closing stock (net realizable value or at cost, whichever is lower). Net realizable value is estimated by analyzing trends, expected changes in demand, and anticipated discounts (SEC, 2018). The cost is estimated based on the first-in-first-out system and takes into account all...…Snapchat, Instagram, Pinterest, Twitter, and Facebook, and also relies on attractive visual presentation and a broad variety of products to attract customers (SEC, 2018). Advertising costs are expensed when advertising takes place (SEC, 2018). However, for direct-to-consumer advertising, the advertising costs are expensed and capitalized when the advertisement is published on the companys mobile apps and website, and when catalogues are mailed (SEC, 2018). Expensed advertising costs are captured in the income statement (under selling, general and administrative expenses), while capitalized costs are reported in the balance sheet.

Store Opening Costs: all store opening costs, including salaries, recruitment, training and travel are expensed as they are incurred and appear under the selling, general, and administrative expenses in the income statement (SEC, 2018).

Website Development Costs: in the application and infrastructural development phases, Urban Outfitters capitalizes all costs associated with website development, while in the planning and operating phases, ll costs are expensed (SEC, 2018). In the fiscal years 2015 to 2017, there was no capitalization of website development costs as all relevant costs were incurred during the operating and planning stages, and those incurred during the development phase were immaterial (SEC, 2018).

Recognition of Costs

A cost is the expenditure incurred in the acquisition of assets, as well as creation and sale of products (Mulford & Comiskey, 2005). In the expensing method, costs are recognized as expenses consumed at a go and are thus charged to the income statement (Mulford & Comiskey, 2005). Conversely, capitalization is used on expenditures that are consumed over a period of time (Mulford & Comiskey, 2005). Simply stated, capitalization is the process of deferring a costs recognition to a later period (Mulford & Comiskey, 2005). When a cost is capitalized, it is recognized as capital expenditure and thus, recorded as an asset on the balance sheet, with only the annual depreciation appearing in the income statement (Mulford & Comiskey, 2005). Thus, the…