Urban Outfitters Balance Sheet and Income Statement

FINANCIAL STATEMENTS

Introduction to Financial Statements

Financial statements are the official records of a company’s 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 company’s 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 company’s 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 company’s assets and liabilities as at a given date (Kramer & Johnson, 2009). The income statement is a list of a company’s 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 company’s liabilities, assets, and shareholders’ equity (Welc, 2020). As such, it shows the company’s 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 company’s 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 costs related to agent commissions, import taxes, freight charges, import-related, and storage (SEC, 2018).

iv) accounts receivable – the total value due from credit card receivables and the company’s wholesale customers (SEC, 2018).

v) prepaid expenses and other current assets

Fixed Assets

i) Property, plant and equipment – this is the total value of equipment, buildings, and furniture and fixtures recorded at cost less accumulated depreciation, which is calculated using the straight line method (SEC, 2018). Depreciation is the process of expensing an asset over its useful life (Alvarez & Fridson, 2011). Straight line method is a form of depreciation that involves expensing an asset in equal installments each year until the salvage value, which is the amount the company expects to raise from disposing it at the end of its useful life (Alvarez & Fridson, 2011). The company depreciates operating equipment over a useful life of 3 to 10 years, 39 years for buildings, and 5 years for fixtures (SEC, 2018).

ii) Intangible assets, goodwill, and long-lived assets impairment – impaired assets are assets whose market value is lower than the book value (SEC, 2018). These are written down on the balance sheet and the impairment loss recorded in the income statement (SEC, 2018).

Liabilities are the company’s credit obligations (Welc, 2020). Equity is the claim of the company’s owners over its assets, represented by the value of preference and common shares held (SEC, 2018). Common shareholders are the company’s owners with voting rights while preference shareholders are creditors with no voting rights (Welc, 2020).

The basic balance sheet equation is:

Assets (what the company owns) = Liabilities + equity (the sources that provide the assets (Kramer & Johnson, 2009).

Common liabilities include:

i) Accounts payable – amounts owed to creditors with a repayment period of less than one year

ii) Accrued expenses – expenses that have been incurred, but for which cash has not been paid

iii) Deferred rent and other liabilities – the company expenses rent in equal annual instalments over the period of the lease (SEC, 2018). Deferred rent is the difference between the cash paid and the annual rent expense (SEC, 2018).

iv) Long-term debt – debts with a repayment period of over one year

Accounting Methods

Urban Outfitters uses an accrual-based accounting system. There are two types of accounting systems: cash accounting and accrual accounting (Kane, 2021). Cash-based accounting is where revenues and incomes are recognized when cash is received and paid respectively (Kane, 2021). Accrual accounting, on the other hand, recognizes and reports revenues and expenses when they are earned and incurred rather than when cash is paid (Kane, 2021). The company uses accrual based accounting as shown by the presence of accrued expenses, which appear as liabilities on the balance sheet, and prepayments, appearing as current assets in the balance sheet (Kane, 2021). Accrued expenses are costs that have been incurred but for which cash has not been paid (Kane, 2021). Under the accrual based system, therefore, expenses incurred but for which cash has not been paid are recognized and affect the income statement while also appearing as current liabilities in the balance sheet. Further, revenues earned but not yet paid are recognized as incomes in the income statement and also as current assets in the balance sheet.

If the company was using the cash-based system, revenues for which cash has not been received would not appear in the financial statements as expenses are only recorded when cash is received. Furthermore, expenses incurred, but for which cash has not been paid out, would not appear in the financial statements until the company settles the same.

The Income Statement

The income statement presents the company’s expenses and revenues over a given period, and shows the surplus (if expenses are less than revenues), or deficits (if expenses exceed revenues (Kramer & Johnson, 2009). Revenues are the incomes generated from sales revenues earned, interest incomes earned, and other forms of income earned whether or not cash has been received (Kramer & Johnson, 2009).

To calculate the net income, the company deducts the cost of sales from the net sales revenue (net sales = gross sales – returns = allowances – discounts allowed) to obtain gross profit (Kramer & Johnson, 2009). From the gross profit, we deduct sales, general and administrative expenses, income tax and all other expenses, and adjust for operating incomes to obtain the net income (SEC, 2018). In 2015, the company reported a net income of $235,428 as compared to $224,489 and $218,120 in 2016 and 2017 respectively (SEC, 2018). There was an increase in gross proof over the period, and the decline in net income is largely attributable to declines in incomes generated from operations, such as interest income (SEC, 2018).

Fig 2: Urban Outfitters Income Statement 2015 to 2017

(Source, SEC, 2018, F-4)

Advertising: Urban Outfitters engages in an intensive marketing campaign that includes social media marketing, email campaigns, use of catalogs, mobile applications, and advertising via the website (SEC, 2018). The company maintains an active presence on 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 company’s 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.