Loblaws Financial Analysis
Assignment 2What is your evaluation of the quality of the financial statements? Please justify your assessment.The primary objective of financial reporting is to obtain high quality information concerning a corporation’s financial nature that is useful for economic decision making. This would influence shareholders and capital providers in making decisions for making investments and providing credit to improve the overall market efficiency. However, financial statements provided by the corporation are not always illustrative of accuracy and precision. As we can see in the example of Loblaws and similar corporations in the grocery/supermarket industry, the financial results provided by internal auditors and financial databases do not always concur, sometimes the results would differ by slim margins, but other times ratios could differ by multiple percentage points. One explanation for the inconsistent result is the different focus on specific attributes of financial reporting, which in turn affects the quality of financial reporting. Some of these attributes include focus on earnings management, financial restatements, and timeliness. Earnings management is a prevalent issue in the accounting world where businesses tend to use different accounting techniques to make their financial statements seem better than they actually are. There are some patchy areas in the financial statements where the revenue growth seemed to have grown by around 20% between 2013 and 2014 but cash and short term investments decreased around 40%. Loblaws failed to explain the inconsistent results.
A lot of the differences in numbers are due to estimated figures, and these estimated figures are always disclosed in the statement’s notes. Loblaw’s in particular does a very well job at delineating and showing calculations for all of their estimated figures. Some of the figures reported are rounded the nearest first decimal place, whereas others are rounded to the nearest integer. This may be a factor that caused the minor discrepancies between ratios of the FS and the financial databases. Loblaws have been audited by independent auditors KPMG for numerous years, which is a justification for its consistency. In it’s MD&A report, numerous risks and uncertainties have been delineated. The auditors have listed out numerous risks and uncertainties relating to the possible failure to manage or realize changes in estimate of inventory costs, changes in inflation rate, exchange rate or interest rate, or failure to realize benefits are some of the reasons to why their results may differ from others expressed.Overall, the quality of Loblaws’ financial statements is pretty healthy. Numbers and ratios are not significantly far off from those of financial databases, and the MD&A and disclosed notes manages to outline all possible outlier numbers and show all unique calculations. Which companies are comparable to your selected firm?  Why did you select these specific companies as comparators?  Using two financial databases, list the companies that are included as comparators (usually included in formulating the “Industry Average”) and comment on their appropriateness.        Loblaws is primarily classified as part of the supermarket/grocery industry, specializing in retail sale of food, beverages, general merchandises, and drugstores. It mainly operates in three segments, namely Retail services, Financial Services providing credit card or loyalty program services, and Choice Properties including developing, leasing, or managing commercial properties. The Dow Jones Industrial Average for supermarket/grocery industry lists the following as comparators to Loblaws Inc.:[pic 1]