Ford Motor Company




Ford Motor Company

GROUP PROJECT

ACC 505 - FINANCIAL ACCOUNTING 12/01/96

TABLE OF CONTENTS

DESCRIPTION PAGE

INTRODUCTION........................................................1

LIQUIDITY...........................................................1-3
Working Capital...................................................1
Current Ratio & Quick Ratio.......................................2
Receivable Turnover & Average Days\' Sales Uncollected.............2-3
Inventory Turnover & Average Days\' Inventory on Hand..............3

PROFITABILITY.......................................................3-7
Profit Margin.....................................................3-4
Asset Turnover....................................................4-5
Return on Assets..................................................5
Debt to Equity....................................................5-6
Return on Equity..................................................6-7

CONCLUSION..........................................................7-8

APPENDIX............................................................9

INTRODUCTION

Ford Motor Company, a large United States automotive corporation, strives for
success each and every year. The success of Ford Motor Company, as well as
other corporations, can be measured by analyzing the two most important goals of
management, maintaining adequate liquidity and achieving satisfactory
profitability. Liquidity can be defined as having enough money on hand to pay
bills when they are due and to take care of unexpected needs for cash, while
profitability refers to the ability of business to earn a satisfactory income.
To enable investors and creditors to analyze these goals, Ford Motor Company
distributes annual financial statements. With these financial statements,
liquidity of Ford Motor Company is measured by analyzing factors such as working
capitol, current ratio, quick ratio, receivable turnover, average days\' sales
uncollected, inventory turnover and average days\' inventory on hand; whereas
profitability analyzes the profit margin, asset turnover, return on assets, debt
to equity, and return on equity factors.

LIQUIDITY Working Capital

Ford Motor Company\'s working capital fluctuated significantly in the years
1991-1995. This phenomenon is directly attributable to the fact that Financial
Services current assets and current liabilities are not included in the total
company current asset and current liability accounts. For example, the
fluctuation from 1994 ($1.4 billion) to 1995 (-$1.5 billion) of $2.5 billion
would suggest that Ford would be unable to pay liabilities during the current
period. However, examination of the Financial Services side of the business
reveals that surpluses of $13.6 billion existed in both 1994 and 1995,
convincingly mitigating the figures indicating negative working capital.

Current Ratio & Quick Ratio

The current ratio in the years 1991-1995 has remained stable, fluctuating
between 0.9 and 1.1. The quick ratio has also remained stable, fluctuating
between 0.5 and 0.6. The larger fluctuation in the current ratio versus the
quick ratio is caused by inventories being included in the asset side of the
equation. Although inventories were significantly higher in both 1994 and 1995,
current liabilities were also higher. In addition, marketable securities
decreased substantially in 1994 and 1995. These factors resulted in the
stability of both the current ratio and quick ratio.

Receivable Turnover & Average Days\' Sales Uncollected

An examination of trends in Ford Motor Company\'s receivable turnover and average
days\' sales uncollected ratios reveal positive indicators of Ford\'s liquidity
position. The receivable turnover, a function of net sales and average accounts
receivable, has nearly doubled in the years 1993-1995 versus 1991-1992. This
trend indicates an extensive increase of net sales in relation to accounts
receivable. Receivables were relatively higher in 1994 than in any other of the
five years, affecting the ratio for both 1994 and 1995. However, net sales
increased 30% in 1994 and 34% in 1995 over the average net sales of 1991-1993.
The average days\' sales uncollected ratio has decreased significantly over the
same period, from 16.9 days in 1991 to 9.7 days in 1995. The substantial
decrease in average days\' sales uncollected ratio coupled with the near doubling
of the receivable turnover ratio is a reflection of Ford\'s strong sales and
effective credit policies in years 1993-1995.

Inventory Turnover & Average Days\' Inventory on Hand

An examination of trends in the inventory turnover and average days\' inventory
on hand ratios also reveal positive indicators of Ford\'s liquidity position.
Inventory turnover, a function of cost of goods sold and inventories, has
remained stable between 14.0 and 16.0 times from 1992-1995. The average ratio
over these four years (15.1 times) is 40% higher than that of 1991. The average
days\' inventory on hand, a derivative of the inventory turnover, has conversely
decreased to stable level fluctuating between 23.5 and 26.0 days in the years
1992-1995. The operating cycle of Ford Motor Company has decreased
significantly as the table below indicates.
1991 1992 1993 1994
1995
Days: 50.8 29.0 33.8 31.1
34.3

PROFITABILITY Profit Margin Profit margin, which is net income divided by net
sales, is a measure of how many dollars of net income is produced by each dollar
of sales. As you can see in Appendix 12, Ford Motor Company had a substantial 4
year rise in profit margin. Using horizontal analysis, the profit margin
increased 98% from 1991 to 1992, 566% from 1992 to 1993 and then 79% from 1993
to 1994. Although the profit margin from 1994 to 1995 decreased 26%, that is
more than acceptable when you look at the substantial increases in the