J. C. Penney Company, Inc. Equity Valuation and Analysis As of ...

Quantitative Analysis of DisclosureGenerally Accepted Accounting Principles (GAAP) provide managers withflexibility. This flexibility is valuable because it allows managers to better portraythe performance of their firms through the financial statements. In addition, thisflexibility helps managers to create a clearer picture of the financial health of thecompany. However, since there is incentive for managers to distort a company’sactual performance, it is important that analysts, regulators, and investors, alike,carefully scrutinize the numbers contained in those statements. Any significantchange in the numbers represented in the financial statements should bethoroughly investigated.Two categories of diagnostics utilized here to help better evaluate therevenues and expenses of a firm are sales manipulation and expensemanipulation diagnostics. Comparing net sales to cash from sales, accountsreceivables, inventory, unearned revenues, and warranty liabilities over anextended period, in this case five years, can aid analysts in pinpointingaccounting irregularities used to puff up performance. Like wise, comparingexpenses, cash flows, accruals, and asset turnover from one year to the next canhelp identify inappropriate manipulation of reported information. Unexplainedincreases or decreases in any of these ratios may be a “red flag” that couldpotentially expose a serious financial health problem, improper accountingpractices, or even fraud.Sales Manipulation DiagnosticsExamining the sales performance of a company across several yearsallows analysts to identify any potential discrepancies in reporting from one yearto the next. Examining the sales performance of a company against that of itscompetitors in the industry allows analysts to check if identified anomalies areindustry wide or company specific. The following section contains sales54