American Apparel Case Study

1. From reviewing the American Apparel’s financial statements from 2007 to present, it is clear that the company started declining in 2008. The unfortunate downfall of situations solely originated from Dov Charney, CEO of American Apparel and the “bad” decisions made internally and externally of his company. The financial statements must have been affected by the numerous sexual harassment lawsuits, offensive advertising strategy, and overall negative image the brand has been projecting which made the company lose an adequate amount of money from the business. There was even a case where he used Woody Allen in his ads without Allen’s permission which Charney got sued for and obviously lost to. Miscellaneous activities like those which can be avoided, give a negative impact to the financial statements, especially if there have been more than one case. Charney also had to layoff 1,500 employees because of illegal immigrants working with respectable wages and benefits. This made the company lose key efficiency workers in running their business, of course because of the employee turnover rate, etc. made them lose more money for that certain time period.

2. This company can or should effectively use the 14 million into their operating activities so that they could at least keep their company going and even increase in their sales where it is most needed to keep up with their business. Some suggestions might be to restructure and reevaluate where they are going with their company, especially with their present image they are projecting. To help them bounce back into their regular routine, they should look into a different path in their advertising where they can reach a wider market, less offensive and more appealing for everyone else new or interested in the brand. Also, Charney needs to be on point with the type of clothing or “genre” of clothing since he is trying to change up with American Apparel’s “look”. It’s a very risky time for him to do so, since he still needs to recover but it can also benefit him if his consumers response is positive enough to start a new trend again.

In all honesty though, I think Charney should “clean up his act” and get on point with his overall company image. It is almost as if he has to regain the respect from people who used to be interested in his clothing because he ruined it through his acts and advertising. On top of that, all of the controversy he has caused already with his personal life and company.

Chapter 5 - Cash Flow Statement

http://www.theglobeandmail.com/globe-investor/ford-rides-new-models-to-26-billion-profit/article1998866/

Summary:

In summary of the above article, Ford Motor Co. posted its best first-quarter period in 13 years because of their new arrival small cars, Ford Explorer and Fiesta. Their profit jumped 22 per cent, their best first-quarter performance since 1998; their eighth straight quarterly profit from their near-bankruptcy 5 years ago. Also, their revenues went up 18 per cent which was way higher than what the analysts were projecting. The company saw an especially strong growth in Asia. The redesigned Explorer SUV got more miles per gallon which more than doubled in US sales. The rising gas prices has been pushing buyers to small, more fuel efficient cars which can affect Ford’s sales later on but Ford has been able to command for higher prices for cars because consumers have been adding expensive options like the Sync entertainment system. Ford still has trouble spots like higher prices for commodities and could increase by the end of the year. They lost some market share in US, Europe and South America in first quarter because it didn’t match incentive spending as General Motors Co. did but Ford is two fewer brands shorter. They are trying to be disciplined and won’t produce more than they can sell. That cycle leads to big discounts with Ford which helps them pay off debt. It has led them to a more cash than debt ratio. Investors are still keeping an eye out for trouble though.

Connection:

The cash flow statement is the main point of the article and the chapter in the textbook. It is Ford’s best first-quarter period in 13 years, which means that there is more income coming in than there was 13 years ago. This is because Ford put an effort and focused towards more research and development and came up with two new arrival cars Ford Explorer and Fiesta. These cars have been doing well in the market as it features new expensive options that help them drive up the costs of the vehicle. Also the redesigned Explorer SUV used more miles per gallon which doubled in US sales which benefited greatly because gas prices have been rising. Overall, the Ford company is generating more cash to debt ratio than they did before because of their “won’t produce more than they can sell” rule that has recently taken place.

Reflection:

In my opinion, I think Ford has really been stepping up their game in the market overall. It seems as if they have effectively reassessed their sales strategies and it has been working to their great benefit. Although there are some trouble spots still unresolved, it is good that their investors are keeping a close eye on them. It ensures their consistency with keeping up with their company goals and expectations of others involved with their business. It also gives Ford a confidence boost to keep innovative and on top of their game among their major competitors.

Chapter 3 - Processing Data through the Accounting System

http://www.nationalpost.com/Morgan+needs+stars+align/4141820/story.html

Summary:

Morgan Stanley boss, James Gorman was only trying to fulfill Wall Street bank’s attempt at perfection. But might’ve not necessarily done it in such an ethical way because they’re trying to improve their credit profile but wiped US$945-million from revenue. Even though an accounting rule reinforced firms to mark to market any changes in the prices of their own liabilities and it shouldn’t change or affect any earnings account. From there on, the firm displays glitches in investment bank’s payout ratio droppings to look more in line with Goldman Sachs, and playing catch-up on rates and foreign exchange from an offset in all their revenue leaving the business with a US$29-million loss. This all seems too unfortunate for the matter, but Morgan Stanley still acknowledges Gorman’s work as the firm had a good 12 months and are now recovering and receiving profits with a steady progress towards 20% pre-tax margin.

Connection:

From this article and the textbook, the connection that is made is through the article’s accounting rule and the earnings account. The accounting rule stated in the article that firms are being forced to do: “to mark to market any changes in the price of their own liabilities” as a “handy way to assess differences in a firm’s quarterly credit profile for those too lazy to check out bond and credit default swap charts”. But to be able to do proper accounting practices, there shouldn’t be any “lazy or short-cut” ways to record transactions. The only way is to actually record them, because the whole point is to determine how transactions should be recorded and how the presentation of items are to be easily understood to the people who reads them. It also ensures any problems that later comes up, to help back themselves up.

Reflection:

I think that James Gorman could’ve handled their financial issues differently because with the losses that have came up under his management and decisions have also impacted the way other firms or people look upon the Morgan Stanley firm. Sure the firm is now recovering from their mistakes and downfalls but now they have provided a negative image of themselves that other people might view them differently from what they were known to be before. The doubt that Morgan Stanley created to their followers is now greater than before all their financial crisis’s were happening. It really brought out the firm’s immoral choices to a different understanding to the public and other firms. All there is to say is, at least they’re going through a rebuilding plan to regain their name.

Chapter 2 - Business Transaction Analysis and Financial Statement Effects

http://www.financialpost.com/Will+that+cash+cash/3287730/story.html

Summary:

To summarize the above article, it informs us that since the harmonize sales tax is now in effect since July 1, more people have been participating in the underground economy to dodge the increased tax of 12% to 13% than what they used to be paying: 5% of government sales and services tax. Now the underground economy has been flourishing and keeps increasing the amount of people who participate in it has been getting larger as the tax gets higher. As soon as tax surpass the level of 29% there will be no doubt as to how many people who start looking for ways to cheat the system.

Connection:

The connection made from the article and textbook mostly has to do with transactions, or rather lack there of. This is because the article explains that people have now been participating in the underground economy since the increase in tax via harmonized sales tax. The objective of the underground economy is to put down hard, cold cash in exchange for goods or services. It is especially effective and beneficial for people in this business (or so they would think) because there will be no way to track the exchange as there will not be any transactions or accounting activity to show any proof.

Reflection:

In my opinion and as I have learned from taking a class called Money Management 12 previous to Financial Accounting 12, when people try to cheat their way out of paying their taxes or by trying to outsmart the government they will soon have to end up paying more later on. This is because the government will need to generate more money for their expenses and if they are not receiving what they expect with the new taxes, then they will have to increase the tax again. It’s kind of like a cycle of adding on tax every now and then per se, yet some people don’t realize that their ignorance is what’s putting up the tax in the first place. And if this underground economy gets larger, I have a feeling the government will be more strict on regulating such behaviour.

Chapter 1 - Overview of Corporate Financial Reporting

http://www.nytimes.com/2010/06/23/realestate/commercial/23fasb.html?_r=2&ref=financial_accounting_standards_board

Summary:

In summary, the article talks about the Financial Accounting Standards Board and the International Accounting Standards Board on their collaboration of generally accepted accounting principles (GAAP) to the international standards. Two boards have already issued a new standard that requires companies to book leases as assets and liabilities on their balance sheets. This new standard may result in weakening companies in the view of investors, activating debt covenants with lenders and it could also affect credit ratings. Although the change is meant to stop “significant off-balance-sheet activity for leases” looks more like it will ripple effects in the leasing market instead of what the two boards initially expected it to achieve.

Connections:

Three major connections I made between the article and the textbook are: the Financial Accounting Standards Board, International Accounting Standards Board and generally accepted accounting principles (GAAP). The Financial Accounting Standards Board sets accounting standards for US while the International Accounting Standards, an independent, successful, private-sector body who is funded by donations to merge their GAAP standards. All of which was also mentioned in the textbook, to develop a single set of financial reporting standards and to bring a better understanding among countries. Generally accepted accounting principles basically are a set of accounting recommendations and guidelines for financial accounting information, of what both the standards board are getting to accomplish one set to work from.

Reflection:

I disagree that the FASB is correct on trying to resolve the “significant off-balance-sheet activity for leases” by changing the GAAP accounting. This change will not only affect already struggling companies under heavy debt load but also the whole leasing market will be at a grand downfall as well. Analysts are even contributing to the many complicating factors of changing the GAAP accounting. From what I understand the change will just add on to the mounts of debt that companies already have and it’ll just give more complications to those dealing with leases. Although there is kind of a bright side to the new accounting standard of being considered the right to use the space being leased for a certain amount of time and to eventually reduce the debt over the term of the lease.. How long will eventually be? Other businesses might not afford the wait for an eventual reduction, especially with everyone trying to recover from the recession nowadays.

Chapter 10 - Industrial Organization in Canada

http://www.vancouversun.com/news/Ottawa+consult+foreign+telecom+investment/3145148/story.html

Summary:

In summary of this article by CanWestNewsService, Industry Canada announced consultations to reducing foreign ownership restrictions in the Canadian telecommunications industry. The Industry Minister Tony Clement said that their goal is to “encourage investment, innovation and competition in the telecommunications sector for the benefit of both businesses and consumers”. The three options the department wants to be considered: “increasing the limit for direct foreign investment in broadcasting and telecommunications carriers to 49%, lifting restrictions on common carriers with a 10% market share or less by revenue and or removing telecommunications restrictions completely. Only 3 countries have these restrictions and Canada is the most severe.

Connections:

The main connection from the article that’s been made with the textbook is obviously foreign ownership. Foreign ownership is when foreign residents invest in Canadian assets and financial securities. In the article, Industry Canada wants to reduce the foreign ownership restrictions in the telecommunications industry with the goal of increasing investments. If all goes through, then their goals will surely be met especially with the help or input of Canadians. Foreign ownership is important to help the economy going and to attract diverse investments overall.

Reflection:

In accordance to the article and what I’ve read from the textbook I’ve come to the conclusion of voting more for the option of increasing the limit for direct foreign investment in broadcasting and telecommunications carriers to 49% because it would only make sense to take a bigger leap to increasing the carriers. This gives their goal more of a chance to reach in a smaller time frame. And it’s also, an easier way for everyone else in foreign ownership to participate willingly.

Chapter 8 - Stabilization Policy

http://www.vancouversun.com/technology/Beyond+Boomercentrism/2927373/story.html

Summary:

To summarize this article, it was about the baby boomers wanting a better life for their children but even though they have always stated that it hasn’t always been the case. This is because the baby boomers inherited little public debt and they’ll all be retiring all at once, it makes federal and provincial debt both raise to occupying 30% of GDP. And in the future debt and global climate will be the future generation’s problems to solve. Baby boomers consume more than what they can afford and at a pace where the Earth cannot produce resources fast enough to restock those needs.

Connections:

The main connection from the article and text is public debt. The point being from the article of the burden baby boomers are going to leave behind on future generations. This is because when the government borrows money it’ll take quite awhile for it to be paid off and it leads to the debt being left for the baby boomers children to pay off. Although, if spending would benefit future generations then it would be fair for them to help pay for the expenses but if it doesn’t help them then why should they take on the responsibility for other people’s debt?

Reflection:

If you ask me what I think about this situation then I’d say that if baby boomers really do want the best for their children then they’d better start consuming more smartly. They need to keep how much they consume at a level where it’s possible for the Earth to restock its natural resources. Although it isn’t their intention, if this doesn’t happen now by then there’ll be more things for their children to pay for and deal with. But not only do baby boomers need to change consumer habits, so do the government because their priority of spending on pensions will drain out their assets and gain more debt; which will then again lead to future generations to struggle with paying it off and not having any benefits that they will at least gain from all of the spending going on now.