- MHA FPX 5010 Assessment 1
Training—Accounting Tools and Practices
The training manual is designed to familiarise you with enough information to help you analyze Urban Outfitters’ balance sheet and income statement. It will state how various accounting techniques affect these documents and show their real-world usage.
This means that the training will include the recommended ways of completing transactions connected to advertising or opening new stores, as well as developing websites where the company’s financial activity will be described, and potential solutions to their issues will be presented. This knowledge will significantly help you in your future careers, specifically if you are targeting employment from retail or any financial-related company.
Company Overview
This depository called lifestyle retailing company was initially founded in the 1970s near the University of Pennsylvania, and it has developed and expanded much beyond the days of its grassroots store. Now, the company has over two hundred stores across the United States and other countries, including Canada (Urban Outfitters, 2024). The story of this company being a small store and converting into an international brand should encourage us financially.
As a creative company that focuses on multicultural values, Urban Outfitters presents a diverse and exquisite assortment of fashions for women and gentlemen, as well as homes equipped with the brands of Anthropologie and Free People. Urban Outfitters’ daily updates are easily relatable to our training in the aspects of finance, particularly with regards to the company’s financial practices: product range was constantly updated with garments, accessories, home items, intimate apparel, sportswear, shoes, and more.
MHA FPX 5010 Assessment 1 Accounting Tools and Practices
Philadelphia, Pennsylvania-based Urban Outfitters is responsible for engaging with communities and supporting entrepreneurship besides embracing opportunities in social media and events; Forbes Magazine has recognized the company with regard to being inclusively a socially responsible company (Forbes Magazine, n. d.).
Financial Statements
Financial statements act as formal records that present the business, individual, or any legal entity’s monetary concerns and activities. These documents have great significance for companies because they demonstrate the company’s financial standing and are a vital reference for outsiders on matters to do with profitability and financial soundness, including opportunities for investment.
It is essential to understand that the use of financial statements mainly revolves around the notion that they supply imperative information on the transaction of the business. These are activities of selling, buying, and acquiring fixed assets, which are the central activities of a company that consistently keep it going. It is significant to note that financial statements accurately analyze the company’s financial health by making susceptible and careful records of such transactions.
Most components of financial statements consist of the balance sheet, income statement as well as cash flow statement. Combined, the elements listed above provide an integrated view of a company’s financial health and organizational performance (SEC, 2023). Therefore, assessing these aspects is critical to analyzing a business’s financial health, as these factors are interconnected.
Balanced Sheets
Like all basic financial statements, balance sheets are a valuable means of determining a company’s financial health at a given point. They define the company’s resources, obligations, and owners’ stake, offering proper signals about its solvency, solidity, and investment appeal. This reduction indicates the effective management of the company’s debts and other financial responsibilities.
This increase in equity means that the business has been – and is – making money and is subsequently reinvesting its profits. The Urban Outfitters Inc. balance sheets depict a solid financial position with a favorable stock of assets, an acceptable level of liabilities, and increasing shareholder equity. This could make it a plausible candidate for investment. However, a more elaborate analysis of the company’s position would include an examination of other financial statements and performances.
Income Statement
Balance sheets, also known as statements of financial position, are critical financial documents that provide a snapshot of a company’s performance, revenues, costs, and expenses incurred during a specific period. Produce these papers to gain insights into business profitability, organization execution, and strategic orientation.
The following are some insights that can be identified based on the analysis of the consolidated income statements of Urban Outfitters, Inc. for the fiscal years ended January 31, 2023, 2022, and 2021, as presented in the table above and from the company’s form 10 K filed with the SEC, 2023): This could be because of higher average common shares outstanding (SEC, 2023).
A balance sheet of Urban Outfitters, Inc. Common Stock shows that the company’s income statement depicts moderately well-off and feeble financial performance, with relatively higher net sales and gross profit. Still, the company’s income from operation and net income per share have declined. This warrants a closer look at the trends in vain to get a reliable understanding of the factors that may be fueling such tendencies.
Financial Statement Notes
These Notes to the Financial Statements are critical reference documents as they complement the restricted and more general information included in the balance sheet, income statement, and cash flow statement of Urban Outfitters. These complement each other with revenue recognition, explaining how and when income from activities like retail and online sales is recognized. This is critical in establishing the Health & Beauty firm’s financial performance.
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It has a massive impact on the reported inventory balance and the cost of goods sold. It also contains information about the methods of depreciation and the estimated useful life of assets that allows the stakeholders to measure the company’s effective utilization of resources in the long run.
Additionally, it provides information concerning sensitive estimates and judgments by management, such as provisions for irrecoverable debts, impairment tests of assets, and management’s expectations concerning future conditions. Thus, in the notes, it is possible to scrutinize the strategic factors underlying the financial numbers in order to better rely on these papers for making decisions.
Advertising, Website Development, and Store Openings
For sustainable development and controlling and containing total expenses, cost control in relation to advertisement, store establishment, and website development is significant in the environment of the retail business. A company such as Urban Outfitters, the industry giant, is worthy of attention in this regard because it provides an example of how exactly such costs are reflected in the financial statements of the business enterprise.
This paper seeks to improve the understanding of the accounting treatment of these material expenses and their effects on the firm’s financial statements. Analyzing how Urban Outfitters deals with these costs reveals suitable patterns that district managers and other stakeholders can use to manage the company’s finances and produce sound business plans that would guide the firm toward lasting profitability and invincibility. Allow us to describe in detail how this cost is captured at the operations segment of Urban Outfitters.
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Advertising:
It is to be noted that Urban Outfitters expenses advertising costs as it takes them. Such fees are direct consumer advertising through channels such as catalogs, the Internet, Facebook, and mobile applications. In general, advertising expenses are classified into selling, general, and administrative expenses in the income statement (Tanaka & Respati, 2021). Specifically, the financial documents do not contain information on capitalized advertising costs – most probably, Urban Outfitters does not capitalize advertising costs but charges them for the period within which they occurred.
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Store Opening:
Specifically, Urban Outfitters’ accountancy recognizes store opening costs as expenses when they are spent. All these costs are recorded in the income statement under the operating expenses. If store opening costs were to be capitalized, such as in case of a purchase of a building or significant improvements, it would be expensed off in the periods over the useful life of the assets, commonly over the lease term for the store or some fixed number of years that are likely to benefit the company. This amortization period would be determined with the expected time frame in which it is believed that the store would be creating economic returns.
Accounting Methods
In particular, accounting policies play an essential role in the firm’s financial statements because they systematically affect them. The decision between FIFO and LIFO physical inventory flow and expense recognition methods has the most significant effect. The senior Vice President and controller of Urban Outfitters, Inc. used the FIFO method for the inventory valuation according to the annual 10-K report (SEC, 2023).
This method presumes that the earliest inventory is issued first, which is advantageous in conditions of inflation since it allows the declaration of lower cost of the goods sold and, therefore, increased net income. This is the case since the older stock with possibly lower unit costs is used to write off the price of goods sold, as opposed to more recent stock, which could be pricier. Hence, the remaining stocks in the balance sheet are stated at the cost of the most recent purchasing activities, which shows relatively more significant total assets.
However, there is a significant demerit associated with the FIFO method because an organization records higher net income, thus resulting in higher taxable income. Nevertheless, FIFO is more advantageous to use in accordance with the company’s policy of Urban Outfitters as it provides the correct value of the inventory on the balance sheet and reveals comparatively higher profits (Tanaka & Respati, 2021).
On the other hand, had Urban Outfitters opted for the LIFO method, would the most recent inventory have been sold first, increasing the costs of goods sold and thus reducing the net income where there is a condition of rising prices? Relating to the balance sheet, this method would decrease the value of the ending inventory and, therefore, reduce the total assets reported. While LIFO has the advantage of producing lower income taxes because the company reports lesser profit, this method can confuse internal operational activities and paperwork as it does not necessarily follow the actual flow of inventories in a particular company.
Appreciating these methods and their consequences becomes pertinent to conducting precise financial analysis decision-making, such as how the firm handles its cost accounting and responsibilities.
Capitalizing versus Expensing
Similar to any other company, Urban Outfitters, Inc. operates under the recognition that some costs must be allocated tactfully under costs and others under assets. This decision is made in accordance with well-defined criteria, which enable the company to capitalize only on some of the expenses, such as advertising. When rightly capitalized, these costs appear on the company’s balance sheet as assets, which gives a higher figure for the company’s assets. This, in turn, can lead to increased reported profits for the company or business, as is the case with Apple. However, if most of these expenditures had been written off as expenses, these would have been subtracted from revenues in the income statement (Oswald et al., 2021).
This would lead to a decrease in gross earnings and as well the net income of the company, hence reducing earnings. However, there is a preference given to expensing these expenditures because the reported profits may be higher through the capitalization method. The most notable driver for generating this preference is the first-dollar benefits of expensing. While capitalization takes the cost of expenditure and then depreciates it over the useful life to gain a tax shield, expensing gives a direct offset of spending against the tax, thus giving a faster tax shield. This prophetic approach to cost distribution has a meaningful impact on Urban Outfitters, Inc.‘s monetary planning and competitive advantage.
MHA FPX 5010 Assessment 1 Conclusion
The choice of this training module does an excellent job of explaining the financial reality of the company known as Urban Outfitters, Inc., and the purpose of statements, as well as the influence that different segments of the business and different methods of accounting have on the business’s revenue.
With knowledge of these elements, the new district manager will comprehensively deliberate on his decisions, effectively plan, and contribute to the company’s achievement in the dynamic retail environment. Further, such knowledge is crucial for dealing with the challenges that arise in the sphere of managing the financial aspects of the enterprise and for achieving the latter’s goals.
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References
Forbes Magazine. (n.d.). Urban Outfitters | company overview & news. Forbes.
https://www.forbes.com/companies/urban-outfitters/?sh=390c5fd12acb
Tanaka, G.M.P., & Respati, H. (2021). Cost of inventory calculation analysis using the FIFO and LIFO methods. Journal of Business Management and Economic Research (JOBMER), 5(4), 109–120.
https://doi.org/10.29226/TR1001.2021.270
Oswald, D., Simpson, A., & Zarowin, P. (2021). Capitalization vs. expensing and the behavior of R&D expenditures. Review of Accounting Studies, 27(4), 1199–1232.
https://doi.org/10.1007/s11142-021-09631-7
MHA FPX 5010 Assessment 1
SEC. (2023). Urban Outfitters annual report 2023. Stocklight.
https://annualreport.stocklight.com/nasdaq/urbn/23793005.pdf
Urban Outfitters. (2024). About us. URBN.