Developing the Analytics Mindset Project Overview

ASC 606 Revenue Recognition from Contracts with Customers and the DuPont Method

This case will be covered in three projects released throughout the term per the Course Schedule.

The primary purpose of financial statements is to provide useful information to key decision makers, including financial advisors and investors. Investors use the information contained in financial statements to measure and compare company performance in hopes information for better investment decisions. One model that is especially useful in communicating company performance is the DuPont Method.The DuPont Method, coupled with an Analytics Mindset, yields great insight for the investor.For this case, we (1) identify skills used in an analytics mindset, (2) explore the origin of the DuPont Method (3) apply the DuPont Method to the data and (4) incorporate Microsoft Power BI to perform data analytics and produce data visualizations in consideration of the recent adoption of ASC 606 Revenue Recognition from Contracts with Customers.

Analytics Mindset in Action

Effective critical thinking includes exercising an analytics mindset.This case seeks to develop and sharpen skills involved with an analytics mindset. Those who employ an analytics mindset have the ability to:

• Ask the right questions.
• Extract, transform and load (ETL) relevant data into a data analysis tool.
• Apply appropriate data analytic techniques.
• Interpret and communicate analytical results with stakeholders.

Context of the Method

Back in 1802, in the city of Wilmington, Delaware, E. I. du Pont de Nemours and Company, or more often referred to as DuPont, was founded.The company started simple, as a producer of black gunpowder, among other items. Today, DuPont holds the record for having the oldest stock in the Dow Jones Industrial Index. Their scope of production has expanded to include chemicals with widespread application ranging from industries such as food and dietary supplements to textiles and pharmaceuticals. Additionally, the company has a significant history in innovative accounting systems. The Return on Equity (ROE) ratio, in its original form, may be attributed to DuPont.ROE reveals the amount of profit that management can generate from resources provided by the owners, or the shareholders. Just over a century later, in 1912, Donaldson Brown, an executive and corporate director for DuPont, effectively decomposed ROE into additional ratios for closer scrutiny.¹

DuPont relied heavily upon the formula for managing its own business and realized several future successes from this approach. The DuPont Method is still relevant today and used by both internal and external stakeholders to better understand company performance.

In summary, if a stakeholder finds ROE to be unsatisfactory, the DuPont analysis can assist by drilling down to the area in the business that requires attention.

Model

The most recent DuPont Method is reflected by the following formula:

Return on equity = Profit margin ratio * asset turnover ratio * financial leverage ratio

The formula may be expanded as follows:

Net Income=Net IncomeXSalesXAvg. Total Assets

Avg. Shareholders' EquitySalesAvg.Total AssetsAvg.Shareholders' Equity

Return on equityis the amount of net income generated for each dollar of value that a shareholder owns of the company and may be either positive or negative.

Profit margin ratiois the percentage of each dollar of sales that the company retains as earnings. If the company realizes a net loss, this ratio may be negative.

Asset turnover ratiospeaks to the operating efficiency of the company.This ratio is the amount of sales that is generated for each dollar of assets the company owns. On rare occasions, this ratio may be negative.

Financial leverage ratiois the amount of assets that is financed by shareholders (equity holders), as opposed to debt holders. On rare occasions, this ratio may be negative.

Case at a Glance

For this case, you will develop and strengthen an analytics mindset by comparing and contrasting early adopters of ASC 606 across different industries using the accounting ratios from the DuPont method. In Part I of the case, you will gain an understanding of a few accounting ratios which will help you to formulate the proper questions about the companies under analysis. In Part IIa, you will load the data into Microsoft Power BI and perform simple tests to verify that you have loaded it correctly. In Part IIb, you will analyze the data. Finally, in Part III, you will leverage the power of data visualization to present the analysis in a format that is more easily communicated.

Data

You will apply ETL techniques to financial statement data for various companies from different industry groups including Aircraft Manufacturing, Securities and Commodities Exchanges, and Semiconductor and Related Device Manufacturing over multiple years.You will be provided the data in a clean format(EXTRACTION &TRANSFORMING).You will be responsible formoving the data to BI for manipulation(LOADING), further transforming, analysis and subsequent discovery.

Before you analyze data, it is helpful to develop an expectation of what you think you might see. Review ASC 606 Recognizing Revenue from Contracts with Customers. Which industries listed in the Data section of the Case Overview do you believe will realize the most significant impact in the following ratios? Why?

1. Return on equity
2. Profit margin ratio