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    Netflix 10k Analysis

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    Netflix 10k Analysis

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    207 views9 pages

    Netflix 10k Analysis

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    of 9

    ACCT400A/500A

    Intermediate Financial Accounting


    Project #2



    Analysis of Netflix’s 2022 10k
    Annie Frank, 12:30 Section

    1. Describe the format of the income statement (single-step, multi-step, hybrid) and
    identify why you describe it that way.

    The format of Netflix’s income statement is multi-step. As shown in Reference 1 there are
    subtotals such as operating income and income before taxes before arriving at net income. As
    opposed to single-step income statements which group together all expenses and all revenues
    rather than dividing them into operating and nonoperating sections.

    2. Utilize the footnote addressing significant accounting policies to identify the method
    used to depreciate PP&E.

    Netflix generally utilizes the straight-line depreciation method to depreciate its property and
    equipment over the shorter of the equipment or property’s estimated useful life (generally up to
    30 years) or the expected lease term.

    3. Think about the business model utilized by your selected company (how do they sell
    their products or services to customers). Utilize the footnote addressing significant
    accounting policies to summarize how they recognize revenue and any specific
    issues related to revenue recognition that they need to consider given their business
    model. Examples could include selling on credit, receiving payments in advance,
    sales returns, gift cards, collectability concerns, etc.

    Netflix sells its subscriptions and only accepts payments in advance. They recognize revenue
    throughout the month for which the customer prepaid, as required by GAAP (Reference 3).

    Deferred revenue consists of membership fees that have been billed but have yet to be recognized,
    this includes gift cards and other prepaid memberships. Most deferred revenue is expected to be
    recognized within the next month. For gift cards and other prepaid memberships revenue is
    recognized in the period immediately following the redemption of the gift card.

    4. Evaluate the trend in sales/revenue over the past three years. Calculate the year
    over year percentage change in revenue. Discuss what you believe is driving the
    change in sales considering what you know about the company, the industry, and the
    overall economic conditions.

    The percentage change in revenue from 2020-2021 for Netflix increased by approximately 19%.
    !"#"$%&&'!&""#()#
    This was calculated by the following: !&""#()#
    . The percentage change in revenue from
    *+#+)))('!"#"$%&&
    2021-2022 was an increase of approximately 6% as calculated by the following: !"#"$%&&
    .
    Data aside from percentages is shown in units of a thousand (Reference 1).

    The 19% increase in revenue from 2020-2021 could be attributed to Netflix gaining over 25
    million subscribers in 2021. Going from 192.9 million subscribers in 2020 to 219.7 million
    subscribers in 2021 (Reference 6). Revenue soared with the influx of new subscribers.

    The 6% increase in revenue from 2021-2022 could be attributed to Netflix’s price increase
    starting its effect on January 14, 2022. It increased the prices of each plan by $1-$2 a month for all
    United States-based subscribers. The price effect went into effect immediately for new members

    Copyright © Arizona Board of Regents Page 2 of 9


    and gradually for existing members (Reference 5). Netflix has also continued to gain subscribers
    which is also a contributing factor to its increased profits.

    5. Evaluate the trend in net income over the past three years.
    a. Calculate profit margin (net income as a percent of revenue). Perform vertical
    analysis on key items (calculating each item as a percentage of revenue) of the
    income statement to help identify reasons for the change in profit margin
    rates between years.

    Netflix’s profit margins were 11%, 17%, and 14% in 2020, 2021, and 2022 respectively. The cost
    of profits as a percentage of revenue were 61%, 58%, and 61%, in 2020, 2021, and 2022
    respectively. The cost of technology and development compared to revenue increased by one
    percentage point each year, from 7% to 8%, and finally to 9% in 2022. Interest and other
    income/expenses had a negative balance in 2020 of 618441, or 618.4 million as the data on the
    income statement is presented in thousands. This was -2% of revenue and decreased net income
    for 2020. In both 2021 and 2022 interest and other income/expenses had positive balances and
    contributed to net income, both were 1% of revenue for the respective years. Provisions for
    income tax for all three years were roughly 2% of revenues (Reference 1).



    b. Calculate the year over year percentage change in net income. Compare the
    percentage change in revenue from question #5 to the percentage change in
    net income.

    There was an 85% increase in net income from 2020-2021, as calculated by the following:
    )++#!!%'!$#+*")
    !$#+*")
    . However, from 2021 to 2022 there was a 12% decrease in net income, as
    &&"+"!&')++#!!%
    calculated by the following: )++#!!%
    . With the 85% increase in net income from 2020-2021,
    there was a 19% increase in revenue over those same years. However, even with a 6% increase in
    revenue from 2021-2022, there was a decrease in net income by 12% (Reference 1).

    Copyright © Arizona Board of Regents Page 3 of 9




    c. Analyze and discuss your findings.

    Looking at the finding for parts a and b we find that the cost of revenue as a percentage of revenue
    decreased from 2020 to 2021, going from 61% to 58%. This decrease in costs would increase net
    income as fewer costs lead to greater net income. This could account for the 85% increase in net
    income from 2020-2021, as the cost of profit decrease from one year to the next. Bring this
    forward to 2022 we see the cost of revenue as a percentage of revenue increase by three
    percentage points back to 61% of revenues. This increase in costs could account for the decrease
    in net income from 2021-2022 by 12%. Between 2021 and 2022 revenues only increased by 6%
    and the cost of revenues increased by 6%, during these same years. Although net income still
    increased from 2020 to 2022 by 63%, because of the huge increase of 85% in net income from
    2020 to 2021, net income decreased from 2021 to 2022.

    6. Compute your company’s current ratio and debt to equity ratio for both years
    presented in the balance sheet. Analyze and discuss what these ratios tell you about
    the company.



    Netflix’s current ratio was 4.13 and 3.64 for 2022 and 2021 respectively. This means that for every
    dollar of current liabilities, there are $4.13 dollars of current assets for 2022 and $3.64 for 2021.
    Its debt-to-equity ratio is 1.34 and 1.81 for 2022 and 2021. This means that for every dollar of
    shareholder’s equity, there are $1.34 of total liabilities in 2022 and $1.81 in 2021 (Reference 7). In
    order to better understand if these ratios are favorable or unfavorable, we must compare them to
    other competitors in the industry, as shown below.


    7. Select a competitor and calculate current ratio and profit margin for the competitor’s
    most recent year. Compare to your calculations for your company. Analyze and
    discuss.

    Copyright © Arizona Board of Regents Page 4 of 9


    Walt Disney Company’s current ratio for 2021 was 1.08 which means that for one dollar of current
    liabilities that Disney has, it has 1.08 dollars of current assets. Disney has a profit margin of 4% for
    2021. This means that for every dollar of revenue, it had net income of $0.04 (Reference 8). If we
    compare these values back to Netflix for the same year 2021, we see that Netflix had a profit
    margin of 17%. Which is over four times as high. Netflix is doing favorably in this aspect compared
    to one of its closest competitors, Disney Plus. Netflix is also doing well with its current ratio of 3.64
    in 2021, compared to Disney’s current ratio of 1.08. This means that Netflix has a current ratio
    that is over three times as large as Disney, which is favorable.

    Copyright © Arizona Board of Regents Page 5 of 9


    References

    Reference 1 – Consolidated Statement of Operations



    Reference 2 – Depreciation Method



    Reference 3 - Revenue

    Copyright © Arizona Board of Regents Page 6 of 9


    Reference 4 - Revenue Continued

    Reference 5 - Kastrenakes, Jacob. “Netflix Raises Prices on All Plans in US.” The Verge, The Verge,
    14 Jan. 2022, https://www.theverge.com/2022/1/14/22884263/netflix-price-increases-
    2021-us-canada-all-plans-hd-4k.

    Reference 6 - Ruby, Daniel, “Netflix Subscribers 2023 - How Many Subscribers Does Netflix Have?”
    Demand Sage, 31 Dec. 2022, https://www.demandsage.com/netflix-subscribers/.

    Copyright © Arizona Board of Regents Page 7 of 9


    Reference 7 -Balance Sheet

    Reference 8 – Disney Balance Sheet

    Copyright © Arizona Board of Regents Page 8 of 9


    Copyright © Arizona Board of Regents Page 9 of 9

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