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Financial Analysis: Cisco Systems Inc. (2012)
Introduction
The financial status and fiscal health of an organization can be determined using
the organizations financial statements including balance sheets, cash flow statements
and income statements. Financial statement is therefore a key metric in determining a
companys performance and is used by management in allocating assets and liabilities
in order to enhance financial performance and improve the companys accounts (Helfert
40). Different public traded companies use different accounting principles and standards
depending on their jurisdiction, but the primary objective is to enhance transparency and
facilitate comparison with other companies (Mooney & Marrer 31). This report seeks to
explore the financial statements of Cisco Systems Inc. that were reported in the
companys 10 K form for the 2012FY in order to determine the impact of journal entry
variations on a companys bottom line and earnings per share (EPS). Situational
analysis will be conducted on the companys journal entries by running variants on the
10 K reports and the resulting findings will be discussed.

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Journal Entries
The financial statement of Cisco for the year 2012 in the form of a 10 K form is
being used for analysis (Cisco Inc. 43-44). The consolidated balance sheet for Cisco
Inc. is presented below and will be referred to when journal entries are being discussed.
28-Jul-12
ASSETS
Current Assets:

(Amounts in $ millions)

Cash and cash equivalents

Investments
Accounts receivable, net of allowance for doubtful accounts of $207 at July
28, 2012 and $204 at July 30, 2011
Inventories
Financing receivables, net
Deferred tax assets
Other current assets
Total current assets
Property and equipment, net
Financing receivables, net
Goodwill
Purchased intangible assets, net
Other assets
TOTAL ASSETS

9,799
38,917
4,369
1,663
3,661
2,294
1,230
61,933
3,402
3,585
16,998
1,959
3,882
91,759

LIABILITIES AND SHAREHOLDERS EQUITY

Current liabilities:
Short-term debt
Accounts payable
Income taxes payable
Accrued compensation
Deferred revenue
Other current liabilities
Total current liabilities
Long-term debt
Income taxes payable
Deferred revenue
Other long-term liabilities
Total liabilities
Equity:
Cisco shareholders equity:

31
859
276
2,928
8,852
4,785
17,731
16,297
1,844
4,028
558
40,458

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Common stock and additional paid-in capital, $0.001 par value: 20,000 shares
authorized; 5,298 and 5,435 shares issued and outstanding at July 28, 2012
and July 30, 2011, respectively
Retained earnings
Accumulated other comprehensive income
Total Cisco shareholders equity
Non-controlling interests
Total equity
TOTAL LIABILITIES AND EQUITY

39,271
11,354
661
51,286
15
51,301
91,759

Issuance of Shares
The first journal entry pertains to the issuance of common stock by Cisco Inc. It is
assumed that Cisco Inc. issues another two hundred thousand shares of common stock
where each share is valued at $10. It is further assumed that all issued shares of the
new issue are immediately purchased by public at the issuance price of $10 per share.
This will subsequently result in the companys revenue growth by two million USD in
form of cash.
During the issuing of new stock, there will only be two major accounts that will
see changes in the entries. The cash and assets will increase to $9,801 million due to
the influx in cash amounting to million USD. The total current assets will increase from
$61,933 million to $61,935 million and consequently there will be an increase in the
company's total assets to $91,761 million. This will result in the disparity of the balance
sheet entries and therefore to restore equilibrium, the released common stock will need
to be recorded under the stockholders equity which will increase by 200,000 shares.
The companys net income will however not be affected by the sale of the common
stock since it will have no immediate impact on the revenue streams of the company
(Mooney & Marrer 108).

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On the other hand, the issue of the new shares will have an impact on the
companys EPS since the number of total shares will increase to 220,000 requiring the
changes to be reflected in the earnings. While the previous earnings of $8,041 million
remain unchanged, the number of shares has increased by 200,000 and as a result,
there would be a decrease of the EPS from the current $1.49 (basic) to $0.14 per share
(basic).
The journal entries are shown in the table below:
Cash and cash equivalent

+2

Common stock and additional paid-in capital, $0.001 par value: 220,000 shares
authorized; 205,298 and 5,435 shares issued and outstanding at July 28, 2012 and July
30, 2011, respectively.

+2

Acquisition of Equipment
It is assumed that Cisco Inc. acquires equipment worth five hundred million
dollars but upon purchase. However, the company pays a down payment of one
hundred million dollars in cash rather than pay the entire amount upfront. The company
agrees with the vendor that it will defer the payment of the remaining four hundred
million dollars using signed notes. Since it is a credit purchase, the equipment, which is
categorized as an asset, is available for immediate use by Cisco Inc. Consequently, the
total asset value of the company will immediately increase with respect to the value of
the equipment. The signed notes that represent payment do the equipment will be
considered liabilities to Cisco Inc since it is the value owed. This will increase the
accounts payable by four hundred million which is the value of the signed notes. The
down payment for the equipment was made in cash which will conversely have the

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implication that the cash entry of assets will decrease at a value that is in accordance
with the cash payments for the new equipment.
However, since it is a credit sale and four hundred million is due to the vendor of
the equipment, it results in a compound entry requirement in order to restore equilibrium
to the balance sheet. The table below illustrates the journal entries that are required for
the credit purchase of the equipment in order for the balance sheet to reflect the
incoming equipment, the cash down payment and the signed notes due to the vendor.
Property, plant and equipment net

+500

Cash and cash equivalent

-100

Accounts payable

+400

Subsequent to the acquisition of the new equipment, the changes in liquidity do

not affect net income of the company since the acquisition of equipment by the
company does not affect the sales. As a result, the purchase of the equipment does not
a direct impact that can increase or decrease the overall net income. This is also the
case when evaluating the EPS in that the acquisition of equipment by Cisco Inc. has not
direct impact on the companys EPS taking into account the fact that the earning of
Cisco Inc. are not affected by the transaction (Barth, Landsman & Lang 469). Although
the Cisco Inc cash account has been reduced by the purchase of the equipment, this
cash stream is not a component of the earnings of the company and therefore the
overall earnings of Cisco Inc. are not affected by the purchase. As a result, Cisco Inc.s
EPS remains unchanged subsequent to the acquisition of the new equipment.

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Provision of Services
Another situation is to assume that Cisco Inc. introduces a new type of service
such as data storage and security which it provides to both individual and corporate
clients and is currently valued at a total of 10 million dollars. The current value is
obtained from the amount due from clients who have already received the services,
invoices and have already been billed for the services but they have yet to provide
payment as of 28 July when the balance sheet was prepared. It is projected that the
client will deliver payment for the services they received within the next four weeks
although there has been no confirmation by the company as yet on the exact date. In
the current situation, the revenue is due to Cisco Inc.s cash accounts but this revenue
cannot be entered into the financial statements as revenue since the respective cash
amounts have not been received by the company. Consequently, the due revenue will
be entered under the receivable accounts entries since the company is the creditor to
these clients (Giroux 245). The due revenue can only be considered as revenue in the
companys financial statements when the actual cash is received since before that there
still remains a risk that the clients will default. This accounting practice defers to the
revenue recognition principle making it a standard practice across organaizaations
(Needles, Powers and Crosson 373).
The journal entries of the credit issued by the company can be reflected as:
Accounts receivable, net of allowance for doubtful accounts of $207 at July 28, 2012 and
+10
$204 at July 30, 2011

Service based revenue

-10

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Despite the fact that the company offered service to its clients, the net income
does not increased and will increase in the future once cash is received. Consequently,
credit sales do not affect the companys net income at present and therefore the net
income of Cisco Inc will remain unchanged (Giroux 245). Similarly, the EPS of Cisco Inc
will not be affected since credit sales do not have an impact on the companys net
income or EPS.
Salary Payments
Assuming that Cisco Inc. reimburses the salaries of its employees at an amount
of 2 million dollars in form of cash payments, then salaries qualify as regular expenses
to the company. Since the cash expense occurs immediately to Cisco Inc. with the
salary payments, the transaction will affect the Salaries entries under the companys
expenses as well as the cash entries.
The journal entries for the reimbursement of salaries to Cisco employees can be
illustrated as:
Salaries

+1

Cash and cash equivalent

-1

Salaries are considered as an expense to business entities and therefore have

an impact on the companys net income as well as the EPS. The salaries expense will
have a negative impact on Cisco Inc.s net income which will be decreased by 1 million
dollars following cash payment of salaries. Furthermore, the EPS of the company will be
affected through the negation of earnings by the salary expense (Rezaee 74). However,
the reduction of the EPS would be marginal considering the expenses in salaries are

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significantly low relative to the earnings of the company. Consequently, the salaries
expense will not decrease the earnings significantly enough to create a noticeable
change in the EPS.
Conclusion
The situational analysis of four financial scenarios underscores the effects of
changes to the financial statements of Cisco Inc in the 2012 fiscal year. All scenarios
were analyzed as journal entries with changes observed to have an impact on different
components of the financial statements. The analysis revealed that a companys net
income and EPS are mainly affected by transactions that have a direct impact on an
organizations revenues. In addition, an organizations financial performance remains
unchanged when the actual cash account is unaffected, with cash transfers to payable
and receivable accounts altering the financial performance.
Potential Areas of Research
Further research should be conducted on the impact of IPOs and share splits on
the net income and the EPS. In addition, the reinvestment of retained earnings and
share capital have an impact on the organizations operations but further analysis of
these financial entries needs to be conducted to determine their overall effect on the
EPS and net income.

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Works Cited
Barth, Mary, Landsman, Wayne & Lang, Mark. "International accounting standards and
accounting quality." Journal of Accounting Research 46.3 (2008): 467-498. Print.
Cisco. Cisco Systems Inc: FORM 10-K. Cisco Systems, 12 Sept. 2012. Web. 9 Dec.
2013. <http://investor.cisco.com/secfiling.cfm?filingID=1193125-12-388590>
Giroux, Gary. Earnings magic and the unbalance sheet: the search for financial reality.
Hoboken, N.J: Wiley, 2006. Print. 245-246
Helfert, Erich A. Financial Analysis - Tools and Techniques - A Guide for Managers. New
York: McGraw-Hill, 2001. Print.

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Mooney Kate & Marrer, Kerry. Sound investing: uncover fraud and protect your portfolio.
New York: McGraw-Hill, 2008. Print.
Needles, Belverd E., Marian Powers and Susan V. Crosson. Financial and Managerial
Accounting. New York: Cengage Learning, 2010. Print.
Rezaee, Zabihollah. Financial statement fraud: prevention and detection. New York:
Wiley, 2002. Print.