Analyzing Financial Statements answeres - Essay Example

FINANCE AND ACCOUNTING SEARS HOLDING CORPORATION 5. This module which is used is a public traded company that focuses on seamlessly connecting the digital and physical shopping experiences. Its 2013 financial statements are analyzed below majoring on the cash flow analysis. The ratios that are used to analyze in the analysis of the cash flow with regards to companies solvency, liquidity and viability are discussed below; (Gregor, 2008)a) Operating Cash Flow RatioOrdinarily, the operating cash flow ratio is one of the most important cash flow ratios.

Cash flow is an indication of how money moves into and out of the company and how you pay your bills. Operating cash flow relates to cash flows that a company accrues from operations to its current debt. It measures how liquidity a firm is in the short run since it relates to current debt and cash flows from operations. (Gregor, 2008)Operating Cash Flows Ratio = Cash Flows from Operations/Current Liabilities = (1116)/8414= - 0.133The ratio -0.133 is less than which means Sears Company is not generating enough cash to pay off its short-term debt which is a serious situation in the company.

This is a critical concern and a matter of urgency. If it is not dealt with it may lead to liquidation of the company. Therefore, it is possible that the firm may not be able to continue to operate. (Sears, 2013)b) Price/Cash Flow RatioThe price to cash flow ratio is often considered a better indication of a companys value than the price to earnings ratio. It is a really useful ratio for a company to know, particularly if the company is publicly traded. It compares the companys share price to the cash flow the company generates on a per share basis.

(Gregor, 2008)Price/cash flow ratio = Share price/Operating cash flow per share = (0.01)/ (1, 116, 000000/500 shares) = 1/223200000This implies that the price to cash flow ratio is quite small and that the ratio price ought to be increased for the shareholders. Ordinarily, share price is usually the closing price of the stock on a particular day and operating cash flow is taken from the Statement of Cash Flows. Some business owners use free cash flow in the denominator instead of operating cash flow.

(Gregor, 2008)c) Cash Flow from Operations/Average Total LiabilitiesNormally, Cash flow from Operations/Average total liabilities is a similar ratio to the commonly-used total debt/total assets ratio. Both measure the solvency of a company or its ability to pay its debts and keep its head above water. (Anonymous, 2008)Cash flow from Operations/Average Total Liabilities= {(1116) X 2}/8414=0.27=27%The higher the ratio, the better the firms financial flexibility and its ability to pay its debts.

The company has a low ability to pay its debts since it has a low ratio of 0.27. d) Current Ratio The current ratio is the most simple of the cash flow ratios. It tells the business owner if current assets are sufficient to meet current debt. (Gregor, 2008)Current Ratio = Current Assets/Current Liabilities = 9265/8414 = 1.1 The answer shows how many times over a company can meet its short-term debt and is a measure of the firms liquidity. This ratio means that Sears Company has a low degree of settling its debts by the use of the current assets.

(Wood, 2009)e) Quick Ratio (Acid-Test) The quick ratio, or acid test, is a more specific test of liquidity than the current ratio. It takes inventory out of the equation and measures the firms liquidity if it doesnt have inventory to sell to meet its short-term debt obligations. This implies that the sears company has to sell inventory to meet its short-term debt, which is not a good position for the firm to be in. (Gregor, 2008)Quick Ratio = Current Assets - Inventory/Current Liabilities = {9265-(5963)}/8414 =0.39.6.

Management discussion and Analysis.According to the 10-K form of the Sears Company does not follow the conservatism principle which demands that all the liability and expenses be recorded as soon as they occur. This often reveals the true financial stability and profitability of the company when they are recorded at their right periods. When they are not recorded in their rightful periods, artificial delays of liabilities and expenses are created which reveals profits in the statements. According to the external auditors, the shareholders will demand the increase in the share value which has led to the loss in the Sears Company.

(Wood, 2009)The company recorded a net loss attributable to Holdings shareholders of $1.4 billion ($12.87 loss per diluted share) and $930 million ($8.78 loss per diluted share) for 2013 and 2012, respectively. The results of the company for 2013 and 2012 were affected by a number of significant items. Our net loss as adjusted for these significant items was $700 million ($6.60loss per diluted share) for 2013 and $266 million ($2.51loss per diluted share) for 2012. The increase in net loss for the year reflected a decline in gross margin, which resulted from both a decline in revenues as well as a decline in gross margin rate of 220 basis points, partially offset by a decrease in selling and administrative expenses.

(Sears, 2013)Works CitedAnonymous. (2008). Sears holding corporation. Retrieved 2015, from http://searsholdings.com/invest/financGregor, P. (2008). operating cash flow ratio. Retrieved 2015, from http://www.investinganswers.com/financial-dictionary/ratio-analysis/operating-cash-flow-ratio-2802Sears. (2013). Annual financial statement-2013. Retrieved 2015, from http://searsholdings.com/invest/docs/SHC_2013_Form_10-K.pdf#pagemode=thumbs&page=1&zoom=100,0,0Wood, F. (2009). Business Accounting 2.

Prentice Hall.