Financial Statements - General Motors - Case Study Example

General Motors Report Task Table of Contents Table of Contents 2 Introduction 3 The conceptual framework 4 Recording business transactions 5 Presentation of financial statements 6 The benefits of preparing the financial statements 7 Recorded inventory and Merchandizing operations 8 Possible investments and international operations 8 The Statement of Cash Flows and Financial Statement Analysis 9 Profitability ratios 9 Liquidity ratios 10 Gearing ratios 11 Conclusion 12 List of References 14 Appendix 1: Ratio calculations 15 Introduction General Motors, founded in 1908, is a car manufacturing multinational corporation. The company’s headquarter in Detroit, Michigan. The company not only produces vehicle but also car parts and sells financial services. The General Motors (GM) produces cars under a vast array of brands such as the Chevrolet, GMC, Buick, Cadillac, Opel, Vauxhall, Holden, Baojun, Wuling, and Jiefang. Since its establishment, GM has engaged in several mergers and acquisition that saw it rise to become one of the biggest car manufacturers worldwide. The company strives to maintain its excellent performance as it treads on the road to achieving the vision, which is to design, build and sell the World’s best vehicle. The company’s car manufacturing and sale of vehicle parts are operated in over 120 countries across the globe under four primary segments (About GM n.d.). The segments are GM North America, GM South America, GM Europe, and GM International. General Motors has a high position in four major markets. Its market area is the most active in North America and South America, the second most influential market position in Asia/Pacific, Middle East and Africa and the fourth highest position in Europe. The company has the following number of authorized dealers in it four major operating segments: 4,946 dealers in North America, 7,087 dealers in Europe, 7,472 dealers in the international division, and 1,201 dealers in South America. General Motors is a publicly traded company whose shares are on the New York Stock Exchange. On that note, this paper seeks to present the following concerning the company: first, the conceptual framework and the financial statement of the enterprise. Second, the business transactions of the enterprise. Third, the presentation of the financial statements. Fourth, the inventory and merchandising operations. Fifth, the investments and international operations. Last, the statement of cash flow and financial statement analysis (About GM n.d.). The conceptual framework For the purpose of this essay, the conceptual framework of the company’s new business model is included. As was mentioned earlier, the company has a new business model that it hopes to make its vision a reality. The management team formulated new strategies to minimize the operating costs, develop a strong balance sheet and reduce the company’s risk profile. In addition, the existence of new leadership team with diverse talents is another critical factor to consider. The company adopts the framework provided by the U.S. GAAP in the preparation of the financial statement. The conceptual framework of the new business model is as below (General Motors: annual report, pp. 7-9). Recording business transactions The company primarily transacts through its five segments (GM North America (GMNA), GM Europe (GME), GM International Operations (GMIO), GM South Africa (GMSA), and GM Financial. The basis of transactions such as the determination of market share is the estimates of industry sales. Such operations are carried out in countries where public reporting is illegal. GMNA produces, distribute and sells cars in the U.S., Mexico, and Canada. In addition, it sells and distributes cars in Central America and the Caribbean. 51.1% of the company’s wholesale vehicle sales in 2013 are attributed to GMNA segment. Market share of General Motors was the largest at 16.9% in North America based upon retail car sales. The introduction of more products into the market such as Corvette Stingray, Cadillac CTS, Chevrolet Impala, Chevrolet Silverado, and GMC Sierra full-size trucks. GM Europe (GME) manufactures, distributes and sells vehicles in both Western, Central Europe, Eastern Europe, Russia and other Commonwealth member states. The segment’s sales contribute 16.3% of the wholesale sales volume in the year 2013. The basis for determining the company’s market position in Europe (fourth strongest) was on the number of retail vehicle sales, which was 8.3%. In an effort to reduce the carbon emission, the company decided to close its manufacturing plants in Bochum, Germany (General Motors: annual report 2013, pp. 20-25). GMIO manufactures, distributes and sells vehicles in the Middle East, Eastern Europe, and Africa, Asia/Pacific, Russia and other Commonwealth member nations. In the year 2013, 16.2% of the company’s wholesale vehicle sales volume was due to GMIO operations. GMSA produces, distribute and sells cars in Argentina, Ecuador Colombia, Brazil, and Venezuela. The segment also operates in Chile, Peru, Paraguay and Bolivia. In the year 2013, 16.4% of the company’s wholesale vehicle sales volume was due to GMSA operations. During the same period, the market share in South Africa was the strongest based on the volume of retail car sales, which was 17.5%. In Brazil, the company’s market share was the third strongest at 17.3%. Last, the GM Financial purchase both the GM and non-GM franchised-initiated automobile finance contracts. The segment also offers commercial lending services to GM-franchised dealerships and lease financing for new GM vehicles. The financial lending products targets low-income earners without the necessary qualifications to obtain loans from common sources such as banks. In November 2012, the segment acquired the automotive and the financial service businesses of Ally Financials, situated in Europe and Latin America. The investment activities appear in the both cash flow statement and the balance sheet. In the cash flow statement, the records are under the investment activities while, in the balance sheet, under non-current assets for relevant accounts (General Motors: annual report 2013, pp. 20-15). Presentation of financial statements In a bid to provide the needs and requirements of various bodies such as the FASB, US GAAP and the IFRS, and different stakeholders in the government and their agencies, customers, the investors , suppliers and other trade creditors, employees, lenders and the public, it is necessary to create financial statements. The needs of the mentioned stakeholders are as follows: the investors, who provide capital to a company are concerned about the levels of risk and return on their investments. They need financial information to help them decide whether they should buy or sell shares of a particular company. They also need the information that enables them to assess the ability of the business to pay the cash dividend. The second category of people is employees. Employees need to know whether their employer is financially stable. They use this data to evaluate the employer’s ability to implement a fair remuneration package, provide retirement benefits and be able to offer employment chances (Saudagaran, 2009, pp. 150-155). Lenders use financial information to access the ability of a company promptly to pay both the principal and interest on loans. Suppliers and other trade creditors need the financial data to enable them to determine whether their receivables will be paid without default. Customers are interested in financial information to determine the life span of an enterprise, especially when they have a long-term association with a company such as the presenting solutions to both short and long-term problems. Government and their agencies use the financial information to regulate the activities of an organization and to determine tax policies. They also use the information to compute national income. Lastly, the public use financial information to determine the trends and recent development activities of an enterprise to help them assess the possibility of a significant economic contribution to an organization (Saudagaran, 2009, pp. 150-155). The benefits of preparing the financial statements The following are the advantages of making the financial statement: first, the users of the financial statements such as the investors benefit by obtaining valuable information about an organization that facilitates informed decision-making. That is whether to buy or sell stocks of a company. Second, companies benefit by attracting new investors, lenders, and employees. The financial statements provide information used in assessing an organization’s financial condition. Third, the preparation of such statements is in compliance with the requirements of the government and their agencies, thus eliminates the legal consequences of violating such regulations. Lastly, by preparing such information, an organization creates a healthy association with the stakeholders, which creates a goodwill for that particular organization (Saudagaran, 2009, pp. 150-155). Recorded inventory and Merchandizing operations The criteria for measuring inventory, adopted by the company is the lower of the cost or the market price. The market price, in this case, is the inventory’s current selling price less the cost of sale. The market price is influenced by a number of economic and market conditions, the cost of the warranty, the influence of incentives on the balance sheet and the current profitability level of the vehicles. The market price for off-lease and other vehicles is arrived at by subtracting disposal and warranty costs from the current auction sales proceeds. The company reviews productive materials, supplies, service parts and work-in-process to determine shortages or surpluses and the usability. Therefore, all the stores in the mentioned markets adopt the inventory management strategy (General Motors: annual report 2013, pp. 65). Possible investments and international operations The company operates in various international markets through its five segments. As was discussed above, the international transactions are in Mexico, South Africa, Middle East, Russia, Europe, China, India, and Canada among other markets. The General Motors has multiple franchises and dealers who are responsible for car distribution and sales to the clients. The continued active operations in the mentioned markets have seen the company develop strong market positions. For instance, General Motors has the strongest market position in North America and South America. In order to sustain the international operations to their current level, a substantial capital investment is necessary. The purchase or lease of plants and equipment, buildings and other non-current and current assets is a requirement in an effort to set up business premises in the mentioned internal and local market. The process whole process is an investment (General Motors: annual report 2013, pp. 20-25). The following are the investment account as a result of the above-mentioned investments: expenditures for property worth $ 7,565 million, Available-for-sale marketable securities, acquisitions worth $ 6,754 million, Trade marketable securities, acquisitions worth $ 3,214 million, acquisition of companies, and net of cash acquired worth 2,623 million. In addition, cash and marketable securities worth $ 984 million, purchase and funding of finance receivables worth $ 30,727 million, Purchases of leased vehicles worth $ 2,254 million, and other investment activities worth $ 9 million (General Motors: annual report 2013, pp. 53-58). The Statement of Cash Flows and Financial Statement Analysis Profitability ratios Net profit margin- this ratio measures the ability of a company to manage its operating expenses such as the administrative costs and the cost of borrowings. A high ratio signifies a lower level of the business’s operating expenses (Najjar 2013, pp. 3-7). Concerning General Motors, 4.03%, and 3.43% are the net profit margin for the year, 2012 and 2013 respectively. Based on the result for the financial year 2013, the company’s net profit was 3.43% of the revenues, whereas, the other 96.57% of the revenue were used to settle the operating expenses. Based on the analysis, there is a decreasing trend between the two periods because the company’s net profit declined whereas, the level of sales increased. Based on the analysis, the operating expenses of the enterprise are very high, which indicates the need for the company to formulate more efficient cost management methods (Najjar 2013, pp. 3-7). Return on capital employed- the expression of capital employed can take a different form such as the total assets – current liabilities. The ratio measures the portion of the net profit generated by every dollar of capital employed. Concerning General Motors, 6.43%, and 5.13% are the return on capital employed for the financial year 2012 and 2013 respectively. Based on the result for the financial year 2013, the corporation’s capital employed generated 5.13% of the total net profit. Based on the analysis, there is a decreasing trend between the two periods because the company’s net profit reduced and at the same time, the level of capital employed rose. It is, therefore, inferred from the analysis that the capital employed is not efficiently utilized. As a result, the company should increase the utilization rate to see the return generation increase (Najjar 2013, pp. 3-7). Return on equity- this ratio measures the proportion of a company’s profits attributed to the shareholder’s equity. The return on equity for General Motors for the fiscal period 2012 and 2013 are 16.58% and 12.35% respectively. Based on the result for the financial year 2013, every $ 100 worth of equity generated $ 12.35 toward the company’s profitability. Based on the analysis, there is a decreasing trend between the two periods because the Business’s net profit reduced and at the same time, the level of equity increased. Based on the analysis, the return on equity is fairly high (Najjar 2013, pp. 3-5). Liquidity ratios Current ratio- the ratio determines how well the company can use the available current assets to service the current obligations arising from the day-to-day operations. A company is in a stable liquidity condition if the current asset to current liability ratio is 2:1 (Najjar 2013, pp. 3-5). Concerning General Motors, the current ratio for the year 2012 and 2013 are 1.296 and 1.306 respectively. Based on the result for the financial year 2013, $ 1.306 of current assets were available, in the company, to cover every dollar of the current liabilities. Based on the analysis, there is an increasing trend between the two periods because the Business’s current assets increased. During both periods, the company’s liquidity position was strong and sufficient enough to settle the current obligation as they fall due. Consequently, the liquidity level of the corporation should be maintained or improved. The possible method of strengthening the liquidity position is through investing in current assets such as cash and the marketable securities (Najjar 2013, pp. 3-5). Cash ratio- the ratio determines how well the company can use the available cash and cash equivalent, banks to meet the short-term obligations. Concerning General Motors, $ 0.342 times and $ 0.32 times are the cash ratio for the year 2012 and 2013 respectively. Based on the result for the financial year 2013, the company had $ 0.32 for covering every dollar of the short-term obligations. Based on the analysis, the company’s cash is not sufficient enough to completely meet the current commitments. There is a decreasing trend between the two periods because the Business’s Current requirements increases more while, the cash and cash equivalent level rose less than proportionately (Kimmel, Weygandt, & Kieso 2008, pp. 675-683). Gearing ratios Debt/equity - ratio measures the percentage of borrowings and equity in the company’s capital structure (Hunt & Andrews 1968, pp. 94). Concerning General Motors, $ 0.29 and $ 0.51 are the ratio for the financial period 2012 and 2013 respectively. Based on the result for the financial year 2013, there was $ 0.51 of debt for every $ 1 of equity. The ratios increase between the two periods because the Business sought for more debt in the year 2013 than in 2012. The analysis shows a low gearing level for both the periods. Therefore, the Company’s level of debt risk is also low (the likelihood of default and solvency) (Kimmel, Weygandt, & Kieso 2008, pp. 683). Interest coverage ratio – the ratio determines how well the company can service the cost of capital (debt). In addition, it indicates the capability of the enterprise to seek for more debt and meet the relevant future costs. When the ratio is high, the company’s ability to pay interest charges increases (Kimmel, Weygandt, & Kieso 2008, pp. 683). Concerning General Motors, -115.8 times and 36.18 times are the ratios for 2012 and 2013 respectively. Based on the result for the financial year 2013, the company could pay the cost of capital 36.18 times using the earnings before interest and tax. There is an increasing trend between the two periods because the earnings before interest and tax rose in 2013. Therefore, the company’s ability to service the cost of debt also improved (Barnes & Lea-Greenwood 2006, pp. 296). The following are the ratio of the net cash from investing activities, Net cash from financing activities, and net cash from operating activities to sales. (The net cash flow from investing activities/sale)*100 = -2.3% and - 9.24% in 2012 and 2013 respectively. (The net cash flow from financing activities/sales)*100 = -3.114% and 2.40% in 2012 and 2013 respectively. (The net cash flow from operating activities/sales)*100 = 6.965% and 8.126% in 2012 and 2013 respectively. Based on the above analysis, the company used 2.3% and 9.24% of revenue in investment activities. Based on the financing activities versus income, 3.114% of the revenue were used while 2.4% of the revenue were generated in 2012 and 2013 respectively. Based on the analysis of the operating activities versus sale, 6.965% and 8.126% of sales were generated by the firms operating activities. Therefore, the cash flow from the operating activities is higher than those from other activities indicating the vibrancy of the company’s operating activities. Conclusion The immense efforts put by the company towards achieving its vision is visible. However, the following should be acted upon: first, more focus is needed on the cost management methods to minimize the operating costs. Second, the utilization rate of the capital employed should increase. Third, company should maintain the liquidity level high and the gearing level low as it currently is. Fourth, the operating activities should be vibrant to improve the cash inflow generation. List of References About GM n.d., Viewed 4 March 2015, http://gmsustainability.com/fancybox/approach_aboutGM.html Barnes, L., & Lea-Greenwood, G. 2006, Fast fashion, Emerald Group Publishing, Bradford, England. General Motors: annual report 2010, Viewed 5 February 2015, http://www.gm.com/content/dam/gmcom/COMPANY/Investors/Corporate_Governance/PDFs/StockholderInformationPDFs/Annual-Report.pdf General Motors: annual report 2013, Viewed 5 February 2015, http://www.gm.com/content/dam/gmcom/COMPANY/Investors/Stockholder_Information/PDFs/2013_GM_Annual_Report.pdf Kimmel, P. D., Weygandt, J. J., & Kieso, D. E 2008, Accounting: Tools for business decision-making, John Wiley, Chichester. Mclean, R. A 2003, Financial management in health care organizations, Delmar Learning, Clifton Park, NY. Najjar, N.J. 2013, "Can Financial Ratios Reliably Measure the Performance of Banks in Bahrain?", International Journal of Economics and Finance, vol. 5, no. 3, pp. 152-163. Palmer, M. & Sanders, T.B. 2008, "Going Concern Debt Ratios: Is The Firm Safe?", Corporate Finance Review, vol. 13, no. 3, pp. 25-33. Saudagaran, S. M. (2009). International accounting: a user perspective. Chicago, IL, CCH. Appendix 1: Ratio calculations Profitability ratios 2013 2012 Net profit margin (Net profit/Sales)*100 3.43% 4.03% Return on Equity ( Net profit/ Equity)*100 12.35% 16.58% ROCE (Net profit/Net assets)*100 5.13% 6.43% Gearing ratios Debt/equity (fixed charge debt/equity) $0.51 $0.29 Interest coverage (EBIT/Interests charges) 36.18 -115.8 Liquidity ratios Current ratio (current asset/current liabilities) 1.306 1.296 Cash ratio (Cash+ bank)/Current liabilities 0.32 0.342 Read More