IKEA's Managerial Accounting - Example

Managerial Accounting Student’s Name Institution CHAPTER ONE PROFILE OF THE COMPANY Industry Study IKEA operates in an industry known as a retail industry that uses multiple channels to sell consumer goods to their customers with an aim of making a profit. There are several firms dealing in the sale of consumer goods and services but IKEA is known to be a player in the retail industry more specifically in the supply of wood-based furniture (Baker, Christensen, & Cottrell, 2012). Within the larger retail industry, there is the IKEA Industry Group, which is comprised fully integrated IKEA industrial group. IKEA Industry is comprised of 50 production units with multiple offices in 10 three renowned continents. The industry is known to manufacture about 100 million units of furniture and furniture related components every single year as facilitated by the industry employee base that currently lies at 16500 people. The industry is highly committed in investments that are long-term and considers pursuing highly ambitious growth. Company History IKEA, which is a privately owned company, is a company that sells ready to assemble wood furniture such as desks, beds, chairs, appliances including home accessories. A 17-year-old Ingvar Kamprad founded the company in the year 1920’s where he only sold flower seed, decorations, stationery, and even matches (Baker, Christensen, & Cottrell, 2012). Between 1940’s and 50’s Ingvar changed the company to a furniture selling retail before it fully transformed to the currently known IKEA in the 1960's and 70's. IKEA then expanded to places like United States, France, Italy, and the even United Kingdom. The companies headquarter at Leiden, Netherlands, and it serves in Asia, Africa, North America, Europe, and Oceania. By August 2015, IKEA is recorded to be owning and operating stores that sum up to 373 in 47 countries. Financial Profile of the Company IKEA’s Financial position remains highly remarkable of the last few years with the company recording a revenue of E28506 million, which is an approximate of $37280.1 million when its financial year ended in Aug 2013 (Walther, 2011). In 2014, the company sold $1.13 billion, which was an increase of 58 percent from what was recorded in 2013. This was an increase of about 3.2 percent of what was recorded in the year 2012. In very 2013, the company had an operating profit of E4011 Million, which is about $5245.6 million. The operating profit was an increase of nearly 15.2 percent from what was reported in 2012 financial. CHAPTER TWO INTRODUCTION Introduction of the Study Financial statement, which is commonly known as statements with financial information about a given business, is one of the most important things in the growth of any business. Through the financial statement, a firm is capable of getting the report of profitability and the financial position the business is when the accounting period ends (Baker, Christensen, & Cottrell, 2012). There are two major statements of the financial statement that any accountant is expected to prepare at the yearend include the balance sheet and the profit and loss account. Others include income statement and cash flow statement, which are equally very essential when making crucial decisions. This paper is looking at the key financial statement of IKEA Company and providing important ration analysis and their interpretation. Purpose of the study The purpose of analyzing financial statement includes: To be aware of the company’s financial strength Known the profitability of earning capacity Known the solvency Know trend in business Scope of the study The scope of the study is more restricted to the financial statement of IKEA Company with the general application of the common ratios analysis. Objectives of the study The main objective of the study is to find out how viable is IKEA financially through the study of its financial statement and the analysis of key ratios (Apéria, Brønn, & Schultz, 2004). The study applies real figures to find out the financial strength of the IKEA with real financial ratios. Methodology Research is mostly known to be a systematic gathering, recording and analyzing a given data about what is being studied. Through research, the report gets its reliability and accuracy (Baker, Christensen, & Cottrell, 2012). To be able to come up with verifiable results, the study uses secondary data that is obtained from various online databases with the company’s financial information. The study employees a descriptive research designs to come up with an insight of the issue under study. Through descriptive research, a systematic description of the factual and accurate result as expected of IKEA financial statement analysis. Data Collection The method of data collection that was found to be more appropriate for this study is through the internet and published data. Tools There is a number of tools that are being used to carry out financial analyzes is with normal calculation of ratios got from the IKEA Company's financial statement. The mathematical formulas are used to get simple comparisons of various crucial ratios (Walther, 2011). The calculation can also be done by inserting derived formulas in an Excel sheet. Limitations There are some values that could be misleading especially when historical costs are used Quantitative information is required during the analysis of ratio, but there is no decisiveness in the analytical output. Some of the figures in the set accounts need to be some months out of date, which only imply that proper indication may not be achieved. CHAPTER THREE PROJECT OVERVIEW Introduction of Financial Statement A financial statement is known to be the medium that companies use to disclose its financial performance. Various investment decisions being made by fundamental analysis require quantitative information that is taken from financial statement. The three major types of the financial statement include a balance sheet, cash flow statement, and finally income statement. Meaning and Concept of Financial Analysis Financial analysis is known to be the analysis s that is highlighting the important relationship as provided for in the last financial statement. The focus put on financial statement analysis is checking on the past performance of the business as regard to profitability, liquidity, growth potentiality, and efficiency in operation (Apéria, Brønn, & Schultz, 2004). This analysis is very essential when it comes to assessing past performance, forecasting, and in planning the future. Types of Financial Analysis There are two ways through which financial statement is divided; the first one is based on the material used and the second one being based on modus operandi (Palepu, & Healy, 2007). Based on the material used financial statement is further divided as external and internal. Those outside the business who do not access the internal records do external financial statement. External types of financial statement are performed by those who can access internal records of the company such as executives, managers, and such like. The division that is based on modus operandi is called horizontal and vertical types. Horizontal finds the relationship of related data for a period that is slightly more than a year. On the other hand, the vertical one considers the quantitative relationship of different items on a given date. Methods and Devices of Financial Analysis Methods and devices that are commonly used in the financial analysis include: Fund flow analysis The analysis of how fund moves from one point to another within a given company Trend analysis It measures the trend of financial ratios by a company in a given year Ratio analysis This is the analysis of how two financial figures interrelates Cash flow analysis This is the analysis of change that is witnessed in cash positions in a given period Comparative analysis This is financial analysis of a given company in two years or of two companies that are different Overview of Ratio Analysis Ratio analysis is commonly known as a process or method through which relationship of group or items of various items in the financial statement are calculated, determined, and finally presented (Palepu, & Healy, 2007). Ratio analysis is applicable both in static and trend analysis. There are multiple ratios that can be used by financial analysts, but the choice is dictated by the purpose and objective of the analysis CHAPTER FOUR ANALYSIS AND INTERPRETATION Comparative Balance Sheet and Income Statement IKEA Comparative Balance Sheet December 31, 2013, and 2012   2013 2012 Increase and Decrease (-) ASSETS (€ ‘000s) (€ ‘000s) Amount % Non-current assets Intangible assets 9,000,000 9,000,000 0 0% Leased Land 179,639 210,799 -31,160 -17% Tangible assets 3,550,050 2,795,061 754,989 21% Property, Plant and equipment 2,908,864 2,218,827 690,037 24% Tangible assets under construction 641,186 576,234 64,952 10% Shares in undertakings linked by virtue of particip. Interests   101,478 101,842 -364 0% Total non-current Assets 12,831,167 12,107,702 723,465 6% Current assets 0 Inventories 8,832 8,049 783 9% Trade receivables 529,886 460,334 69,552 13% Amounts due within one year 529,886 460,334 69,552 13% Amounts due after more than one year – – Other debtors 202,956 114,437 88,519 44% Amounts due within one year 122,306 98,601 23,705 19% Amounts due after more than one year 80,650 15,836 64,814 80% Transferable securities 2,163,844 1,918,581 245,263 11% Cash at bank and in hand 290,898 312,288 -21,390 -7% Total current Assets 3,196,416 2,813,689 382,727 12% Deferred charges 31,210 28,431 2,779 9% Total Assets 16,058,793 14,949,821 1,108,972 7%   2013 2012 Increase and decrease (-) EQUITY AND LIABILITIES (€ ‘000s) (€ ‘000s) Amount Percentage Equity Share capital 300,000 300,000 0 0% Share Premium 4,500,000 4,500,000 0 0% Legal Reserve 30,000 30,000 0 0% Retained earnings 2,684,236 2,238,359 445,877 17% Result of the year 515,860 445,877 69,983 14% Currency Transl. Adj. 9,396 17,667 -8,271 -88% Minority interests 468,717 340,174 128,543 27% Total Equity 8,508,209 7,872,077 636,132 7% Provisions Provision for deferred taxes 27,967 30,559 -2,592 -9% Other provisions 77,688 51,855 25,833 33% Total Provisions 105,655 82,414 23,241 22% Non-current & current liabilities Amounts owed to credit institutions 700,957 581,776 119,181 17% due within one year 109,973 254,151 -144,178 -131% due after more than one year 590,984 327,625 263,359 45% Trade creditors 288,551 194,571 93,980 33% due within one year 288,551 194,571 93,980 33% due after more than one year – – Other creditors 6,435,595 6,199,860 235,735 4% due within one year 654,715 349,488 305,227 47% due after more than one year 5,780,880 5,850,372 -69,492 -1% Total non-current & current liabilities 7,425,103 6,976,207 448,896 6% Deferred income 19,826 19,123 703 4% Total equity and liabilities 16,058,793 14,949,821 1,108,972 7% IKEA Comparative Income Statement December 31, 2013, and 2012   2013 2012 Increase and Decrease (-) INCOME STATEMENT (€ ‘000s) (€ ‘000s) Amount Percentage Net turnover 2,810,239 2,583,982 226,257 8% Other operating income 45,935 76,143 -30,208 -66% Operating income 2,856,174 2,660,125 196,049 7% Use of merchandise, raw material and consumables     0     -1,539,476 -1,328,201 -211,275 14% Staff expenses -201,174 -167,135 -34,039 17% Value adjustments -156,810 -127,000 -29,810 19% In respect of tangible assets -157,157 -126,860 -30,297 19% In respect of current assets 347 -140 487 140% Other operating charges -203,776 -205,509 1,733 -1% Operating result 754,938 832,280 -77,342 -10% Financial income 236,246 146,712 89,534 38% Financial expenses -437,314 -454,045 16,731 -4% Share in profit/loss in Associates 2,537 -28,264 30,801 1214% Profit on ordinary activities 556,407 496,683 59,724 11% Income tax expense -76,589 -57,615 -18,974 25% Profit of the year before       minority interest 479,818 439,068 40,750 8% Attributable to:       Shareholders of the parent company 515,860 445,877 69,983 14% Minority interests -36,042 -6,809 -29,233 81% IKEA Common size Balance Sheet December 31, 2013, and 2012 Common Size Analysis of Balance Sheet and Income Statement     2013 2012 2013 2012 ASSETS (€ ‘000s) (€ ‘000s)     Non-current assets Intangible assets 9,000,000 9,000,000 56% 60% Leased Land 179,639 210,799 1% 1% Tangible assets 3,550,050 2,795,061 22% 19% Property, Plant and equipment 2,908,864 2,218,827 18% 15% Tangible assets under construction 641,186 576,234 4% 4% Shares in undertakings linked by virtue of participate. Interests 0% 0%   101,478 101,842 1% 1% Total non-current Assets   12,831,167 12,107,702 80% 81% Current assets 0% 0% Inventories 8,832 8,049 0% 0% Trade receivables 529,886 460,334 3% 3% Amounts due within one year 529,886 460,334 3% 3% Amounts due after more than one year – – Other debtors 202,956 114,437 1% 1% Amounts due within one year 122,306 98,601 1% 1% Amounts due after more than one year 80,650 15,836 1% 0% Transferable securities 2,163,844 1,918,581 13% 13% Cash at bank and in hand 290,898 312,288 2% 2% Total current Assets   3,196,416 2,813,689 20% 19% Deferred charges 31,210 28,431 0% 0% Total Assets   16,058,793 14,949,821 100% 100% IKEA Common size Income Statement December 31, 2013, and 2012     2013 2012 2013 2012 INCOME STATEMENT (€ ‘000s) (€ ‘000s)     Net turnover 2,810,239 2,583,982 100% 100% Other operating income   45,935 76,143 2% 3% Operating income 2,856,174 2,660,125 102% 103% Use of merchandise, raw material and consumables   0% 0% -1,539,476 -1,328,201 -55% -51% Staff expenses -201,174 -167,135 -7% -6% Value adjustments -156,810 -127,000 -6% -5% In respect of tangible assets -157,157 -126,860 -6% -5% In respect of current assets 347 -140 0% 0% Other operating charges   -203,776 -205,509 -7% -8% Operating result   754,938 832,280 27% 32% Financial income 19 236,246 146,712 8% 6% Financial expenses 20 -437,314 -454,045 -16% -18% Share in profit/loss in Associates   2,537 -28,264 0% -1% Profit on ordinary activities   556,407 496,683 20% 19% Income tax expense -76,589 -57,615 -3% -2% Profit of the year before 0% 0% minority interest   479,818 439,068 17% 17% Attributable to: 0% 0% Shareholders of the parent company 11 515,860 445,877 18% 17% Minority interests 14 -36,042 -6,809 -1% 0% Ratio Analysis The Common Shareholder Earnings per Share EPS= (515,860-0)/ 100000 = EUR 5.1586 Through this ratio, the earnings for every share specifically of the common stock outstanding are clearly indicated. Price-Earnings Ratio = EUR 30/2.4 = 12.5 ROA = (515,860 + [364,968 9*0.96])/ 15504307 = 5.6% These is the percentage at which assets of IKEA has been employed = (515,860 – 0)/ 8190143 = 6.3 % With 6.3 percent, IKEA has employed its owners’ investments well to earn income. The Short-Term Creditor Working Capital WC (2013) = 3,196,416 – 1,053,239 = 2,143,177 WC (2012) = 2,015,479 Current Ratio CR 2013 = 3,196,416 /1,053,239 = 3.03 to 1 CR 2012 = 3.5 to 1 This ratio is used to measure how well the company can pay its debts when they become due Acid-Test (Quick) Ratio ATR (2013) = (290,898 + 2,163,844 + 529,886)/ 1,053,239 = 2.8 ART (2012) = 2691203/798,210 = 3.4 Accounts Receivable Turnover ART = 2,810,239/990220 = 5.7 times Account collection period is = 365/5.7 time = 64 days The ratio helps in measuring the more the company converts receivables into cash when the period is utilized Inventory Turnover (IT) = 45,935/8440.5 = 5.4 times, this is equivalent to 91½ days The ratio indicates the number of times merchandise stock sales and is replaced in a year Long-Term Creditor Times Interest Earned Ratio = 556,407/356,178 = 1.6 times Measure of the ability to offer protection to long-term creditors Debt-to-Equity Ratio 2013 = 7,425,103/8,508,209 = 0.87 2012 = 6,976,207/7,872,077 = 0.89 Measure assets offered by creditors for a given dollar per assets offered by the owners of the firm. CHAPTER FIVE FINDINGS AND SUGGESTIONS The comparative financial statement of IKEA is clearly showing significant changes that happened on both the balance sheet and income statement that are instrumental in understanding the company’s performance (Baker, Christensen, & Cottrell, 2012). The statement shows a positive percentage change in the operating income and even in the balance sheet figures. On the other hand, common sense financial statement clearly shows the way the figures recorded in 2013 and 2012 measured up, this is essential in understanding the strength of the financial performance of the firm. Besides balance sheet and income statement, there is also cash flow, which is equally essential to companies such as IKEA. Cash flow is subdivided into three major parts, which are operating, investing, and financing activities (Palepu, & Healy, 2007). The sections are subdivided this way through the general rule of identifying the source of the cash, identifying where the cash was used and finally how some of the activities of the firm are financed. From the analysis of the ratios by IKEA Company, it can be seen that the company was not doing so bad when it comes to creating wealth to its shareholders as witnessed by its 2013 earnings per share. There is also improved on its operating performance as shown by return on total assets. Through financial leverage, the company is seen to be doing so well when it comes to common shareholders’ equity. Working capital of the company in 2013 is seen to be higher than that in 2012, which is a positive gesture as it shows how capable the company is to settle its short-term Walther, L. M. (2011). The company is strong in handling both long-term creditors as well as long-term creditors as it is seen in the ratios calculated above. Ratios are all positive and are showing improvement from the previous year. References Apéria, T., Brønn, P. S., & Schultz, M. (2004). A reputation analysis of the most visible companies in the Scandinavian countries. Corporate Reputation Review, 7(3), 218-230. Baker, R., Christensen, T., & Cottrell, D. (2012). Essentials of advanced financial accounting. McGraw-Hill Higher Education. Brigham, E., & Ehrhardt, M. (2013). Financial Management: Theory & practice. Cengage Learning. Palepu, K., & Healy, P. (2007). Business analysis and valuation: Using financial statements. Cengage Learning. Walther, L. M. (2011). Floyd A. Beams, Joseph H. Anthony, Robin P. Clement and Suzanne H. Lowensohn, Advanced Accounting , Pearson Education, Upper Saddle River, New Jersey, USA (2009) ISBN 978-0-13-135805-8 864 pages,[euro] 74.75, £ 59.99. The International Journal of Accounting, 46(2), 238-239. Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & Managerial Accounting. John Wiley & Sons. Read More