Analyzing and Adjusting Cash Flow Statements - Case Study Example

Analyzing and Adjusting Cash Flow Statements Assignment Student name Institution name Tutor name Introduction Purpose The purpose of the cash flow statements is to ensure that the organization monitors its cash inflows and outflows. Through the use of balance sheets, income statement and cash flow statements. This shows the amount of cash the business generates and where the cash is spent within a given period. The solvency/liquidity of the company can be determined using this cash flow analysis and financial statements like the balance sheet. It indicates the amount of cash that the company is using in its operations, investments, and financing (Kaplan, and Atkinson, 2015). Scope The scope of this report will be able to cover the analysis of the following ratios; Activity Solvency profitability liquidity The DuPont analysis which enables the company to measure the performance of its assets, operating efficiency and financial leverage. The cash flow statement which facilitates the running of the organization through the day to day business activities. The prospective analysis also aids the company in making various decisions concerning the investment and its operations. This report will also cover the adjustments on the financial statements (Henry et al., 2015). The adjustment on cash flow statements and balance sheets. Finally, it will be able to give a various comparison between JB Hi-Fi and its competitors. Methodology Financial statements for the company will be adjusted in this report. This is through the use of analysis based on the profitability, liquidity, and solvency of the company. JB Hi-Fi has been able to participate in various business activities through its stores which are located in most parts of the city of Sydney and Melbourne. The adjustment will not be able to cover the use of non-recurring items and ratios such as activity ratio. This is used to access the performance of the company as per the analysis of the prospective done to forecast the financial performance of the company. The methodology used in this report will be able to determine the investment ability of the company. Assumptions The data used in the report is the real information contained in the financial report of the organization. however, there are a few changes and assumptions that are made on various data that is available and other information which is not provided but is deemed significant in the forecast. The assumptions made in the reports enables the organization to maintain its credit rating and hence its shareholders will not panic over changes in financial statements. Economic growth assumptions are also included in this report to ensure that the company has its aims and objectives kept in order. Limitations There are different limitations encountered during the development of financial statements. Insufficient data on the various project the company is undertaking is one of the major limitation in this report. The adjustments did base on the financial statements also has some assumptions. Determination of activity ratio and DuPont requires some assumptions due to limited data on the financial status of the company. Company Overview JB Hi-Fi is a company which has been well established over the past years as indicated by their financial reports. It is located in Melbourne city in Keilor East suburb. It was established in 1975 by John Barbuto, which was later sold to Richard Bouris. The company has been expanded from its initial status to a chain store which operates more than 150 stores in Sydney. The company was initially specialized in Hi-Fi equipment. Currently, it has established stores in Australia, New Zealand, and the United States. The company has increased its profit by an average of 25 percent annually for the past five years. They deal in selling music CDs, televisions, digital cameras, portable audio, computers, video games, in-car entertainment systems among other consumer electronics. It is one of the leading retailer of Apple and Dell computers in Australia. The company launched JB Hi-Fi NOW, which sells music records and has more than 7 million records with a subscription of $ 99 annually to its customers. It has its application in Windows, iPhone, and Android. The company has been expanding and hence its financial status is increasing; it makes spells of up to 3.7 billion annually. Economic framework The economic model that JB Hi-Fi implemented is more complex since it is a large company which operates many stores with various products. The company has several investments and also has many developing projects which form the whole economic framework to develop the company. There are some basic frameworks implemented by the company; sales framework, marketing framework, managerial framework, and development framework. Sales framework The company operates its chain of stores to ensure that it sells its products to the consumers directly. Each store operates independently with the aim of targeting more customers within their area of influence. They are responsible for the direct sales to customers which have seen them ensure that customers are given high-quality products at relatively lower rates to reduce competition from other firms in the industry. Marketing framework JB Hi-Fi has been a leading marketing company regarding adverts it creates through the social media, website and the use of billboards. The company has ensured that many potential customers are reached through various channels. Their products are branded to market the company and its premises have a unique design which has been able to reduce its expenditure regarding marketing to about 10% of the entire budget. Managerial Framework The management of the company is centralized such that its chief executive officers are summoned by the board of directors. The managers are responsible for their respective chief officers in the organization. the company has enjoyed a smooth running of operation due this kind of managerial system. Development framework JB Hi-Fi has been involved with many other projects like the JB Hi-Fi NOW, which is an investment for the company. It has explored internet and e-commerce, where it has successfully created a database of more than 7 million music library. It also deals with online sales, customers who are in a location which does not have an operational store are free to order any product from the company, and they are delivered. It has not developed outlets in Africa and most parts of Asia and Europe. Financial analysis Ratio analysis This is the comparison of various figures on the balance sheet, cash flow statements, and income statements. The comparison is made between previous years of operation of the company and those of its competitors in the industry. this is used in predicting the future performance of the company. These ratios help in determining the possibility of the company to cover its short-term debts through simply looking at the current assets and liabilities in the balance sheet. Activity ratio This is a metric which enables the company to optimize its balance sheet data into revenues. The activity ratio includes the following; inventory turnover, asset turnover and average collection period. It enables the company to assess the ability to generate revenue through cash and sales based on its assets, capital, and liabilities. Short-term activity ratio Asset turnover ratio Asset turnover is a ratio of the amount of sales/revenues generated to that of the company’s assets. It helps the company in determining whether it is efficient in certain operations while using the assets of the company. This is calculated as follows: Asset turnover = For JB Hi-Fi, the asset turnover for 2015 financial period is Asset turnover = 3.65 billion/ 903.81 million = 4.038 This indicates that the ratio is high compared to that of its competitor hence the performance of the company is good Long-term activity ratio Inventory turnover ratio This is the ratio of the company’s sales to that of the inventory It is calculated as Inventory turnover = For JB Hi-Fi, the inventory ratio for 2015 financial period was = 6.09 This is much compared to Dick Smith company limited. Profitability analysis The profitability analysis enables a company to ensure that it is not making any losses and also maintains the operation of the company. There are various ratios in analyzing profits; gross profit, pretax profit, operating profit and net profits. This is done on a historical basis by comparing profitability for the past years. JB Hi-Fi will use a five-year period to analyze its profitability and the amount of money it has been generating over the las five years. This is also compared to its competitor like Dick Smith (Vogel, 2014). Profit margin analysis This compares the net sales that the company generates and the gross profit of the company. For the past five years, JB Hi-Fi has been posting an increasing profit margin annually. It indicates that the company is making much progress over the last five years. The gross margin is as shown below Margins % of Sales 2011 2012 2013 2014 2015 Revenue 100.00 104.00 130.00 150.00 170.00 Cost of goods sold 78.2 79.3 78.8 78.9 78.1 Gross Margin 21.8 20.7 21.2 21.1 21.8 The company’s gross profit has been increasing over the period of five years hence good performance for the company. Liquidity analysis Liquidity is a situation where the company is in a position to service its financial obligations like debts. Liquidity ratio is used by the company and shareholders to determine the ability of the company to solve short liabilities. These ratios are; current ratio, cash ratio, and acid ratio. Current ratio This ratio indicates the company’s ability to service current liabilities using its current assets. It is determined as the ratio of current asset to that of current liabilities. Acid test ratio This is also known popularly as quick ratio; it gives the ratio of liquid assets to that of current liabilities. This indicates how the company can solve its daily needs using the most liquid asset like cash at hand. Acid Ratio = (Short-Term + Investment Cash + Accounts Receivable) ÷ Current Liabilities Solvency analysis This is the ability of the company to meets its operational obligations and to service its debts, either long term or short term. The company has to be able to maintain the cash flow in the organization to ensure that it meets its daily operational expenses. A higher solvency ratio indicates that the company can be able to pay its debts and foresee smooth running of various operations. However, the solvency ratio is calculated as the ratio of net income to that of liabilities. JB Hi-Fi has a solvency ratio of 47.98 in last financial period of 2015. Cash flow analysis This serves to indicate the amount of cash inflow and cash outflow in a company. They are from three sources, cash flow from operation, financing and investing. The adjustments are shown in the appendix Adjustment of cash flows In the year 2011, JB Hi-Fi decided to restructure Clive Anthony in which the above transactions occurred. The reason it was readjusted to "nonrecurring” was because it was not something that occurred with regularity and wasn’t seen as a core operating activity for JB Hi-Fi. The actions taken from the adjustment was to remove this amount from the operating activities in which reduced the " Net Cash inflow from operating activities" by 14327 in the year 2011. Dividends paid to owners of the Company -87174 -77183 -65263 -77031 -88411 Since JB Hi-Fi prepared the report under the IAS 7 standards, "Dividends paid to owners of the company" can be classified as either an operating activity or a financing activity. For the adjustment made, it was decided to change the activity from a financing activity to an operating activity. Based on the information on JB Hi-Fi for the last five years, it shows that dividends were paid out every year showing regularity. Therefore, it can be said that it is part of the company's core business activity and for that reason it was readjusted as an operating activity (Maravas, and Pantouvakis, 2012, pp.374-384). Interest and bill discounts received 552 402 455 568 2236 Under the IAS 7 standards that JB Hi-Fi follows, "Interest and bill discounts received" can be classified as either an operating activity or financing activity. For the adjustment made to the cash flow statement, the activity was changed from an operating activity to an investing activity. The reason for this adjustment was because the interest received from transactions can also be used for the investment activities of the company. Therefore, it would be considered as an investing activity and not an operating activity (Mulford, and Comiskey, 2005, pp241). Interest and other finance cost paid -5689 -7496 -8896 -12765 -6047 Under the IAS 7 standards that JB Hi-Fi Cash Flow statement is reported under, "Interest and other finance costs paid" can be classified as either operating activity or financing activity. The adjustment made was to change the classification of "interest and other finance costs paid" from an operating activity to a financing activity. The reason for this change was because interest paid usually means that interest is being paid for any debt the company may have. Since debt is usually classified as a financing activity for the borrowing of funds and such, it would seem that it would be only natural for "Interest and other finance costs paid" to be a financing activity as it relates to repaying the interest gain from borrowing funds. Analyzing cash flow statements include analyzing the company’s cash-generating efficiency. The ratios used are as follows: Cash Flow Yield: This indicates how much the operating activities are contributing to the firm’s net income. Cash Flows to Assets: It is a measure of return on Assets. Cash Flows to Sales: This is a measure of profit margin. 2015 2014 2013 2012 2011 Cash Flow Yield (Real) 1.307 0.322 1.341 2.055 0.818 Cash Flow Yield (Adjusted) 0.711 -0.224 0.854 1.435 0.082 Cash Flow to Assets (Real) 0.201 0.048 0.185 0.265 0.143 Cash Flow to Assets (Adjusted) 0.109 -0.033 0.118 0.185 0.014 Cash Flow to Sales (Real) 0.049 0.012 0.047 0.069 0.037 Cash Flow to Sales (Adjusted) 0.027 -0.008 0.030 0.048 0.004 The table above displays how the cash generating efficiency of JB Hi-Fi has changed after adjusting the cash flow statements. If we adjust the cash flow statements of JB Hi-Fi, it is clear that its ability to generate cash from its continuing operations. Conclusion and recommendation The company has been able to foresee its financial obligations and has successfully developed in the past five years. The company should now implement various means of retailing their products especially by opening new stores in part of Asia and Africa so as to increase its market share. The company should also reduce its prices about that of its competitors to ensure that they maintain their customer. JB Hi-Fi has been a leading retailer of electronics, and consumer goods such as CDs, entertainment systems, and other products, it has been successful in opening up the market and eliminating competition from other firms in the industry. References Henry E., Robinson R., Greuning J., Broihahn M., 2015, Understanding Cash Flow Statement, International Financial Statement Analysis, Wiley, pp 243 IBIS World, 2016, IBIS World Company Premium Report, JB Hi Fi Limited, IBIS World. JB Hi Fi, 2011-2015, Annual Report, JB Hi Fi Ltd., viewed 20 April 2016, retrieved from JB Hi Fi website, https://www.jbhifi.com.au/General/Corporate/Shareholder-Matters/Financial-Annual-Reports/ Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning. Legoux, R., Leger, P.M., Robert, J. and Boyer, M., 2014. Confirmation biases in the financial analysis of IT investments. Journal of the Association for Information Systems, 15(1), p.33. Maravas, A. and Pantouvakis, J.P., 2012. Project cash flow analysis in the presence of uncertainty in activity duration and cost. International Journal of Project Management, 30(3), pp.374-384. Mulford C.W., Comiskey E.E., 2005, Measuring Sustainable Operating Cash Flow, Creative Cash flow Reporting: Uncovering sustainable performance, John Wiley & Sons, pp 241 Mulford C.W., Comiskey E.E., 2005, Non-recurring Source and uses of operating Cash flows, Creative Cash Flow Reporting: Uncovering Sustainable Performance, John Wiley & Sons, pp 209 Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis. Cambridge University Press. Appendix Cash Flow Statements of JB Hi Fi (2011-2015) 2015 2014 2013 2012 2011 $'000 $'000 $'000 $'000 $'000 Cash flows from operating activities Receipts from customers 4,012,130 3,832,979 3,646,509 3,448,130 3,267,490 Payments to suppliers and employees -3,767,211 -3,723,982 -3,442,104 -3,171,643 -3,101,569 Interest and bill discounts received 552 402 455 568 2,236 Interest and other finance costs paid -5,689 -7,496 -8,896 -12,765 -6,047 Income taxes paid -59,886 -60,577 -39,554 -49,283 -52,165 Net cash inflow from operating activities 179,896 41,326 156,410 215,007 109,945 Cash flows from investing activities Payments for acquisition of subsidiary, net of cash acquired -4,197 Acquisition of non-controlling interests -2,400 -3,000 Payments for plant and equipment -42,466 -35,914 -35,307 -46,078 -45,063 Proceeds from sale of plant and equipment 496 674 1,203 1,257 1,144 Net cash (outflow) from investing activities -44,370 -38,240 -38,301 -44,821 -43,919 Cash flows from financing activities Proceeds from issues of equity securities 3,125 21,523 1,082 3,514 9,305 Proceeds/ (repayment) of borrowings -40,113 54,063 -26,210 -84,174 163,334 Payments for debt issue costs -484 -64 -632 -13 -955 Payment for shares bought back -4,970 -25,830 -173,333 Share issue and buy-back costs -24 -118 -40 -801 Dividends paid to owners of the Company -87,174 -77,183 -65,263 -77,031 -88,411 Net cash (outflow) from financing activities -129,640 -27,609 -91,023 -157,744 -90,861 Net increase/(decrease) in cash and cash equivalents 5,886 -24,523 27,086 12,442 -24,835 Cash and cash equivalents at the beginning of the financial year 43,445 67,368 39,710 27,246 51,735 Effects of exchange rate changes on cash and cash equivalents -200 600 572 22 346 Cash and cash equivalents at end of year 49,131 43,445 67,368 39,710 27,246 Adjusted Cash Flow Statements (2011-2015) 2015 2014 2013 2012 2011 $'000 $'000 $'000 $'000 $'000 Cash flows from operating activities Receipts from customers 4,012,130 3,832,979 3,646,509 3,448,130 3,267,490 Payments to suppliers and employees -3,767,211 -3,723,982 -3,442,104 -3,171,643 -3,101,569 Nonrecurring operating items -14,327 Dividends paid to owners of the Company -87,174 -77,183 -65,263 -77,031 -88,411 Income taxes paid -59,886 -60,577 -39,554 -49,283 -52,165 Net cash inflow from operating activities 97,859 -28,763 99,588 150,173 11,018 Cash flows from investing activities Interest and bill discounts received 552 402 455 568 2,236 Payments for acquisition of subsidiary, net of cash acquired -4,197 Acquisition of non-controlling interests -2,400 -3,000 Payments for plant and equipment -42,466 -35,914 -35,307 -46,078 -45,063 Proceeds from sale of plant and equipment 496 674 1,203 1,257 1,144 Net cash (outflow) from investing activities -43,818 -37,838 -37,846 -44,253 -41,683 Cash flows from financing activities Interest and other finance costs paid -5,689 -7,496 -8,896 -12,765 -6,047 Proceeds from issues of equity securities 3,125 21,523 1,082 3,514 9,305 Proceeds/ (repayment) of borrowings -40,113 54,063 -26,210 -84,174 163,334 Payments for debt issue costs -484 -64 -632 -13 -955 Payment for shares bought back -4,970 -25,830 -173,333 Share issue and buy-back costs -24 -118 -40 -801 Net cash (outflow) from financing activities -48,155 42,078 -34,656 -93,478 -8,497 Net increase/(decrease) in cash and cash equivalents 5,886 -24,523 27,086 12,442 -24,835 Cash and cash equivalents at the beginning of the financial year 43,445 67,368 39,710 27,246 51,735 Effects of exchange rate changes on cash and cash equivalents -200 600 572 22 346 Cash and cash equivalents at end of year 49,131 43,445 67,368 39,710 27,246 Read More