Presentation of Financial Statements Cash Flow

Question: Discuss about the Presentation of Financial Statements for Cash Flow. Answer: 1.The various requisite ratios are calculated for the year 2016 (Damodaran, 2008). Rate of return on total assets = (EBIT/Average Total Assets)*100 Average Total Assets = (29935000 + 28045000)/2 = $ 28,990,000 Ratio for 2016 = (6270000+1560000)/28990000)*100 = 27% Rate of return on ordinary equity = (Net profit after taxes/Shareholders equity)*100 Ratio for 2016 = (4362000/14215000)*100 = 30.69% Profit margin = (Net income/Revenue)*100 Ratio for 2016 = (4362000/55000000)*100 = 7.93% Earnings per share = (Net income Dividends on preference dividends)/Total outstanding shares Ratio for 2016 = (4362000-50000)/7200000) = 60 cents Price-earnings ratio = Price per share/Earnings per share Ratio for 2016 = 12/0.6 = 20 Dividend yield = (Dividend per share/Price per share)*100 Dividend paid per share = (2702000/7200000) = $ 0.375 Ratio for 2016 = (0.375/12)*100 = 3.125 Dividend payout = (Dividends per share/Earnings per share)*100 Ratio for 2016 = (0.375/0.6)*100 = 62.5% Current Ratio = Current Assets/Current Liabilities Ratio for 2016 = (12745000/5780000) = 2.21:1 Quick Ratio = (Current Assets inventory)/ Current Liabilities Ratio for 2016 = (12745000-7000000)/5780000) = 1:1 Receivables Turnover = Credit Sales/Average receivables Average Receivables = (4100000 + 3675000)/2 = $ 3,887,500 Assuming all sales were credit sales, credit sales = $ 55,000,000 Ratio for 2016 = (55000000/3887500) = 14.15 days Inventory Turnover = Cost of goods sold/Average inventory Average Inventory = (7000000+6930000)/2 = $ 6,965,000 Cost of goods sold = $ 35,100,000 Ratio for 2016 = (35100000/6965000) = 5.04 days Debt Ratio = (Total Liabilities/Total Assets)*100 Ratio for 2016 = (15720000/29935000)*100 = 52.5% Times interest earned = EBIT/Interest Charges Ratio for 2016 = (6270000+1560000)/1560000 = 5.02 Assets Turnover = Sales/Total Assets Ratio for 2016 = (55000000/29935000) = 1.84 Profitability With regards to profitability, the company is superior to the industry average which is apparent from the companys higher ROE (Return on equity) and profit margin. However, the return on total assets is lower than the corresponding industry average which is attributed to lower asset turnover of the company. Additionally, superior profitability indirectly is also reflected in the various market ratios whereby the company has a superior EPS as compared to the industry average while contribute to relatively higher P/E (Parrino Kidwell, 2011, p.90). Liquidity With regards to liquidity, the company is inferior to the industry average as the current asset and acid ratio for the company are lesser than the industry average. However, these ratios are slightly lower than the industry average and therefore there are no concerns with regards to short term liquidity as of yet but going forward the company should be considerate towards this aspect. This is also confirmed from the higher times interest earned ratio for the company as compared to the industry average (Petty et. al., 2015, p. 103-104). Financial Gearing It is apparent that the debt ratio for the company is inferior as compared to the industry average. This is indicative of the fact that the company should be considerate with regards to raising more debt in the future as the business risk may increase and also the debt cost may increase. However, at the present the debt levels are not a matter of concern (Brigham Ehrhardt ,2013, p. 72). 2. In order to ascertain, whether the chef can be ascertained as an asset or not, it is imperative to analyse the definition of asset. An asset may be defined as any resource from which it is likely that future economic benefits would arise and it could be controlled by the relevant entity. In the given case, the chef would lead to future economic benefits for the restaurant in the form of attracting customers. However, the chef cannot be controlled as the chef may resign from the job at any juncture and the restaurant cannot force him to continue. Additionally, the restaurant on its own will cannot transfer the chef to some other restaurant or sell the chef to another restaurant. Hence, while the chef would bring future economic benefits but still it would not be termed as an asset. The chefs value also cannot be ascertained since it is not evident as to how long the chefs stay would be at the restaurant (AASB, 2011). Examples with regards to need of financial information are shown below. Manager of human resources He/She would need to take decisions with regards to future labour requirement and their exact skillset, the kind of training that must be granted to individuals based on their productivity at the job, hiring individuals based on the exact production and demand pattern along with ensuring that appropriate pay packages and incentives are designed keeping in mind the state of the company and its performance (Damodaran, 2008). Factory manager: He/She would need to take decisions with regards to total production and the production mix which would be based on accounting information such as past sales and future forecast. Additionally, key decisions would be required with regards to keeping the costs within the stipulated limits and make attempts to reduce the same so as to maximize the profitability margins. Besides, other overheads costs such as those incurred for ensuring occupational health along with employee safety also need to be considered (Petty et. al., 2015, p.5-6). Management of a AFL club: The management needs to take critical decision with regards to the player selection and underlying cost along with the cost of the coaching staff. Additionally, decision making would need to be done with regards to the coaching staff cost along with the overhead cost associated with training venue and equipment (Parrino Kidwell, 2011, p.4-5). The manager of a second hand clothes charity: The manager would need to make decision with regards to the amount of second hand clothes and therefore the amount of collection centers and their respective location. Further, these would need to be processed further so that they could be given to the needful and arrangements can be made so that this second hand cloth can be accessed and suitably processed in a timely manner (Brealey, Myers Allen, 2008, p. 35). C) The impact of the various transactions on the financial statements is discussed below (Brealey, Myers Allen, 2008, p. 732-734). There would be an increase of a non-current asset i.e. equipment while a decrease of a current asset i.e. cash in the balance sheet. Further, there would a decrease in the overall cash flow due to an outflow on account of investing activities in the cash flow statement. There would an increase in the current asset namely account receivable. Additionally, the income would also increase which would lead to increase in shareholders equity in the form of higher retained earnings. There would a decrease in the current asset i.e. cash which would be balanced by the same decrease in the liability since it has been paid. Further, in the cash flow statement there would be a decrease in the cash which is most likely to arise from operating activities. With regards to the balance sheet, there would be an increase in the current asset i.e. cash while there would also be an increase in the equity i.e. share capital. Besides, there would be an increase in the cash inflow from financing activities in the cash flow statement. Also, the equity would increase in statement capturing equity change. With regards to the balance sheet, there would be an increase in cash at hand which would be balanced by a decrease in the amount of accounts receivable. Also, the cash would increase from operating activities in the cash flow statement. With regards to the balance sheet, there is a decrease in the current asset i.e. cash and also the equity would decrease on account of lower retained earnings. The expenses would increase and hence would lead to decrease in the income. As a result, there would be a decrease in the cash inflow arising from operating activities of the cash flow statement. With regards to the balance sheet, there would an increase in the current liability on account of accounts payable which would be balanced by a decrease in the shareholders equity. The expense would increase in the income statement and in equity change statement, the equity would decrease due to decline in the income. With regards to the balance sheet, there would an increase in the current asset i.e. cash while the non-current asset would decrease due to sale of equipment. Also, if the sale of equipment involves some profit, the equity would also increase. Further, in case of profit on sale, the income would increase in the income statement. On account of cash inflow from investing activities, there would an increase in cash in the cash flow statement. Also, in case of profit, equity needs to be increased in equity change statement. With regards to the balance sheet, there would be a decrease in the current asset i.e. cash and also proportionate decrease in the share capital or equity. Also, there would be increased cash outflow on account of financing activities which would decrease the cash in the cash flow statement. Further, the equity would be decreased in the equity change statement. With regards to the balance sheet, there would be an increase in the current assets i.e. cash while the non-current liability would increase in the form of borrowings. Also, there would be increased cash inflow on account of financing activities which would lead to increase in cash in the cash flow statement. References AASB 2011, Presentation of Financial Statements, AASB Website, Available online from https://www.aasb.gov.au/admin/file/content105/c9/AASB101_09-07_COMPmay11_07-11.pdf (Accessed on August 20, 2016) Brealey, R, Myers, S Allen, F 2008, Principles of Corporate Finance (Global edition), 10th edn, McGraw Hill Publications, New York,Brigham, EF Ehrhardt, MC 2013. Financial Management: Theory Practice, 14th edn., South-Western College Publications, New YorkDamodaran, A 2008, Corporate Finance, 2nd edn, Wiley Publications, London Parrino, R Kidwell, D 2011, Fundamentals of Corporate Finance, 3rd edn, Wiley Publications, London Petty, JW, Titman, S, Keown, AJ, Martin, P, Martin JD Burrow, M 2015, Financial Management: Principles and Applications,6th edn, Pearson Australia, Sydney