The Role of Financial Statements

Question: Write an essay on The role of financial statements. Answer: The role of financial statements in the process of decision making is quite significant. The paper has chosen Adairs as the organisation that will be reviewed and subsequent financial acumen of the company will be determined after evaluating these financial statements. It is pertinent to observe here that Adairs was listed in the Australian Stock Exchange only in June, 2015 even though the company has an operational history dating back to 1918. The financial statement of the year 2015 will be evaluated and compared with that of the year 2014 so as to understand any relevant growth of the company within the areas of current assets, liabilities, non-current assets and liabilities. The paper has been divided into 5 parts and every part contains essential information relating to the operational dexterity of the entity. Part 2 contains review of the balance sheet by analysing the current and non currents assets and liabilities along with stock holders equity. Part 3 reviews the income sta tement for analysing the operating revenues, cost of goods sold, earnings per common share and so on. Part 4 comprises of cash flow statement analysis and part 5 reviews the stockholders equity section. Lastly the findings have been summed up and relevant recommendations have been made in relation to the investment in the company. Introduction Adairs is one of the leading retailers in home products within the territory of Australia. The company has a presence over all of Australia with more than 100 stores with a diverse range of products that include bed linen, curtains, pillow cover, furniture and so on. The company was established in 1918 as a single retail store in Victoria. Later the company spread its wings to other parts of the country with opening of first modern boutique store in 1981. The company employs highly trained employees along with experienced product developers and designers (Adairs, 2016). The report will analyse the financial statement of this company and evaluate various ratios and other pertinent income and expense statement so as to understand financial acumen of the company. The analysis of the financial statements and their comparison with the performance of the last year will help in understanding effective growth or decline for the company Reviewing the balance sheet Examination of the balance sheet is of prime importance since it depicts definite trends and patterns for a company (Proctor et al, 2006). In context to Adairs such an analysis has been carried out below: a) Current Assets: The current assets of the company are comprised of several items that have been illustrated below: For the year 2015 Specification in, 000 Lay-by receivables: 1070 Less: Allowances for cancellation 103 Net lay-by receivables 967 Prepaid expenses 2889 Deposits 201 Other receivables 733 Sum of current receivables 4790 Total current assets 4790 b) Non-current Assets Nil c) Current liabilities Trade creditors 13588 Accrued expenses 8179 Other payables 1951 Sum of current liabilities 23718 d) Non-current liabilities Nil e) Stockholders equity Ordinary Shares 65,875,000 For the year of 2014 these figures were a) Currents Assets Lay-by receivables 882 Less: Allowances for cancellation 85 Net lay-by receivables 797 Pre-paid expenses 2415 Deposits 282 Other receivables 1091 Sum of current assets 4585 b) Non-current Assets Other receivables 115 c) Current liabilities Trade creditors 8896 Accrued expenses 4047 Other payables 2324 Total Current liabilities 15267 D) Noncurrent liabilities Accrued preference share interest 6309 E) Stock holders Equity in 000 34718 There was a share split by a factor of 4.35 of ordinary shares resulting in creation of 116,305,000 shares without any extra cost. When compared to 2014 the amount of current assets was more in 2015. To be specific the current asset increase was (4790-4585) = $205. Noncurrent assets decreased by 115 and current liabilities increased by (23718-15267) = $8451. Noncurrent liability increased by $6309. When expressed in terms of percentage the changes in 2015 are 4.471 % increase in current assets. There was a 41.32 % increase in the volume of current liabilities. Thus it may be stated that both the current assets and current liabilities increased from 2014 to 2015 (Allen et al, 2013). In case of increase in the current liability the change was more significant. On a whole it may be stated that the financial position of the company from this metrics is sound. Thus it may be stated that there have increase in current assets, decrease in non-current assets, current liabilities and decrease in noncurrent liabilities. For 2015 a) Total Operating revenue 210,878 b) Cost of goods sold 80180 c) Earnings per common share 5 cents For the year 2014 a) Total Operating revenue 167,917 b) Cost of goods sold 64093 c) Earnings per common share 22 cents It can also be opined that data for the year of 2014 and 2015 were analysed and any non-operating gains or losses could not be ascertained for these two years. The changes between the two years are as follows. Total operating revenue increased by (210,878-167917) = 42961. When expressed in terms of percentage this is 25.58%. Again cost of goods sold increased from $ 64093 in 2014 to $ 80180 in 2015. The increase is 80180-64093= 16087. Expressed in terms of percentage this increase is 25.009 %. Again significant changes can be observed when earnings per common share are analysed (Aside, 2015). In 2015 the earning per common share was 0.5 cents whereas it was 22 cents in 2014. The change is 21.5 cents signifying a decrease of 21.5 cents. There has been a significant change in EPS and compared to 2014 the percentage decrease is 97.72 %. Thus it can be stated that there have been significant changes in Earning per share as a result of restructuring of capital. Moreover operating revenue has increased by 25.8 % that is significant. Consequent rise in the cost of goods sold have also been observed (Aside, et al, 2016). Part 4 Reviewing statement of cash flows For 2015 a) Net cash inflow (outflow) from operating activities Receipt from customers 231,442 Payment to suppliers 194,315 Interest received 446 Payment of income tax 68 Payment of interest 3478 Transaction cost of IPO 7597 Cash flow from discontinued operations 5192 Cash flows from operating activities 31952 For 2014 Receipt from customers 185,260 Payment to suppliers 159,868 Interest received 354 Payment of income tax 68 Payment of interest 3600 Transaction cost of IPO Nil Cash flow from discontinued operations 4256 Cash flows from operating activities 26011 b) Net cash inflow (outflow) from financing activities For 2015 Buyback of shares Nil Receipts from issue of shares 35645 Receipts from borrowing 47500 Transaction cost levied on share issuance (2878) Repayment for borrowings (40387) Redemptions paid for redeemable preference shares (71476) Cash inflows from discontinued operations Nil Net Cash inflows from financing activities (31596) For 2014 Buyback of shares (11) Receipts from issue of shares Nil Receipts from borrowing (2016) Transaction cost levied on share issuance Nil Repayment for borrowings (552) Redemptions paid for redeemable preference shares Nil Cash inflows from discontinued operations (1552) Net Cash inflows from financing activities (4131) c) Net cash inflow (outflow) from investing activities For 2015 Sale proceeds from property, plant and equipment Nil Acquirement of property, plant and equipment 6878 Purchase of intangible assets Nil Investment in discontinued operations 1374 Loss from discontinued operations 7044 Net cash flow from investment activities (15296) For 2014 Sale proceeds from property, plant and equipment Nil Acquirement of property, plant and equipment 4146 Purchase of intangible assets 2108 Investment in discontinued operations 371 Loss from discontinued operations Nil Net cash flow from investment activities (6625) d) Net increase/decrease in cash from different activities For 2015 Receipt from operating activities+ cash flows from investing activities+ cash flows from financing activities = 31952+ (15296) + (31596) = (14940) Cash and equivalent at the beginning of the year = 24377 Cash and equivalent at the end of the period = 9437 For 2014 Receipt from operating activities +cash flows from investing activities+ cash flows from financing activities = 26011+ (6625) + (4131) = 15255 Cash and equivalent at the beginning of the year = 9122 Cash and equivalent at the end of the period = 24377 From the analysis of the operating, financing and investing activities certain pattern can be observed. The cash flow from operating activities increased in 2015 as compared to 2014. This increase is 31952-26,011= 5941. When expressed in terms of percentage it comes out to 22.84 %. Thus the cash inflow increased significantly from 2014 at a rate of 22.84 %. The operating activities got a major boost from increase in sales and apart from the income from sales the volume of interest received by the company was greater in 2015 (Carlon et l, 2013). Other than that the cash inflow from operating activities benefitted from cash flows from discontinued operations that increased from $4256 in 2014 to $5192 in 2015. . However when other activities of the company is analysed namely investing and financing activities it may be seen that Adair performed poorly. There was negative cash inflow from both the investing and financing activities for the year of 2014 as well as 2015 (McPhail and Walters, 2009). The quantum of such outflow was greater in 2015 than 2014 and it may be seen that there were some significant issues affecting the revenue generation of the company within investing and financing activities (Dumay and Cai, 2014). The figures have been written in brackets indicating it was negative. To be specific cash flow from investing activities stood at $ (15296) in 2015 whereas it was (6625) in 2014. Thus resulting increase in net cash outflow for 2015 was $ 8671. When expressed in terms of percentage this decrease is 130.88. In other words cash outflow from investing activities increased significantly by 8671 from 2014 to 2015. Moreover it may be opined that significant contributors for such in crease in investing activities was Acquisition of property plant and equipment (Kumarasiri, 2012). Expenditures on such acquisition were 4146 in 2014 as compared to 6878 in 2015. Moreover there was cash loss from discontinued operation to the amount of $7044. Investment in such discontinued operations was 1374 in 2015 and when compared to the figures for 2014 this was $371. Thus there has been significant increase in cash flow from discontinued operations. All these together have led to increase in negative cash flow from operating activities (Morison and Ramsay, 2015). Cash flow from financing activities also witnessed significant inflow and outflow. Adairs received proceeds from borrowings and share issue for the amount of $47500 and $356445 respectively. However there was significant cash payment for the company for redeeming preference shares and repayment of borrowings. There were also transaction costs on issue of shares thus the net cash flows used in financing activities amounted to $(31596). Proceeds from borrowings amounted to $ (2016) and repayment of borrowings resulted in $ (552) in the year of 2014. Financing cash flows from discontinued operations was $(1552) in 2014. As such the net cash flow used in financing activities was $ (4131) and it may be stated that there was greater cash outflow for the year of 2014 as compared to the year of 2015 (Randeberg and Selvik, 2014). The resultant increase of cash outflow was (31596-4131) = $27465. Thus it may be seen that there was negative cash flow from financing activities. For the year 2014 the net increase in cash and equivalents was 15,255 whereas the corresponding figure for 2015 was (14940) indicating a steep decline of $30195. Moreover the cash and equivalents at the end of 2014 and 2015 was 24377 and 9437 respectively. Thus it can be stated that the cash flow for the year 2015 witnessed significant cash outflow resulting in such erosion (Southey, 2011). Reviewing stock holders equity section Ordinary shares issued by the company were 165,875 in the year of 2015. For Adair the issued shares in 2014 were 34718. The company was listed in the Australian Stock Exchange at a price of $2.40 per share. Before such listing in the ASE there was a restructuring of the share capital and every ordinary share was divided by a factor of 4.35. Thus such a split resulted in creation of 116,305,000 ordinary shares without any extra cost (Cunningham et al, 2011). As per the information provided by the company it can be stated that there were 1569 shareholders holding 91,064, 990 fully paid ordinary shares. The review of the stockholders equity section also provides insight into the number of shares held by individuals along with the range. The company has created five ranges that depict the range coupled with the number of shares held by each of the ranges. A review of the balance sheet for the company reveals earnings per share attributable to ordinary equity holders of the parent and ear nings per share from continuing operations (Curwin and Slater, 2007). The basic profit for 2015 attributable to ordinary equity holders is 0.5 cents whereas this was 22 cents in 2014. Again earnings per share for the continuing operations were 1.9 cents in 2015 as compared to 20 cents in 2014. Profit for 2015 and 2014 was $745and 7545 respectively (Srivastava and Mock, 2013). The following graph illustrates the weighted average number of ordinary shares. Thus it can be inferred that there has been significant decrease in the earning per share post the listing of the company in ASX. The company was listed in ASX only in the month of June 2015 and as such it may be seen that a restructuring of the shares reflected in the Earning per Share. The profitability of the company has been calculated by implementing an equation as illustrated in the prospectus (Adairs, 2016). Again, the pro forma earnings per share for the year 2015 has been illustrated in the subsequent section. Earnings before Interest and Tax were $31,409. The pro forma tax after payment of income tax was $ 21986. Share price after the end of the year was $2.78 with an EPS of 15 cents. Moreover it may also be stated that as per the prospectus of the company the actual EBIT of the company was 5.7 % over the forecasted profit. Thus it may be opined that the performance of the company was commendable and is stated to improve over the coming years (Zikmund et al, 2012). As of Ju ne, 2015 there was no outstanding shares and therefore dilutive EPS is the same as that of basic EPS. Recommendation and Conclusion Accounting and business decision are entwined and investments are carried out by understanding the financial acumen of the entity. For the purpose of this study Adairs Ltd has been chosen as the company. The company was listed in the ASX only in June 2015. However the operational history of the company dates back to 1918. From the study of the financial instruments it can be opined that the company has been able to perform well. The paper has also evaluated the balance sheet of the company for the purpose of ascertaining current assets, non-current assets, current liabilities, non-current liabilities and stakeholders equity (Pratt, 2013). It can also be observed that operating activities of the company has been fairly stable and lucrative. However there has been significant erosion in the value of the investment from financing and investing activities resulting in net decrease in cash during the year. Therefore the cash position of the company was weakened to a substantial degree. Fr om a viewpoint of the investment in the company it may be stated that the company has performed well within the Australian market (Fulmer and Cargile, 2016). The process of investment is typically carried out after analysing the different macro and micro environmental factors. Combined with past operations and these factors it can be opined that Adairs is one of the suitable companies that has its own brand equity. 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