FBL5030: Value Creation in Business - Accounting - Report Writing Assessment Answer

Accounting Assignment

Assignment Task

ASSIGNMENT REQUIREMENTS

• The following is a list of 10 organisations/ companies, one of which will be thesubject of your analysis.

CODE COMPANY ANZ Australia And New Zealand Banking Group Limited NAB National Australia Bank Limited QBE QBE Insurance Group Limited TLS Telstra QAN Qantas Airways Limited MGR Mirvac Group Stapled TPM TPG Telecom Limited HVN Harvey Norman Holdings Limited RIO Rio Tinto Group WPL Woodside Petroleum Limited

• One of these ten companies will be randomly assigned to you for analysis. For thisinformation, refer to the Excel spread sheet on Blackboard (Bb). If working in groups, choose only one company from either partner.
• Find the Excel files on Bb which contain the past 6 years of the financial statements data. Download your selected company data file for the analysis.
• Research about your company. Find all important and relevant information in company’s annual reports, company’s websites, or newspaper articles, etc.

ASSIGNMENT QUESTIONS

1. Analyse the behaviour of any three significant items in the income statement for the period of six years. Discuss whether your organization’s performance relating to these items appears to be improving, deteriorating, or remaining stable over this period. Explain why you selected those items and what you recognize as the most relevant strategic reasons for the trend/s that you have recognized. Justify your answer.
2. Analyse the behaviour of any three significant items in the balance sheet for the period of six years. Discuss whether your organization’s performance relating to these items appears to be improving, deteriorating, or remaining stable over this period. Explain why you selected those items and what you recognize as the most relevant strategic reasons for the trend/s that you have recognized. Justify your answer.
3. Analyse cash flow statements of the last six years and explain any three majorchanges which have occurred in relation to investing, financing and/or operating activities of the business. Justify your answer.
4. Calculate two relevant ratios under the four chosen ratio categories (profitability,leverage, solvency, operational efficiency or market ratios) for the period of six years. Give conclusions for your ratio analyses based on the figures you have derived.
5. Identify any two items not included in (or derived from) the financial statements that you think would be important to someone considering whether the organization is performing well. Discuss your reasons for believing that these two items about the company would be important in making an investment decision. (HINT: you might want to consider items discussed in other sections in this unit)

NOTE

• Your assignment should be in the form of business report (please refer to the document provided). Your report should include: - an executive summary (not more than 200 words) - an introduction (not more than 150 words) - answers to the given questions written in the body paragraphs, with appropriateheadings, subheadings, etc. - a conclusion (not more than 150 words) - an appendix with excel data provided for financial statements and relevantcalculations.

Executive Summary

This report provides a financial analysis of Harvey Norman Holdings Limited (HVN). A study of three components each of income statement, balance sheet and cash flow statement has been conducted for the period ranging from year 2010 to year 2015. This component analysis is followed by ratio analysis and few ratios are calculated and interpreted. Besides this quantitative analysis, external factors and qualitative analysis has also been conducted and at last conclusion is provided.

Introduction

Harvey Norman Holdings Limited is a franchise based retailer company which sells electronics, furniture and several other day to day items. There are two hundred plus stores in Australia and New Zealand, besides that HVN has stores in other countries such as Singapore, Malaysia etc. HVN also owns several other franchise such as Space Furniture, Domayne, Ariston Appliances and Joyce Mayne (HNV, 2016).

First Harvey Norman store was opened in year 1961 by Garry Harvey and Ian Norman. In the year 1990, HVN adapted the super market format (HNV, 2016). The unique aspect of HNV is that each and every store is opened as a separate management entity. Company has also opened online stores in order to cater the needs of new age buyers.

Analysis of Income Statement

Operating Revenue

Operating revenue is the revenue earned from the operating activities of the business (Hansen, Mowen, & Guan, 2012). HVN saw a fluctuating trend in the revenue as the revenue showed a declining trend from year 2011 to year 2013. However there was a boost in the revenue and finally revenue showed a growth from $ 2368 in year 2010 to $ 2580 in the year 2015.

Interest Expense

The interest expense was $ 33.64 in the year 2010, which showed an increasing trend for next two years. However from year 2012 interest expense has shown a declining trend, and this is good for the HVN.

Pretax Profit

Pretax profit was $ 438 in the year 2010 and it showed a declining trend till year 2013 (Langfield, Thorne, Smith, & Hilton, 2015). However the pretax profit picked up and recovered in the past two years and ended at $ 378 in the year 2015.

Analysis of the Balance Sheet

PPE

PPE stands for Property, Plant & Equipment. PPE for HVN has shown a slight growth in the past six years. The value of PPE was $ 439 in the year 2010, which increased to $ $ 552 in the year 2015. An increase in the PPE suggest expansion phase of the company (Smith, 2010).

Share Capital

The share capital has remained almost constant for the past six years, except an increase in share capital in the year 2015.

Cash

The cash balance was $ 157 in the year 2010, which showed an increasing trend till year 2012. There after there was a decline 6.26% in the year 2013 and decline of 10.33% in the year 2014, in the cash balance. However the cash balance recovered in year 2015 and the cash balance increased to $ 185 million.

Analysis of the Cash Flow Statement

Receipt from customers

Cash receipt from customers has shown a mixed trend. However there is almost a constant cash flow during the past six years.

Proceeds from sale of PPE

Cash proceeds from PPE showed a declining trend, from year 2010 to year 2013. Thereafter there was a higher sales in the year 2014.

Proceeds from borrowings

Company was able to reduce its borrowings index and this is visible from the above chart, where the cash flow from borrowings has taken a declining trend (Wickramasinghe, 2010).

Ratio Analysis

Operational Ratios

The inventory days for the year 2010 was 50 days, which slightly improved to 48 days in the year 2015. A shorter duration indicates a fast moving inventory and a longer duration indicates a slow moving inventory.

The average collection period was 162 days in the year 2010, which increased to 154 days in the year 2015. A shorter collection period is more suited for the needs of working capital management of the company.

Solvency Ratios

The current ratio indicates the ability of the company to repay its current liabilities out of the current assets. There is a slight decline in the current ratio, which was 1.62 in the year 2010 and deteriorated to 1.31 in the year 2015.

Quick ratio represents the ability of the company to repay its current liabilities out of the quick assets. Quick ratio was 1.35 in the year 2010, which improved to 1.51 in the year 2013. However it deteriorated to 1.07, in the year 2015.

Leverage Ratios

The debt ratio was 0.09 in the year 2010, which deteriorated to 0.16 in the year 2013. This also caused increase in the interest expense during the said period. The debt ratio improved in the year 2014 and in the year 2015 it was 0.07.

This ratio indicates the ability of the company to pay the interest out of the EBIT. There was a decline in this ratio for the period ranging from year 2010 to year 2012, due to increase in interest expense.

Profitability Ratios

Company has shown a declining trend in operating profit till the year 2012. However the operating profit margin improved from year 2013 and reached 14.86% in the year 2015.

Return on assets has shown a mixed trend. The ratio was 8.01% in the year 2010, which deteriorated to 5.11% in the year 2012. However ROA again improved to 6.18% in the year 2015.

External Factors Not Included in the Financial Statements

HVN has been in controversy for several reasons such as misleading advertisements, Fair Import Alliances etc. Besides that retail industry is facing great competition due to heavy discounts offered by the companies.

Conclusion

Performance of HVN showed a declining trend from year 2010 to year 2012. However company invested in the information technology infrastructure and has gone for expansion phase. The profit of the company has recovered in the past two year and it appears to be a good investment at this point of time.