Financial Accounting For Business - Essay Example

FINANCIAL ACCOUNTING FOR BUSINESS Financial accounting for business Name Course Tutor Date Table of contents Introduction 1 Layout of the financial statements 2 Analysis of the financial statements 4 Conclusion 9 Reference List 11 Appendix 1: 12 Introduction The current global crisis demands radical financial decisions and especially for corporate entities that must remain profitable in this period. The pressure exerted on the management by a company’s shareholders have often led to pay cuts and forced turnovers. The chief executive officers (CEOs) normally take responsibility to ensure that these cuts and forced turnovers or retrenchments are done with an aim of saving on costs and hence maintaining a favourable balance sheet. Currently the financial outlook for any company remains the most important aspect of consideration for the management, stakeholders, and investors. Home Retail Group is a holding company in the United Kingdom and the Republic of Ireland, including retailers like Argos, and Homebase. It was established in 2000 after the merger of Gus plc that included Argos and Reality United Kingdom (UK) business. Two years later the merger acquired Homebase and later more than 30 index stores in 2005. Currently Home Retail Group comprises the following subsidiary businesses Chad valley, Alba Bush, Hygena, Homebase, Schreiber, Argos, and Habitat. B&Q is a subsidiary business of Kingfisher plc. This is a British retailing company with a multinational scope. Presently kingfisher plc is the largest home improvement retailer in Europe. Kingfisher plc consists of 900 stores distributed across Europe, and Asia, including brands like B&Q, Screwfix, Castorama, and Brico. This company deals in consumer goods. Kingfisher plc was founded in 1982 after the buyout of then British Woolworths by Patemoster stores. Later the company expanded its scope by the eventual acquisition of B&Q, Comet, and Superdrug. Castorama became its next acquisition and by 1999 it was ranked the largest retailer making an attempt to acquire Asda supermarkets. Kingfisher plc stocks home improvement products, including appliances, tools, hardware, and garden supplies. Layout of the financial statements A sound business undertaking is one capable of generating profits for its owners and shareholders. The profitability of a company can only be properly assessed by looking at the company’s financial statements. Such statements may include balance sheets, profit, and loss accounts, and cash flows among other reports. This report will focus on the balance sheet in the period ending 2011 to indicate the financial statement layout for Home Retail Group and B&Q a subsidiary of Kingfisher plc. Kingfisher plc consolidated balance sheet Non-current assets in million UK pounds Good will 2395 Intangible assets 86 Property, plant and equipment 3632 Investment property 32 Other receivable 15 Joint venture investments 259 Post employment benefits - Derivatives 62 6508 Current assets Inventories 1791 Trade and other receivables 531 Derivatives 15 Current tax assets 45 Cash and cash equivalents 731 3095 TOTAL ASSETS 9603 Current liabilities Trade and payables (2519) Borrowings (196) Derivatives (11) Current tax liabilities 372 Provision (27) Non current liabilities Other payables (76) Borrowings (577) Derivatives (17) Deferred tax liabilities (238) Provisions (52) Post employment benefits (58) (1018) TOTAL LIABILITIES (4143) Net assets Share capital 371 Share premium 2194 Own shares held (42) Retained earnings 2390 Other receivables 539 5432 Home Retail Group Balance sheet August 2011 Good will 1543.9 PPE and other intangibles 651 Inventories 1013.9 Installment receivables 427 Other assets 174.8 INVETSED CAPITAL ASSETS 3810.6 Trade and other payables (1132.9) Provisions (209.4) INVESTED CAPITAL LIABILITIES 1342.3 Invested capital 24683 Retirement benefit obligations (81.8) Net tax assets 52.9 Forward foreign exchange contracts (14.6) Financing net cash 200.5 Net assets 2625.3 From the results it can be inferred that Kingfisher plc B& Q’s parent company had 5432 million UK pounds as net assets in the year ended December 2011 whereas Home Retail Group had 2625.3 million UK pounds worth of net assets. Additionally, Kingfisher plc had current assets for 2011 valued at 9603 million UK pounds as compared to Home Retail Group with a current asset value standing at 3810.6. A look at the liabilities indicates that Home Retail Group had liabilities valued at 1342.3 as compared to Kingfisher plc with liabilities valued at 4143 (Kingfisher 2012). Analysis of the financial statements The financial statements were further analyzed based on a number of business ratios. Profitability ratios are used to evaluate how well a business is carrying on business by evaluating how income was earned in relation to sales, total assets, and net worth. Basically, three profitability ratios will be used to evaluate the profitability of Kingfisher plc and Home Retail Group. The profit margin also called return on sales ratio can be sued to measure the earnings after taxes on the annual sales. This ratio is calculated as follows: Net profit after tax ÷ net sales Therefore the net sales for Home Retail Group for 2011 amounted to 1676 million UK pounds. This is in comparison to Kingfisher plc’s net sales that amounted to 10450 million UK pounds in the same period. The profit after tax for Home Retail Group was 2468.3 while the profit after tax for Kingfisher plc was 2077 Therefore, the profit margin for Kingfisher plc can be derived as Net profit after tax÷ net sales = 2077÷10450 = 0.198 Additionally the profit margin for Home Retail Group can be derived a: Net profit after tax/ net sales = 2468.3÷1676 = 1.47 Summarily the higher the profit margin ratio, the healthier the business is ready to manage downtrends. Therefore Home Retail Group was more prepared to handle downtrends in 2011 (see appendix). To further assess the profitability of the two companies, another profitability ratio considered was the gains on the assets ratio. This highlights the after tax income on the assets and shows how lucrative a business is. Return on assets (ROA) is calculated as Net profit after tax ÷ Total assets. A higher percentage rate shows that the business is well managed and also implies a strong return on assets. Accordingly the ROA for Kingfisher plc the parent company for B&Q can be calculated as Profit after tax ÷Total assets = 2077÷9603= 0.216 Additionally the ROA for Home Retail Group is calculated as Net profit after taxes = 2468.3÷ Total assets = 2625.3 = 0.94 From the two sets of results it can be inferred Kingfisher plc has a ROA = 0.216 while Home Retail Group’s ROA = 0.94 Therefore, Home Retail Group is well managed based on the ROA as compared to Kingfisher plc Efficiency ratios were also used as another set of evaluation for the two companies. Efficiency ratios consider the business’ quality receivables and how competently they are used and control the company’s property. Additionally efficiency ratios highlight how effectively the company pays its suppliers and if the company is under trading or over trading on equity. The sales to inventory ratio also can be used to compare the stock to the sales ratio of the business. A higher ratio is indicative that sales are minimal because of minimum inventory. A low ratio is indicative that the stock is outdated or stagnant. This ratio is calculated as follows: Annual net sales ÷ Inventory Additionally the assets to sales ratio showing how competently a business is utilizing its property to create revenue can be used to evaluate the efficiency of the company. The higher the ratio the more likely it is that the business is less efficient. On the other hand a low ratio may indicate that the company is overselling. The ratio is calculated as follows: Total assets ÷net sales These two ratios can be used to evaluate the efficiency at Home Retail Group and Kingfisher plc. Kingfisher plc inventory for 2011 was 1791 Kingfisher plc’s annual net sales for 2011 amounted to 10450 million UK pounds Therefore, the company’s sales to inventory ratio = 10450÷1791 = 5.83 Home Retail Group’s inventory for 2011 was 1013.9 Home Retail Group’s annual net sales = 1676 Therefore, Home Retail Group’s sales to inventory ratio = 1013.9÷1676 = 0.604 Additionally using the assets to sales ratio to compare the companies it can be inferred as follow: Kingfisher plc total assets = 9603 Kingfisher plc net sales (2011) = 10450 Therefore, the assets to sales ratio for Kingfisher plc = 9603÷10450 = 0.91 Comparatively the asset to sales ratio for the Home Retail Group can be deduced as follows: Home Retail Group total assets = 2625.3 Home Retail Group net sales = 1676 Therefore, the asset to sales ratio for Home Retail Group = 2625.3÷1676 = 1.566 Liquidity as the degree to which an asset or security can be traded on the market without affecting its price can also be used to evaluate the performance of a company. A company’s assets that can be easily traded and are called liquid assets. Liquidity is calculated using a number of ratios. These ratios can determine the company’s capability to meet both short and extended term debit obligations. Liquidity ratios commonly used include current asset, quick ratio and operating cash flow ratio. Quick ratio considers the company’s market securities and accounts receivables as the liquid forms of the current assets within a company. A quick ratio of les than 1 indicates a dependency on stock and other property to repay short term debts. The quick ratio is formulated as follows: (Cash + Accounts receivables)÷ Current liabilities Additionally the current ratio will be used to evaluate the liquidity of the companies under study. The current ratio is a comparison of the current assets to current liabilities. This indicates the company’s capacity to pay current debts when due. Current ratio is worked out using the formula: Current assets ÷ current liabilities Therefore, the liquidity of the two companies can be evaluated as follows: Kingfisher plc quick ratio Cash = 731 Accounts receivable = 531 Current liabilities = 4143 = (731 + 531) ÷4143 = 0.30 Since the quick ratio for Kingfisher plc the parent company for B&Q is less than one it implies that Kingfisher plc cannot sufficiently service short term debts without depending on inventory or any of its assets. Home Retail Group Cash = 200.5 Accounts receivables = 427 Current liabilities = 1342.3 = (200.5 + 427)÷ 1342.3 = 0.46 Similarly Home Retail Group’s quick ratio is less than one implying that Home Retail Group cannot sufficiently service short term debts without depending on inventory or any of its assets. The two companies’ liquidity status if further evaluated using the current ratio. Kingfisher plc current assets = 3095 Kingfisher plc current liabilities = 1018 Therefore the current ratio for Kingfisher plc = 3095÷1018 = 3.04 Home Retail Group current assets = 3810.6 Current liabilities = 1342.3 Therefore, the current ratio for Home Retail Group = 3810.6÷1342.3 = 2.83 Investment ratios examine the accounts of a given company from an investment perspective. So for example they consider if someone should invest in shares of the company or whether an existing shareholder should continue to hold their investment. Examples of ratios used in this category include earnings per share and price earnings ratio. The earnings per share (EPS) ratio assesses the measure of the return for share of the company’s earnings that are available to the shareholders in form of dividends. Earnings per share ratio can be worked out using the formula below: Net profit after tax ÷ Number of shares issued The price earnings ratio (PE) gives an indication of the stock market’s confidence in the future prosperity of the company. The higher the ratio the better as far as the level of confidence that is applied to the company is concerned. The price earnings ratio is calculated as follows: Quoted price per share /earnings per share Conclusion Companies are struggling with cutting their operational costs and this involves retrenchments. This is also a consideration at Kingfisher plc and Home Retail Group. As the companies adopt and rely more on technology it is likely that the companies’ workforce will be reduced to save on human resources cost. However, this must not compromise value in which case the companies must focus on the system value theory at the workplace. Information technologies will not wok for the companies if there is no teamwork and supportive work policies that promote professionalism. Therefore, Kingfisher plc and Home Retail Group can remain as leaders in home improvement and consumer solution provision if they proactively apply these technologies internally to enhance their business processes and improve productivity. However, this is likely to come at some cost although the eventual returns on investment will be evident in the companies’ cost cuts. Additionally, the technology will give both Kingfisher plc and Home Retail Group the competitive advantage they need. It is most certain that Kingfisher plc and Home Retail Group would want to continue enjoying a strong brand management and communication campaign that would see their products as most outstanding within Europe, Asia and beyond. This will however be possible if they adopt their strengths and opportunities strategies effectively meeting the aims and aspirations of their customer by maintaining quality in their products. However all this is determined by various market forces and Kingfisher plc the mother company to B&Q, and Home Retail Group will position themselves at strategic advantageous points as they adopt a resilient approach. Reference List Kingfisher plc 2012, Investor and media: Consolidated balance sheet. Available from: .[19 April 2012] Appendix 1: Operational levels for Home Retail Group 2009 to 2011 Source: Third party mystery shop report. Read More