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Accounting for Management Decision Making — ACCT20077

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Accounting for Management Decision Making (ACCT20077)

   

Added on  2020-02-18

Accounting for Management Decision Making — ACCT20077

   

Accounting for Management Decision Making (ACCT20077)

   Added on 2020-02-18

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ACCT20077: Practical and written assessmentPage 1 of 11
Accounting for Management Decision Making — ACCT20077_1
ContentsIntroduction................................................................................................................................3Part 1: Method used by each company for preparing the cash flow statements........................3Part 2: Analysis of the cash flow statements of both the companies.........................................4Comment on the cash flow statement of the Harvey Norman Holding Limited....................4Working Capital Ratio............................................................................................................5Cash Flow Adequacy Ratio....................................................................................................5Debt to Total Asset Ratio.......................................................................................................6Debt Coverage Ratio..............................................................................................................6Cash Flow to Sales Ratio........................................................................................................7Comment on the cash flow statement of the JB HiFi.............................................................7Cash Flow Adequacy Ratio....................................................................................................8Debt to Total Asset Ratio.......................................................................................................9Debt Coverage Ratio..............................................................................................................9Cash Flow to Sales Ratio......................................................................................................10Part 3: Conclusion and recommendations................................................................................10References................................................................................................................................12Page 2 of 11
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IntroductionFinancial statements are the most important of the annual report and users of the annual report uses financial statements to predict the financial performance of the company. The financial statements are mainly divided into four main parts namely, statement of comprehensive income, statement of financial position, statement of change in equity and statement of cash flows. Among them statement of cash flow the most important as it helps in providing the actual cash flows take place in the company through the operating activity, investing activity and financing activity.In this report, cash flow statements of Harvey Norman Holdings and JB Hi Fi for year2016 are analyzed to report on the cash position of the company. Financial ratios are also calculated to support the findings.Part 1: Method used by each company for preparing the cash flow statementsThere are two methods to prepare the statement of cash flows, namely direct method and indirect method. Mainly there is difference for preparing the cash flow from operating activity. Cash flow from investing activity and financing are calculated in the similar manner under both the options. It has been analyzed from the annual report of the Harvey Norman Holdings that company has implied direct method to prepare the statement of cash flows. The statement of cash flows in annual report of Harvey Norman Holding Limited is presented on the page 65 and reconciliation of profit after income tax to net operating cash flows has been incorporatedin the notes to account in section 28 (b) on page 112 (Annual report 2016: Harvey Norman Holding Limited). Under direct method for preparing the cash flow statement, it is important to disclose the reconciliation statement under notes to accounts in order to facilitate the betterunderstanding of cash flows under the operating activity. On looking at the annual report of the JB HiFi for the year 2016 it has been noted that this has also used direct method to prepare the cash flow statement. The reconciliation of profit after income tax to net operating cash flows has been incorporated in notes to accounts at note number 14 (Annual report 2016: JB HiFi). Page 3 of 11
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Part 2: Analysis of the cash flow statements of both the companiesComment on the cash flow statement of the Harvey Norman Holding LimitedCash flow (Used in)/ from various activitiesActivities2016Amount ('000)Net Cash Flows From Operating Activities$ 437,691.00Net Cash Flows Used In Investing Activities$ -179,853.00Net Cash Flows Used In Financing Activities$ -307,427.00On the basis of above chart it can be said that Harvey Norman has generated enough cash flow their operating activities. The cash flow under operating activities comes from receipts from their franchisees and receipts from their customer. There was more than 29 % increase in the cash flow from operating activity in year 2016 as compare to cash flows from operating activity in year 2015. The main expenses that require cash to be paid are payments made to suppliers and employees, GST expenses, income taxes, and other cash expenses. It isvery easy to prepare the cash flow statement from direct method if all the cash receipts and payments are recorded as when they occur. Apart from these, there are some cash income likedividend received in cash from investment made and interest received. Cash generated from the operating activities are free cash flow for the company and it is used to invest expansion of business or to make purchase of fixed assets (Annual report 2016: Harvey Norman Holding Limited). Investing activity refers to activity that requires cash to be invested in the fixed assets,acquiring any business or to purchase the securities. There is mainly use of cash in this activity and any cash flows from this activity can be through sale of any asset or sale of any securities. When cash used in the investment activity in year 2016 has been compared with year 2015 it has been found that company has invested 2 times more in year 2016. Company has mainly invested in purchasing the properties and equity investment. Cash used in financing activity has increased in year 2016 as compared with year 2015. It is due to increase in amount of dividend paid in year 2016 and discharge of loans taken from related parties. So it can be said that Harvey Norman has used huge amount of cash and cash equivalents in paying the dividend and purchasing the investments (Annual report 2016: Harvey Norman Holding Limited). Page 4 of 11
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