Financial Statement Analysis Report: Nick Scali Limited (Finance)

This report provides a financial statement analysis of Nick Scali Limited, focusing on the company's accounting practices and their impact on financial performance. The analysis, based on the 2018 and 2019 annual reports, examines key accounting policies, including those related to revenue recognition, inventories, depreciation, and lease accounting. The report evaluates the accounting flexibility and strategy employed by the company, assessing the quality of disclosures and identifying potential earning management techniques. The analysis also considers potential red flags, such as credit and liquidity risks, and evaluates the impact of accounting distortions on reported profits. The report concludes with an overview of the company's financial health and the effectiveness of its accounting policies in reflecting the underlying business reality. The report also includes a table that explains the accounting techniques used by the company.

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FINANCIAL STATEMENT ANALYSIS
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Author Note

1FINANCIAL STATEMENT ANALYSIS
Executive Summary
The main purpose of this research is to do an analysis on the accounting system adopted by
Nick Scali Limited. The study is supported by doing an analysis of the company's annual
reports for the financial year 2018 and 2019. It has been found that the accounting technique
used by the company, has helped them to sustain as a good financial performer in the market.

2FINANCIAL STATEMENT ANALYSIS
Table of Contents
Introduction................................................................................................................................3
Discussions.................................................................................................................................3
Accounting Analysis..............................................................................................................3
Step-1 Accounting Policies adopted by Nick Scali Limited..................................................3
Step 2: Accounting Flexibility...............................................................................................4
Step 3: Accounting Strategy...................................................................................................5
Step 4: Disclosure Quality.....................................................................................................5
Step 5: Earning Management of the Company......................................................................6
Conclusion..................................................................................................................................7
References..................................................................................................................................8

3FINANCIAL STATEMENT ANALYSIS
Introduction
Nick Scali Limited is a leading importer of furniture across New Zealand, Hamilton
and Australia. The company has gained a substantial growth of sales in the FY 2019. The first
part of this paper has discussed on the accounting policies adopted by Nick Scali Ltd. The
next part is on the accounting policies and strategy implemented by the organisation. The last
part is an emphasis on the earning management technique implemented by the management.
The intense of this paper is to do an accounting analysis of Nick Scali Limited.
Discussions
Accounting Analysis
Accounting analysis is the process that is carried out by the professionals of a
company in order to facilitate subsequent decision-making. Accounting analysis is done to
maintain the profitability & liquidity position of a business in order to sustain itself in the
long run. The professionals include management, auditors & financial managers of the
company. They estimate the future financial performance of a company by improving the
quality of the financial reports.
Step-1 Accounting Policies adopted by Nick Scali Limited
Nick Scali Limited is an importer of furniture, having nearly 30 stores at June 2018
and added five more stores in Australia. Income from the contacts with the customers is the
main revenue for the company (Openbriefing.com.au, 2019). The inventories are valued
according to the net realisable value and weighted average cost method. Net realisable value
is calculated by estimating the selling price of the business, less the cost estimated to make
the sale. Sales margin are used for identifying the historical measure of the inventories.
Depreciation is charged for proper, plant and equipment. The land is not depreciated. It is

4FINANCIAL STATEMENT ANALYSIS
done on the basis of straight-line depreciation basis on both the financial years. The
depreciation methods are adjusted in case of any requirements.
Figure 1: (Depreciation periods of plant, property and equipment in FY 2019)
The estimation of useful lives of assets was considered by using, lease terms for lease
premises and historical data. The operating leases are written on a straight-line basis in the
comprehensive income statement of the company.
Step 2: Accounting Flexibility
In case of applying the accounting policies, the management of Nick Scali Ltd has
done estimation and assumptions for accounting the inventories and other assets. Actual
results may differ from the values estimated. The company used straight-line depreciation
basis for measuring the useful life of the assets, then can choose other depreciation methods
like diminishing balance method to find the useful life (Openbriefing.com, 2019). Nick Scali
Ltd, uses AASB 16 Lease standard to improve the estimation of presentation of the lease in
the annual report. The company has accounting flexibility for accounting the non-current
assets like goodwill, where the recoverable amount from stores are determined using cash
flow projections. The company has adopted hedge accounting in making a foreign exchange
contracts. This could be risker in attributing the net income in the future period. According to
the annual report 2018, the AASB standards are used for accounting the financial instruments
and other assets. But, The Australian Accounting standard implemented by the organisation is
not appropriate.

5FINANCIAL STATEMENT ANALYSIS
Step 3: Evaluating the Accounting Strategy
The organisation is compiled with Australian Accounting Standard and Corporation
Act 2001 to improve the standard of the annual report for better decision-making. But, the
company has done adjustments in preparing the financial statement. The company used
weighted average method for valuation of inventories. This method is easy and better for
asset valuation (Hsieh and Novoselov 2018). The value of financial instrument is the fair
value that is calculated according to the accounting standard, whereas, the values of other
particulars are just on the basis of assumptions from the historical data. The straight-line
method used for calculating the depreciation is a simpler way to find the useful life value of
the assets. But, the some of the equipments like office equipments, fittings and lease
improvements cannot be performed with the same amount. This accounting strategy may not
provide an appropriate figure of depreciation. Qantas Ltd also calculates its depreciation
value on a straight-line method for property, plants and equipments. The depreciation value
are on the basis of estimation of residual value of the assets. Accounting strategy of using
AASB 16 will be replaced with AASB 117 for recognition of lease requirements, where the
lease expenses will be recognised as expense on the basis of the straight-line method.
Step 4: Quality of Disclosure
The Annual report of Nick Scali Ltd of both the financial years has shown; the
auditor’s independence report, various financial statements, director’s report, shareholders
information and corporate information. But, the corporate governance statement is not
presented by the management (Fisman, Schulz and Vig 2016). The directors have not
disclosed the premium paid to the directors and other officers during the contract. The report
has clearly mentioned about the total number of employees working in the organisation. Total
employees in 2019 is 515 and in 2018 were 468 in numbers. Statutory remuneration report is
not disclosed. According to the FY 2019 report, the sales of goods were increased by 6.9%

6FINANCIAL STATEMENT ANALYSIS
from $250.8 to $268.0, but the net profit after tax did not show a larger variation. It only
increased by 1% in the current year. The information from the historical data does not show a
correct measurement of the figure. Therefore, the financial performance from the historical
data does not provide a clear review of the data. The company mainly focuses on the
underlying profit for making a fair presented in the annual report.
Step 5: Potential Red Flags
The management of the company has been using this accounting policy since past
years. In the annual report, the maximum credit risk of the company includes the receivables,
cash & cash equivalents. It was also found that, the company will not able to meet the
liquidity risks due to insufficient fund. The annual report is audited by a qualified auditor,
therefore, they have successfully audited the report in a qualified way. They have
successfully implemented the earning management techniques to hide the changes in
accounting system. There is unexpected write-offs in depreciation amount, sale expenses,
inventory expenses, administration expenses and other market expenses. The accumulated
depreciation value of the asset is adjusted and is normally written off as the depreciation
expense for property, plants and equipment. The greater value of depreciation expense was
shown in the current year as compared to the previous year 2018. Even the estimation of the
useful life of some assets is shorter than the actual physical life of assets (Swlearning.com,
2019). Hence, the management is engaged with large earning management technique to show
a good appearance of company’s financial statement. There is a large increase in gap of
taxable income in the income statement of FY 2018 and 2019. This could cause a problem for
the company. (Sajjad et al. 2019). There is a weak audit committee in the organisation. There
are total four audit committee in the organisation.
But, the management is implementing the earning management technique from past
years. The company has maintained a substantial growth in sales revenue from the past years.

7FINANCIAL STATEMENT ANALYSIS
The firm is well placed to grow its capital and take advantages from the investment
opportunities. Therefore, this method has not been a threat for the company. Hence, no such
major adjustments are required in this case.
Step 6: undo Accounting Distortions
Items Over five years Accounting flexibility Adjustments
Inventory Valued on weighted
average cost method
and net realisable
value.
Regulation
AASB 102 inventories, section 334 of
corporation act (Aasb.gov.au, 2018)
Net realisable value is done by
estimation of the selling price, and the
weighted average cost formula is used
for valuation of inventories. No
adjustments are required. Overstating
of inventories is not done.
Depreciation The useful life of the
assets are recognised
using the straight-line
method
Regulation
Australian Accounting standard AAS
4 ‘depreciation” section 5.5.11
(Aasb.gov.au, 2019).
Recognition of the depreciable
amount can be done by the straight-
line method.
Adjustments can be done by using
reducing-balance method for
increasing the expected yield from
certain equipment.
In-tangible
assets
The recoverable
amount of goodwill
is determined on the
basis of cash flow
projections
Regulation
According to the AASB 1338
Intangibles, the carrying amount will
be recognised by using the cost model.
(Cpaaustralia.com.au, 2019)
No adjustment is required. No impact
on the income
Table 2: (Explanation of accounting techniques used by this company)
Conclusion
Therefore, it can be deferred from the annual report of Nick Scali, that the company
has acquired a reasonable increase in the sale revenue over the past five years. In the current

8FINANCIAL STATEMENT ANALYSIS
year, the sales revenue was increased by 6.9%, which is quite for the company. The
accounting policy used by the management has helped the company to maintain a position in
the market. The current strategy has helped the business to sustain and face challenges in the
market. Earning management technique is implemented by the management for appearing a
good financial statement of the firm.

9FINANCIAL STATEMENT ANALYSIS
References
Aasb.gov.au (2019). [online] Aasb.gov.au. Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB102_07-15.pdf [Accessed 12 Dec. 2019].
Aasb.gov.au (2018). [online] Aasb.gov.au. Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB102_07-15.pdf [Accessed 12 Dec. 2018].
Cpaaustralia.com.au. (2019). [online] Available at:
https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-
resources/public-sector/guide-to-valuation-and-depreciation [Accessed 12 Dec.
2019].
Fisman, R., Schulz, F. and Vig, V., 2016. Financial disclosure and political selection:
Evidence from India. Unpublished manuscript, Boston Univ.
Hsieh, C.C., Ma, Z. and Novoselov, K.E., 2018. Accounting conservatism, business strategy,
and ambiguity. Accounting, OrganisationsOrganisations and Society, 30, p.1e15.
Openbriefing.com.au (2019). [online] Openbriefing.com.au. Available at:
http://openbriefing.com.au/AsxDownload.aspx?pdfUrl=Report%2FComNews
%2F20180921%2F02024908.pdf [Accessed 12 Dec. 2019].
Sajjad, T., Abbas, N., Hussain, S. and Waheed, A., 2019. The impact of Corporate
Governance, Product Market Competition on Earning Management Practices. Journal of
Managerial Sciences, 13(2).
Swlearning.com (2019). [online] Swlearning.com. Available at:
http://www.swlearning.com/pdfs/chapter/0324223250_2.PDF [Accessed 12 Dec. 2019].