HI5001: Accounting for Business Decision - Stakeholder's Equity - Assessment Answer

Accounting for Business Assignment

Assignment Task

Introduction

FFI Holdings Limited is engaged in the business of processing, manufacturing, distribution and packaging of food products within Australia. There are segments that the company operates through - Bakery, Investment Property and Smallgoods. The company uses its own retail brands Nemar and Golden Popcorn, and the retailers’ private labels for the distribution and marketing of a number of products in the retail market such as cooking chocolates, sugar confectionery, chocolate coated confectionery, popcorn snack food products and cake decorations.

Its brands Prepact and Snowflake are marketed in the home cooking market sector where various products are produced and marketed by the company. The company produces specialty chocolate compounds, apple products, cake decoration toppings and baker’s fillings targeted at the bakery and pastry cooks industries and engages in contract packing services on behalf of third party brands (www.ffiholdings.com.au, 2016). It also produces processed meat products like fresh sausages, bacon.

Headquartered in Jandakot, Australia, FFI Holdings Limited was founded in 1979 and also has business interests in prime industrial and commercial property for investment. The company values integrity, creativity, flexibility and reliability and consider itself to be a leader in the Australian food industry. Apart from all states of Australia, the country also has operations in some South East Asian markets (www.bloomberg.com, 2016).

A. Statement of Financial position

a) Total current revenues:

The total current revenues of the company were $30,723,095 for 2015 and $30, 469,433 in 2014. The company noted a negligible increase in current revenues of 0.8% compared to 2014

b) Total non-current assets

The company had total non-current assets of $32,694,836 for 2015 and $32,068,456 in 2014. The company increased its non-current assets by 1.95% in 2015 compared to 2014.

c) Total current liabilities

The total current liabilities for the company for 2015 were $3657153 in 2015 and $3,388,189 in 2014 noting a 7.9% increase in 2015 compared to a year earlier.

d) Total non -current liabilities

The total non-current liabilities of the company in 2015 and 2014 was $3,000,000 for every year in the form of long term borrowings noting no change in the figure I the two years being studied

e) Total stockholder’s equity

The total shareholder’s equity for the company increased in 2015 compared to 2014 by 4.92% from 29,016,777 in 2014 to 30,444,828 in 2015.

The increase in the current revenues for the company has been 0.8%. Current revenues denote the money that the company is scheduled to get paid within the next one year. This very small increase notes that the company has not been able to enhance its current revenues generating avenues in any significant manner in 2015 compared to what it did a year ago (https://quote.morningstar.com, 2015).

The company saw an increase in its non-current assets by 1.95% in 2015 compared to that of 2014. Now non-current assets are those assets that are expected to remain with the company and which the company can use to generate value in the future but not in the immediate future such as within the next one year (A. Coste, 2014). the increase of nearly 2% of non-current assets by the company in the current year compared to a year earlier indicates that the company has been trying to enhance long term assets with the use of money generated from business and also shows that the company has the ability to generate assets that ultimately increases the market value of the company (Unknown, 2004).

Current liabilities are those that the company has to pay off within the next one year. This value increased by 7.9% 2015 compared to a year earlier which means that the company has to pay more money in the next year (2016) than it did in 2015. Current liability increase generally means that the cost of running the business in the short term has increased.

No change in non-current liabilities shows that the company has not taken any new long term loans in 2015 expect what was outstanding from the last year noting a healthy financial state and indicating that the company has been able to finance any new projects or capital expenditure by itself or from the retained profits or shareholder’s equity.

This is reflected in the increase in the total equity of stockholders in 2015 by 4.92% compared to 2014.

B. Stockholder’s Equity

Comparison of the stockholders equity patters for the two years – 2014 and 2015, reveals that the total stockholders’ equity has risen in the current year compared to a year earlier. The net value of the company is represented by the stockholders' equity, or the amount of money which can be returned to the shareholders by the liquidation of all the company's assets as well as all its debts repaid (Galbraith, 2007).

In general, stockholders’ equity is found out by subtracting total liabilities form total assets.

The components that make up stockholders' equity in the balance sheets of companies are:

Paid-in capital – this is the money that was raised from the issuing of shares or of capital stock.

Retained earnings – this represents the amount that remains with the company after the company has paid all of the dividends to the shareholders.

Accumulated other comprehensive income – this includes any amount that is not reported under the net income section in a financial report

Treasury stock – this is the amount that is deducted from stockholders' equity and is the amount that is spent by the company for repurchase of shares without retiring any of its own shares of capital stock (Mori, n.d.).

For the company being discussed, the % increase in stockholders’ equity has been noted at 4.92%.

This includes enhancement of in fully paid ordinary shares in the company from $9,385,111 in 2014 to $9,672,585 in 2015 where shares were issued by the company in 2 phases during year starting November 2014 to April 2015. No money was expended in creating treasury stock. In 2014, the company had also issued outstanding shares to the tune of $956550. In 2015, the company issued $287474. Therefore nearly 70 percent less outstanding shares were issued by the company in 2015 compared to 2014 (https://quote.morningstar.com, 2015).

A detailed review of the stockholders’ equity section in the balance sheet of the company for 2015 reveals that there has been an enhancement of 6.72% in the ordinary share value in the company reflective of the number of new shares issued and that were fully paid by investors.

The cash reserves of the company for revaluation of reserve records and for non-current assets from which dividends can also be given have remain unchanged during the two years under consideration. However there has been an increase in the amount of retained earnings of the company by 6.8 percent. This is again reflective of the fact that the company did not have to take long term loans to finance business activities as well as of the ability of the company to generate earnings in addition to the paying dividends to shareholders.

C. Statement of Profit & Loss

a) Total operating revenues

Operating revenues, also referred to as operating profits, is the amount that that company generates from its overall business operation minus the expenses that it incurs in operational expenses. Such operational expenses can be items like the cost of goods sold, expenses for freight, rents and lease rentals, office supplies, marketing and advertising expenses and payroll expenses. The operating revenues does not take into account the any of the taxes, any loan repayment or interest payable or any payments for single events like lawsuits etc (Kothari, 2008).

Study of the company balance sheet shows that operating revenues or the profit before accounting for taxes etc. has come down to $2,972,301 from $4,631,356 in 2014 noting a percentage decline of nearly 36%. This number was reached despite the fact in 2015 the total revenues of the company were more than that in 2014. This means that the cost of operation had increased significantly in 2015 resulting in the 36% drop in operating profits.

b) Cost of goods

The costs of goods for 2014 increased by a 4.78% in 2015 compared to t a year earlier. This is reflective of the value of amount that the company spent in the production process of the goods. In this aspect the most noticeable change occurred in the change in inventories for finished goods and work in progress which increased by nearly 34% in 2015 compared to 2014. This shows that more capital of the company was locked up in inventory in 2015.

However this was partially offset by reduction in the costs for raw materials in 2015 by 4.34 %.

c) Total expenses (before income tax)

The total expense before tax was paid by the company in 2015 was $27,750,794 and $25,838,077 in 2014. The change in total expense for the two years was 7.4% where expense in 2015 was more than the previous year.

d) Any non operating (extraordinary) gains and losses

Non-operating or extraordinary income or loss is the amount generated or lost from activities and sources that are not part of the main or central operations of a business. They are also referred to as incidental or peripheral revenues. This can include income from interests, shares in other entities, rents, etc (Anabila, 2012).

In the case at hand the extraordinary sources of revenue include dividends, rent and interests received and other revenues sources which re minor and hence not defined. The combined figure of extraordinary income for 2015 was $775,281and that for 2014 was $215,413. Hence there was an increase of 260% in extraordinary income for the company in 2015 compared to a year earlier.

e) Earnings per common share

The earnings per share of EPS for 2015 was 22.7 cents while the figure stood at 36.2 cents per share in 2014. Hence there was a reduction of 37.2% in the dividends paid to shareholders of the company I 2015. This is directly linked to the operating revenue or profit generated which had also dropped by around 35% as shown earlier (https://quote.morningstar.com, 2015).

Hence from the above ratios and figures derived from the company balance sheet of 2015, it is evident that the company has not been able to deliver to expectations compared to a year earlier and has failed in almost parts, primarily due to the rise in the cost of operations in 2015 compared to 2014.

D. Statement of Cash Flow

a) Net cash inflow (outflow) from operating activities

The net cash outflow provided for operating activities for 2015 for the company was much more than that in 2014. The figure was an astounding 400% more in 2015 compared to 2014. This was primarily due to increase finance costs or costs incurred in interest payments for short term and long term debts, which increased by 256% in 2015 and reduction in income tax refunds to the tune of nearly 60 percent.

b) Net cash inflow (outflow) from financial activities

There here was a net cash inflow from financing activities in 2014 compared to a net cash outflow in 2014 from financial activities. The difference was primarily due to the fact that the company had paid a larger dividend in 2014 which resulted in cash outflows. However there was a surplus in the net cash used (inflow) in financing activities in 2014 compared to an outflow in 2015 because the company had taken a debt of $3,000,000 in 2014 and hence had additional cash at hand.

c) Net cash inflow (outflow) from investing activities

Both the years under consideration saw net cash outflows in investing activities. But there was an decrease of nearly 70 percent in cash outflow in 2015 compared to 2014. The main reason for this is that the company had incurred cash outflows to the tune of $4,112,634 in property development costs in 2014 compared to just $103,625 in 2015. This was nearly 198% less in 2015 compared to 2014. Therefore this resulted in the greater cash outflow by the company in investment activities in 2014.

d) Net increase (decrease) in cash during the year

The company had a net cash outflow of $2,040,004 in 2014 while it had a net cash inflow of $1,634,664 in 2015. Hence there was clearly a surplus in net cash in 2015 (as on 30June 2015). Compared to the figure in 2014, the difference in net cash was to the tune of $1,634,664. This was 186.5% more compared to the net cash the company had at the end of last year (30July 2014) (https://quote.morningstar.com, 2015).

The cash flow analysis clearly establishes that in terms of cash inflow the company was in the better position in 2015 compared to the year earlier despite the fact that the company had taken a debt in 2014. But the cash outflow in 2-14 was primarily due to the expenses incurred in the creation of property assets of assets. The cash flow scenario was better in 2015 because of a drastic reduction in this business activity of the company. Hence it can be concluded that even if the cash position looks bad in 2014 compared to 2015 for the company, it is not much of a worry as the company had invested the money in creation of assets which are yet to be disposed off to generate revenues (Linzer, 2007).

Conclusion

There has not been much of a change in the current revenues for the company amongst the two years under consideration indicating lack of enhancement of revenue generating modes of the company. The company has also not been able to significantly enhance long term assets with a slight increase in its non-current assets. Increase in the current liabilities suggests that the company has increased its costs in 2015 by nearly 8% which is not a good sign for the company financially. However one good thing is that the company has not needed to incur fresh debt in 2015 which shows that the company has been more or less able to finance its projects and business activities internally from the retained profits or increased shareholder’s equity. This is shown by the increase in the total equity of stockholders in 2015 by 4.92% compared to 2014. This is a sign that the company is being managed well mostly.

Another positive indication for the company is the bettering of its debt to equity ratio which the company accomplished by infusing more equity by ways or issuing more ordinary shares. The rise in equity and no change in debt would keep the investors sufficiently interested in investing in the company. The total equity change in 2015 has been nearly 8%. The company has also retained more in 2015 which means that the company would have more internal revenues in 2016 to finance business costs by itself.

However the reduction in operating profits of the company is a cause of concern. The decline in operating profits, despite the fact in 2015 the total revenues of the company were more than that in 2014, is significantly large compared to 2014 indicating that the company needs to plug operating expenses.

There has not been a marginal rise in the costs of goods in 2015 except for a noticeable change in inventories for finished goods and work in progress which increased significantly locking up cash and capital of the company.

Another disturbing fact in the reduction in EPS by 37.2%, and is reflective of the reduction in operating revenue. Therefore it can be concluded that the company has been unable to deliver to expectations in 2015 from the shareholders’ point of view. However the increased cash flows in 2015 and the net available cash of the company is satisfactory.

Recommendations

1) Thes company should seek ways and means to enhance revenue generation as the current revenue situation of the company needs to improve in the face to enhanced business costs.

2) While the company has increased its retained profits in 2015 significantly more compared to 2014, it has not been able to increase long term assets of the company. This is one area that the company should focus and make use of the retained earnings.

3) Increase in the current liabilities makes it necessary for the company to look for ways to reduce the current expenses – especially those associated with running of business.

4) in the last two years the company has increased equity significantly. It is suggested that the company look to other forms of revenue generation for business financing and refrain from diluting the equity structure any more

5) as mentioned earlier, the company should definitely find out ways to reduce operating expense. One aspect is the finance cost that is increasing the operational expenses and the company has to look into how to better manage its short term loans. The company can look to balance operation financing and creating long term assets from the retained profits this year.

6) While a reduction in the EPS is a serious cause of concern and can impact investor interest in the company, it is advisable that the company clearly communicates to the investors the reason for the increase in expense – especially operating expenses, and the measures it is taking to reduce it. This can help the company offset the negativities caused by a 37.2% drop in EPS in 2015.