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Questions: 1.Outline the Method used in Presenting the Statement of Cash Flows for each Company. 2.Examine the information in relation to cash flow from operating activities, Cash Flow from Investing activities and cash flow from Financing activities 3.Based on the analysis, you are required to make Conclusions and recommendation. 3.a.Which Business would you expect to be a better short-term credit risk. 3.b.Do you think both Companies have adequate Cash resources? 3.c.Assess both Companies ability to survive in the longer term. 3.d.Which Company is better at generating cash from their Sales Revenue? Answers: 1.The direct method which is being applied for presenting a statement of cash flows represents specified cash flows regarding the items which affect cash flow. The main advantage which can be attained through application of the direct method is that it reveals operating cash and receipts. The same is not available in the indirect method. JB Hi- Fi The company has applied the direct method of cash flow statement in for presenting cash flows relating to the company in the annual report. Further, reconciliation statement regarding net cash inflow from operating activities has been appropriately provided in the annual report of the company. Figure 1: Reconciliation statement of net cash inflow from operating activities to profit (Source: Annual report of JB HI FI, 2016) Harvey Norman Harvey Norman Holdings Ltd has also applied the direct method for presenting cash flows relating to operating, financing and investing activities in the annual report of the company. Further, reconciliation statement relating to cash and cash equivalents available at the end of the year as well as a reconciliation of profit after income tax to net operating cash flows has been provided in an appropriate manner. It can be concluded that Harvey Norman Ltd has presented the reconciliation in the more appropriate manner in comparison to JB Hi-Fi by providing a reconciliation of cash and cash equivalents at the end of the year. Figure 2: Notes Accounts of Cash Flow Statement (Source: Annual report of Harvey Norman, 2016) 2.JB Hi- Fi Analysis of Cash Flow Statement JB Hi Fi has applied the direct method in order to present cash flow statement in its annual report. Further, reconciliation statement regarding net cash inflow from operating profits has been provided in notes to accounts in an appropriate manner (Brigham and Ehrhardt, 2013). However, reconciliation relating to cash and cash equivalent balance has not been provided in detail, rather the same has been explained by way of a note in notes to accounts of financial statements. Other than this point, all the activities relating to financing, investing and operating have been appropriately bifurcated and presented in cash flow statement in annual report Table 1: Trend of cash flow from operating activities Year 2016 2015 2014 Cash Flow from operating activities $185.14 million $179.89 million $41.326 million Year JB Hi- Fi Liquidity Ratios Working Capital Ratio 1.57 Cash Flow Adequacy 1.21 Work Capital Ratio: The ratio assesses the relationship between current assets and current liabilities. In case of JB Hi-Fi in accordance with ratio evaluation, it can be concluded that sufficient current assets are available to the company to pay off or accomplish current liabilities of the organization. Cash Flow Adequacy Ratio: The ratio analysis the ability of the company to meet its future debt obligations. For assessing the same free cash flows available to the company are divided by long term debts which will mature over next five years (Annual report of JB HI FI, 2016). The above analysis concludes that JB Hi-Fi has adequate funds in order to pay off its long term debts. Company Name JB Hi- Fi Solvency Ratio Debt to Total Assets 0.06 Debt coverage ratio 3.73 Debt to Total Asset Ratio: The specified ratio assesses the extent of solvency of the company. In case this ratio is high, the company is deemed risky and high leveraged organization. In the present scenario, as the ratio is .6 which means 60 % of the assets is financed through debt (Chandrasekaran, Manimannan and Kumar, 2013). Although the risk framework is evaluated and analyzed with input from senior management for identifying and managing risk in an appropriate manner, the same required to be done with more efficiency so that the ratio can be improved and risk relating to same can be reduced. Debt Coverage Ratio: The ratio represents the ability of a company to pay off its debts. JB Hi-Fi is having higher debt coverage ratio, which can be said the strength of the organization. Thus, it can be concluded that appropriate revenues are available in order to pay off the existing debt obligation of the organization. Company Name JB Hi- Fi Profitability Ratios Cash Flow to Sales ratio 0.05 Cash Flow to Sales Ratio In the present case of JB Hi-Fi, as the cash flow to sales ratio is 0.05; which specifies that .05 cent of operating cash flow is generated through every sales dollar. The higher the amount, the favourable for the organization, as the same is too low, it requires being improved. The same can be improved through assessing the relationship between cash generated from operation and sales. Harvey Norman Analysis of Cash Flow Statement The direct method of cash flow provides details relating to operating cash receipts and payment. In the present scenario, Harvey Norman has adopted the same method for presenting cash flow in its annual report. Further, it has reconciliation statement of cash equivalents as well as cash flow from operating activities in appropriate manner (Halim, Osman and Haniff, 2012). The company is having a policy of preparing cash flow forecast after evaluating all the operations of the business and efforts are made to achieve predetermined goals with the assistance of financial and no-financial key performance indicators of the organization. Table 2: Trend of cash flow from operating activities Year 2016 2015 2014 Cash Flow from operating activities $437.69 million $340.45 million $338.9 million From above provided it can be assessed that Harvey Norman is having an increasing trend of operating cash flows. However despite improved cash flows from operating activities the closing cash balance of company has been decreased by $45.97 million in comparison to balance which was available in a previous year (Annual report of Harvey Norman, 2016). Due to the same reason, the payment higher payment and interest bearing loans have been funded through existing cash reserves rather than eternal debt. Therefore, it can be concluded that debt to equity ratio requires being improved as the same was prominent in previous years. Company Name Harvey Norman Liquidity Ratios Working Capital Ratio 1.26 Cash Flow Adequacy 1.21 Work Capital Ratio: Working Capital ratio assesses whether the company has sufficient short term assets in order to cover its short term debt. In the present case, as the ratio is above one, the same indicates that Harvey Norman Ltd has sufficient current assets in order to pay off short term debts (Healy and Palepu, 2012). Even after paying all the debts, it is having a current asset or positive working capital. It also specifies that sufficient operating liquidity is existing in business. Cash Flow Adequacy Ratio: It is one of the main financial metrics which is applied for evaluating the sufficiency of cash in an organization. In case the ratio is above one; if represents that sufficient liquidity is present in the company for accomplishing required business obligations. It can be concluded from above cash flow adequacy ratio that company will be able to pay off all long term annual debt with existing free cash flows. Company Name Harvey Norman Solvency Ratio Debt to Total Assets 0.39 Debt coverage ratio 1.77 Debt to Total Asset Ratio: Debt to the Total asset can be interpreted as that proportion of organizations asset which is being financed by debt. In the present case, it can be assessed that 39% of the assets are being financed by debt (Ormiston and Fraser, 2013). It can be concluded through the study that company has grown and produced profits in order to expand the assets. Harvey Norman can be said as less leveraged firm, and thus it has required asset for paying off the existing liabilities in case required. Debt Coverage Ratio: It evaluates the amount of cash flow available for payments relating to interest, principal, lease payment and sinking fund. As the debt coverage ratio of Harvey Norman Ltd is approximately near to two, it can be concluded that the company has sufficient operating income in order to pay off debt obligations. Thus, sufficient cash is available for its current interest, principal amount and sinking fund obligations as it is able to generate sufficient revenues for paying the same. Company Name Harvey Norman Profitability Ratios Cash Flow to Sales ratio 0.24 Cash Flow to Sales Ratio: The ratio evaluates the ability of a company to turn its operating cash flow into net revenues. The investor receives an idea through this ratio regarding the capability of the company to turn cash into sales. Net cash flow from the operation has increased 97.24 million, $437.69 which is an increase in comparison to $340.45 million of the prior year (Saunders, Cornett and McGraw, 2006). Even though, company requires to make an effort to improve this ratio by increasing the capacity of converting sales into cash at a higher rate. 3.a Company Name Harvey Norman JB Hi- Fi Liquidity Ratios Working Capital Ratio 1.26 1.57 Cash Flow Adequacy 1.21 1.21 Figure 3: Comparison of Liquidity of both the companies Credit risk can be specified as a risk for not repaying the existing debts. From above table, it can be assessed that JB Hi-Fi is a comparatively better short term credit risk as it has higher working capital ratio. The same represents that it has sufficient funds in comparison to Harvey Norman Ltd for repaying its current debts. 3.b Table 3: Comparative cash ratios Company Name Harvey Norman JB Hi- Fi Cash Flow to Sales ratio 0.24 0.05 Cash Flow Adequacy 1.21 1.21 Table 4: Comparative cash Flow from operating activities Year 2016 2015 2014 JB HI FI $185.14 million $179.89 million $41.326 million Harvey Norman $437.69 million $340.45 million $338.9 million By considering ration analysis of both the companies it can be noticed that company has sufficient cash resource to manage liquidity of business (Strumickas and Valanciene, 2015). Further, cash adequacy ratio of both the entities is similar and having an increasing trend of cash from operational activities. This factor shows improving the capacity of business in terms of cash generating efficiency. 3.cBoth the companies are having sustainable future in the long term as their annual report show future financial plans for further growth and success. Further, financial ratios also do not indicate any sign regarding termination or closure of operational activities in the near future. Management of both the entities are focused on improving their financial and market performance to attain competitive advantage 3.dBy considering the cash flow to sales ratio, it can be cited that Harvey Norman is performing comparatively better than JB HI-FI. Company Name Harvey Norman JB Hi- Fi Cash Flow to Sales ratio 0.24 0.05 References Books and Journals Brigham, E. and Ehrhardt, M., (2013). Financial management: Theory practice. Cengage Learning Chandrasekaran, R., Manimannan, G. and Kumar, C.A., (2013). Assessment of Top Ranking Companions Using Financial Ratios. In International Journal of Engineering Research and Technology. ESRSA Publications. Halim, M.S.A., Osman, O. and Haniff, M.S., (2012). Financial Ratio Analysis: An Assessment of Malaysian Healy, P. and Palepu, K., (2012). Business Analysis Valuation: Using Financial Statements. Cengage Learning. Ormiston, A. and Fraser, L.M., (2013). Understanding financial statements. Pearson Education. Saunders, A., Cornett, M. M., and McGraw, P. A. (2006).Financial institutions management: A risk management approach. McGraw-Hill/Irwin. Strumickas, M. and Valanciene, L., (2015). Development of Modern Management Accounting System. Engineering Economics. 21(4). Online Annual report of JB HI FI. (2016). [PDF]. Available through https://www.jbhifi.com.au/Documents/2016%20JB%20Hi-Fi%20Annual%20Report_ASX.pdf . [Accessed on 1st September 2017]. Annual report of Harvey Norman. (2016). [PDF]. Available through https://www.harveynormanholdings.com.au/pdf_files/2012_Annual_Report_Final.pdf . [Accessed on 1st September 2017].