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Cash Flow Statements
Regulatory authorities require commercial entities to issue among other statements, the statement of cash flows during periodic financial reporting. This paper discusses the nature, preparation process and importance of cash flow statements. .
Importance of Cash Flow Statements
Generally, Accepted Accounting Principles and International Accounting Standards require companies to prepare financial statements at the end of trading period using the accrual basis of accounting. The accrual accounting basis recognizes expenses when they are incurred as opposed to when they are actually paid for. Similarly, revenues are recognized in the period in which sales were made and not when payment is received. This ensures that expenses and revenues for a particular financial period are attributed to that particular period. The final impact of this method of accounting is that actual cash balance differs from the balance reflected in income statement. According to Sheeba (2011), the sole importance of preparing cash flow statements is to reconcile these balances to portray the actual cash flow position of the firm to stakeholders such as investors and the public. Management may also find cash flow statements helpful in short term financial planning, tracing activities that generate, and those that use cash and in evaluation of the firms efficiency in cash management.
Structure of Cash Flow Statements
The cash flow statement is normally divided into three broad components. These are operating activities, financing activities and investing activities. Operating activities are the main cash generators for the firm, for example, purchase and sale of goods that the company deals in. Financing activities provide the firm with capital to finance its operations for example issue of shares and loan acquisition. Investing activities involve investment in assets that facilitate the firm’s operations, for example, purchase of property plant and equipment.
Classification of transactions in the cash flow statements enables users of financial statements to analyze the firm’s sources carefully and easily, and use cash according to their area of interest (Albrecht, Stice, Stice & Swain, 2007). Investors for instance, would be interested in the firm’s ability to pay dividends. The dividend payment and share issue records are classified under financing activities. The investor can quickly obtain relevant information by focusing his analysis on this section of the cash flow statement. Similarly, management staff may only be interested on finding out whether the firm’s day-to-day operations are generating the expected amount of cash. This information can be easily extracted from the cash flow statement by focusing on the operating activities section. Classification of transactions also facilitates easy comparison of cash flow statements of different companies. By focusing on a particular category of transactions, an analyst can evaluate a company’s weaknesses and strengths in that particular area.
Direct and Indirect Methods of Cash Flow Statement Preparation
The two methods only differ in the manner in which cash flow from operating activities is determined. According to Whittington and Delaney (2011), while preparing the statement under indirect method, to determine cash used or generated from operating activities, the net income as calculated in the income statement is adjusted for items that do not involve actual cash movement. For example, depreciation and amortization expenses subtracted while determining net income is added back. Similarly, gains recognized in the income statement that do not involve actual cash receipt are subtracted from the net income. Changes in working capital are then added or subtracted appropriately. For example, an increase in creditors balance compared to the previous period is added, as this is interpreted that the firm has used less cash to pay less creditors, retaining more cash that is treated as an inflow. Similarly, increase in debtors is treated as an outflow because the company has recovered less cash from its debtors. The increase is thus subtracted from net income. Tax paid is disclosed separately under this method.
The direct method however, does not determine cash from operating activities by adjusting the net income. Under this method, cash from operating activities is calculated by adding all gains that involve cash inflow to sales. All expenses that involve cash outflow such as cash used to purchase goods sold, interest, taxes and other cash expenses are then deducted directly from sales. Under both methods, cash from financing and investing activities is determined in a similar manner. Cash used or generated from investing and financing activities are added or subtracted from the operating income with respect to the nature of transactions that occurred under those categories. For example, purchase of equipment classified under investing activities would be subtracted because it involves cash outflow. Disposal of equipment that would however be added as cash is received from the disposal. Issue of shares or loan acquisition involves cash receipt therefore would be added. The totals under each category are then summed up to obtain the actual cash balance at the end of the period.
The two methods of preparing cash flow statements are similar the only difference between them being the methods they use in calculating cash from operating activities. Most public companies use the indirect method of cash flow presentation. The method is preferred because it is easier and less costly to use. Financial Accounting Standards Board (FASB) prefers the direct method as it is more consistent with the purpose of cash flow statement (Rich, Jones, Mowen & Hansen, 2009). However, the ultimate goal of a cash flow statement is to reconcile cash, the cash balance that is achieved by both methods as they yield the same results, thus FASB allows both methods to be used in financial reporting.
Albrecht W., Stice J., Stice E., Swain M. (2007). Accounting: Concepts and Applications.
Mason, OH: Thompson Higher Learning. Retrieved on April 4, 2014 from;
Rich J., Jones J., Mowen M., Hansen D. (2009). Cornerstones of Financial Accounting,
Current Trends Update. Mason, OH: South-Western Cengage Learning. Retrieved on April 4, 2014 from;
Sheeba K. (2011). Financial Management. New Delhi. Pearson Education India. Retrieved on April 4, 2014 from;
Buying a car can be a devastating occurrence with many factors to consider before settling for a certain car model. There are many features that need to be considered when one is buying a car. These factors include the model of the car, the price, the environment which the car will be used and the odometer reading if it is a second hand car. Cars can be differentiated by observing the characteristics that include the model, model year, cylinders, displacement and transmission. We are able to identify these measured due to the use of individual prices and variation in energy expenses per model of the car and odometer reading at the time of purchase. These factors are: – price, fuel consumption, odometer reading, safety, durability, performance and the operating costs. In our study, we will focus mainly on the reading of odometer and the cost. We will establish an association between these two factors.
Used-car market has changed drastically in the past few years. Today’s new used cars are better in quality, stability and strength which are challenging the local manufacturers and hard-pressed to create cars which are cost effective and high performances to compete with second hand imports. Used cars are very popular in our society today, this because one can save up to thirty to forty percent over buying a new car. This study investigates whether the used car buyers are having an effective prices compared to the odometer reading. With different assumptions about mileage, endurance and demand elasticity, calculate the relationship between the odometer reading and the quoted price for these cars. Also consider the vintages, and fuel usage in relation to the odometer reading at the time of buying. The car’s engine is measured using cc (cc in engines stands for cubic centimeter).
To purchase a used car one can visit numerous websites, newspapers, journals and marketing flyers where he can choose a manufacturer, year of manufacture and get an interim odometer reading and the price range. In websites one can compare prices of different cars, models, engine capacity in cc and get facts about the fuel usage. It is essential to take a test drive so that one can have confidence that the odometer is not tampered with. To be on a safer side one can buy certified used vehicle, although it will cost a little more but the quality is assured. In our sample we held up the computation of average prices within collected data which is based on manufacturer, model, cc rating ranges, and age of car. To ensure usefulness of these averages cars with tampered odometer were disqualified from the study which resulted in use of only around 75 percent of the data collected. In this study we will analyze if there is any relation between the odometer analysis and the price of a used car.
The literature related to this study was reviewed from online journals, research reports and raw collection of data from people who are interested in buying or selling second hand cars. Understanding the today’s needs and functions of a used car are fundamental aspect of responding to increasingly demand. Several of the topics discussed are:
- Identifying the customer’s needs
- Analyze and adjust the prices to suite the targeted customers
- Analyze the regulations to import used cars
- The traders credibility
An individual to make selling decision of their car, they identify private information from dealers or traders who purchase and sell cars. They may also trade in the car they are using for a better model or improved efficient car. The responsibility of maintenance of these cars is passed to the customer and mostly they are not given a warrant to assure them quality and durability. Due to this vice, most buyers prefer to rent or lease the car for sometime before buying (Caserini, Pastorello, Gaifami & Ntziachristos 2013).
The literature review establishes there are advantages gained by individuals who purchase used car. In terms of acquiring the cars, it offers a cheaper price which is economical and socially acceptable. Most people prefer to buy these cars because of their socio-psychological benefits for those who are conscious about their status, self-esteem, socialization and expansive aspiration and cognitive horizons (Krsinich, 2011). Used car traders are accountable to the public to offer motor vehicles that are secure, in good condition, environmental safe and suitable to use. They are also required by the law to guarantee the public on their vehicle’s safety and roadworthiness. Conformity with these laws will protect the buyers from being subjugated or acquiring cars with tampered odometers. Traders and buyers are also conscious on the year of manufacture so as not to get an old vehicle. Cars are different and of various kinds and models will give different performance.
Buying and selling of long-lasting goods can be classified into classes based on assumption made about the data collected and circulated in the market. The literature assumes that complete and reliable information is available to buyers and sellers (Krsinich, 2011). It also assumes that everyone purchasing these cars knows the rules and regulations governing these transactions. As a customer, one is supposed to have a trusted mechanic who will inspect the car thoroughly and give an unbiased opinion of the car. The difference in information between owners and potential buyers creates misunderstanding which forces the buyers to prefer to deal with traders or sellers (Engers et.al, 2012). Used car durability is mostly determined by the first hand user car use and the care used to handle it. In the recent state of affairs, used cars are imported from Japan and Singapore which are cheaper than the locally manufactured cars. The manufactures are getting competition from second hand vehicle which are cost effective to the final users. Traders should have competent mechanics to service and analyze the road worthiness and the safety. An absolute guarantee of sustainability at a low price, quality and durability should be given to the buyer (Engers, Hartmann & Stern 2012).
Endurance capabilities of used cars are determined by the age, model year, class, and manufacturer’s specifications. The manufacturers make cars with modifications between the model years. These models tend to rectify or improve performance of the previous model. The secondary car market is dominated by the odometer reading. The buyer is concerned to know how many miles the car has covered before purchasing. The new car market is expensive for many to afford and to breach the gap; people have decided to buy used cars to meet their daily transportation needs. In relation to the previous literature, the traders tend to estimate the prices using odometer. These estimates are assumed to be efficient and reliable to determine the price (Caserini, et.al, 2013: Engers et.al, 2012).
The method used in this study is collection of information through different sources that is population sample, data collection and data examination. The respondents were car traders, private sellers and customers who are considering purchasing a used car. There were variable studies in the reading of odometer and the value of the car. The primary data source was through interview aided by online information about the related literature.
Cars used in this study are automatic transmission and four cylinders. The models of these cars are Hyundai, Toyota, Mazda, BMW, Mercury, Mitsubishi, Nissan, ford, Volkswagen and Subaru. The size of engine is rated by cc. the sampled data was collected from cars with engine size between 2300cc to 3000cc.
To teach in to an estimation equation, we start with a simple model of the price of used cars which we assume that the used cars are competitive in the market and the supply is inelastic. The data is collected from online traders for both imports and local manufacturers, individuals selling their cars and auction prices. Collected samples were of second hand cars which are on sale. On our study we focused on the relationship between the odometer mileage reading and the price offer. In order to establish this relationship, we used a simple linear regression equation to predict future values. In the simple linear regression, there is only one independent variable which in our case is (y) and one dependent variable (x). Y is the asking cost and x is the meter reading.
Our research strategy is based on exploiting difference in the anticipated future price of the car resulting from differences in the odometer reading and the price at the time a car is sold. For example, two cars in the model of 2011 Toyota Camrys are sold in 2014, one with 50,000 miles on the odometer and the other with 70,000 miles. The price difference between these two cars should replicate the difference in value of having a lower mileage vehicle. This calls for construction of a board classification strategy that requires noticeable car attributes to be common across model years. These classifications included the following characteristics in the model for each second hand car
- Place of purchase
- Make and model of the car
- The vintage in years
- Size of engine in cc rating, e.g. 2300 cc
- Odometer reading in miles
With these guidelines one is able to input data on a table useful for analyzing the relation between the two variables.
The lower mileage translates to better condition of the car and a longer expected remaining life. To come up with a linear regression equation, add the odometer readings (x), and the prices to analyze the relation between them. In the following table, xy is a multiplication of the odometer and the price. X2 is the square of X and y2 is square of y. using this information, construct and analyze data using simple model of regression, to develop perception about the relation between odometer and price.
Y is representing the equation
y= dependent variables values (asking price)
x = independent variables values (odometer mileage)
f= the slope of regression line
∑ is the summation sign
|odometer in mile(x)||Price in $ Y||X2||Y2||XY|
e= ∑x^2- ∑x∑xy
n∑x^2 – (∑X) ^2
= 94,692,498,623(432,484) – 1,639,659(22,831,684,325)
30(432,484) – (1,639,659)^2
= 30(22,831,684,325) – 1,639,659(432,484)
30(432,484) – (1,639,659) ^2
Y= -1308.11043 + 0.008992x
The findings show that the relationship between the odometer reading and the price is positive. This means that one can use the odometer analysis to forecast the value of the car. In this study it was also discovered that the reading of the meter determines the price of the car no matter the vintage. In addition, odometer reading is as well used to predict the durability and the road worthiness. It was also discovered that some odometer readings were tampered with. For instance, a car that was bought when its odometer reading was 50,000 miles but after the owner used it for two year the reading has dropped to 30,000 miles. This finding implies that car buyers pay more attention to the first two digits on the car’s‘ odometers and ignoring the rest of the digits. This is a dangerous trend because every digit in the meter reading is important and it can increase the buyer’s bargaining power. The decision to purchase used car is totally depended on the meter, and the correct miles coverage for the right price. I am for the opinion that one should value used car capability to meet his daily transportation.
It was established that the used cars are at times not operational to meet the consumer’s needs. It is believed that the relevant legislation is satisfactory but more requires to be done to ensure that dealers are aware of the law, customers are aware of their constitutional rights, and dealers who fail to comply face a real threat of effective enforcement action. It was possible to establish the connection amidst the meter reading and cost for these cars. As a result, there is a significant selection bias problem associated with excluding some cars because the odometer reading was not reliable. Whether the car is being sold with a warranty to convince the customer about the performance, the customer should be cautious of the durability. The buyer should also take note on the repair percentage for certain duration. The seller should keep the customer in check so that he can provide an after the sale services. The after sale service should be in hard copy so that it can direct the buyer and seller on terms and conditions.
Used cars possession has rapidly increased over the last few years as the living standard has risen. Due to this, people are looking to meet their commuting needs in an economic way by purchasing used cars. When buying these cars, one should make sure that it is not a way of waste disposal from the exporting country. The importing country should acknowledgment this by creating laws on environmental protection and pollution control should be passed to deal with the unceasing threat which posed danger to the vehicle user as well as the citizen.
The statistics used on second hand cars is to estimate the cost of a car by using the odometer reading. Economic challenges that are encountered by use of these cars were identified. By considering the odometer, one can predict the performance, durability and the working cost as well as the price of the car. There was also comparison of the cost of a car with more miles, outstanding to the price of an identical vehicle with few miles remaining.
The outcome of this experiment is understood as an examination of whether or not consumers fully aware of the price of used cars. With the present condition, one can only jointly check assumptions about the discount rate, gas price usage, and rationality. The customers are willing to economize on fuel expenditure by purchasing an economy vehicle. This marketplace study has given an understandable image of the reasons why a client experiences problems when buying second-hand cars. It is believed that existing consumer protection law is fit for the principle and has the prospects to tackle many of the unwarranted trading practices that have been identified in the market. There is confidence in the use of the already made by law provisions in handling a number of these serious and destructive practices in the second-hand car market. The second-hand cars need to introduce and enforce laws to prohibit mileage modification or alteration and their publicity.
Emanating from the findings and consequent conclusion, the following points should be considered.
- The model of a car and its genuine odometer reading
- The year of manufacture
- The dealer is confident about the car and he can offer warranties
There is always a concern that buying a used car will signify one is buying someone else’s nuisance. An important step in buying a used car therefore is to have an excellent mechanic verify the car capabilities and performance. A good mechanic should be able to tell whether the used car one is taking into consideration is in good shape. If there are some foreseeable troubles he should advice accordingly. The mechanic should also determine whether or not it has been involved in car accident. He should also check the trustworthiness rating for the car one is looking at in a dealer’s shop.
Caserini, S., Pastorello, C., Gaifami, P., & Ntziachristos, L. (2013). Impact of the dropping activity with vehicle age on air pollutant emissions. Atmospheric Pollution Research, 4(3)
Engers, M., Hartmann, M., & Stern, S. (2012). Automobile Maintenance Costs, Used Cars, and Private Information.
Krsinich, F. (2011). Measuring the Price Movements of Used Cars and Residential Rents in the New Zealand Consumers Price Index.
The article aims to describe the structure of measuring cost and performance in new forms of business organizations that are developing to rally the competitive challenges of the 21st century. Firms are interested in operating in all corners of the globe. For them to realize this ambition, they need to develop global strategies that can synchronize their operations at all phases of the value chain. Strategic performance measurements delineate the focus and scope of management accounting. For management accounting to be relevant in the competitive environment, its practices have to replicate and recognize choices made in organizations. A number of companies in every sector of the economy are examining ways of reducing cost, shortening product development time, and managing risks. Global competition has led companies towards a transformed commitment to brilliance. Attention to the quality of products and processes, workforce improvement, and inventory levels has presented a competitive edge for companies determined to be world class (Gunasekaran, James, and Ronald 524-25).
The authors assert that there are numerous challenges that face the management of new forms of organization but there are solutions presented. Proactive concepts such as Total Quality Management, Just-In-Time, Lean Production, Supply Chain Management, and Concurrent Engineering have become essential for companies that are seeking lean processes. Performance Based Costing (PBC) measures performance in areas of knowledge management and information system. The authors assert that, in today’s information age and with the growth of e-business, the technology is transforming old industries while creating new ones. Sustainability Analysis can be used to assess strategic advantage from the product perspective. Different approaches to conducting business have evolved in response to pressures created by a rapidly changing business environment (Gunasekaran, James, and Ronald 531).
The study is theory-based and non-experimental. The authors have fulfilled fully the objective of the article. The article aims to describe frameworks for measuring costs and performances in the 21st century. The authors have discussed Activity Based Costing as one of the frameworks. ABC helps to identify problems and opportunities that influences accounting in the 21st century. It also formulates solutions to the problems. In so doing, the authors are fulfilling the objective of their research. In order to fulfill their objective, the authors have discussed the use of Performance Based Costing. The systems encourage proactive instead of reactive responses to customers, markets, and partners. Furthermore, the system promotes agility and creates wealth. What is more, the article has established a framework for measuring performance in new enterprises. Supply Chain Management coordinates activities between firms (Gunasekaran, James, and Ronald 525).
The article is not general. It provides evidence of every point that is mentioned. The arguments of the article are well presented and flows in a logical manner. The authors have used scholarly sources to back up their points. The authors have provided an abstract that gives the reader a glimpse of what the article is talking. The introduction has a thesis statement of the topic and it is discussed in the body of the paper backed up with several studies. The article has a strong conclusion that reaffirms that thesis statement and provides a summary of the article. In essence, the study is well organized and any reader can follow with ease.
Relevancy of the article
The article is quite relevant in cost/management accounting. Global competition has brewed the need for new costing and performance measurements and the article has addressed the problem. New systems and approaches in cost/management accounting are needed because the traditional costing systems do not provide sufficient non-financial information. In addition, the existing product costing systems are not accurate. The current costing systems do not support improvements and overhead costs are predominant. The article is quite relevant because it identifies critical success factors, develops metrics and measures, and highlights how such measures can be used to plan and control operations to enhance organizational performance enhance competitiveness (Gunasekaran, James, and Ronald 528)
addition, the article has addressed new pressures approaches, and enterprises
for the 21st century. Supply Chain Management has been discussed in the
article as one of the new approaches. It makes instantaneous improvements to
business strategies and operations. Supply chain is made up of several layers
of business units that make the efforts of cost/management accounting easy. The
article has designed a Performance Based Costing system that focuses on the
performance of the organization in terms of financial and non-financial
activities rather than mere activities. This helps to get rid of unclear
product cost information that is produced by appliance of traditional costing
system. The basic principle of PBC is to make out business areas that add value
to an organization and work out on direct materials, overheads, and labor.
Traditional cost accounting methodologies do not have the capabilities to capture
the value of some of the value creating activities that are involved in ERC.
PBM offers cost and operating information that mirrors the horizontal view of
accounting practices (Gunasekaran, James, and Ronald 529).
Gunasekaran, Angappa, James Williams, and Ronald McGaughey. “Performance measurement and costing system in new enterprise.” Technovation 25.5 (2005): 523-533.
Transformational Leadership Theory
In the last five years, the general trend of capital and labor mobility in Australia has had a major implication on the country’s exchange rate system. Variable exchange rates combined with high level of capital and labor mobility has led to a positive speculative boost resulting from fundamental policy consistencies. Australia has worked on balancing the combination of capital and labor mobility with exchange rate fixity to promote its currency (The Australian dollar Buoyant, 2013). The availability of US Dollar reserves in Australia is also an important factor that has reduced the risk of speculative attacks of the Aussie Dollar and promoted the country’s macroeconomic policies. Sustainability of public finances, as discussed by Cheol S. Eun (2009) is an important factor in this regard.
Transformational Leadership Theory
The Australian dollar looks like the US dollar ($) and has a code denoted as (AUD). This currency is the focus of this paper. This dollar is the popular currency used in Commonwealth Australia, including the Norfolk Island, Christmas Island, Cocos Islands or the commonly referred to as Keeling Islands, and the independent Pacific Islands states of Nauru, Kiribati, and Tuvalu (Jackson, et al. 2012). It is however abbreviated with a dollar sign to distinguish it from other currencies. A dollar is an equivalent of 100 cents.
Currently, the Australian dollar accounts for about 7.6% of the world’s daily share, making it the fifth most traded currency behind the US dollar, the sterling pound, the euro, and the yen. Commonly referred as the “Aussie” by foreign-exchange traders, this dollar is popular with major world’s currency traders because of several factors; these factors will be explained in this paper. This paper also looks at movements of Australian Dollar /US dollar exchange rate and provides some prospects for this currency for the next year.
The Australian Dollar /US dollar exchange rate refers to the rate at which a unit of the Australian Dollar is exchanged for the US dollar. The Australian Dollar (AU$) has experienced a floating exchange rate over the last five years (Eun & Resnick, 2009). The exchange rate may fluctuate by either appreciating or depreciating in order to maintain the market exchange equilibrium. An appreciation refers to the rise in purchasing power or the value of the AU$. Depreciation on the other hand refers to the decline of value or the purchasing power of the AU$. The appreciation in AU$ happens when the demand for the AU$ in the exchange market exceeds the supply. This is caused either by a decrease in supply or because of an increase in demand. A rise in demand may be due to a rise in world growth, which leads to an increase in demand for the Australian exports (Viney, 2007).
AU/US dollar exchange rate over the last 5 years
The movements of the exchange rate for the AU$/$US over the past 5 years has been subject to the machinations of the central banks, the governments, investor needs, the speculator’s instincts and possibly, although not particularly, nation’s economy state. Factor trade and the degree of output between the trading economies are important in maintaining the fixed exchange rate for major economies (Melecky, 2008).
2008/2009 Australian dollar exchange rate movements
Back in May 2008, the Australian dollar exchange rate was around 95 US cents. Bill Evans, the Westpac’s chief economist predicted then that the Australian currency would reach parity with the US dollar over the coming one year, i.e. By May 2009 (Eun & Resnick, 2009). He noted that the Aussie dollar would become strong over that period owing to a single most vital contributor, which he noted as a weaker US economy that was being estimated then by the interest rates market and the currency. However, the prediction turned out to be opposite as by March 2009 one Aussie dollar was worth 65 US cents. This is represented in the graph 1 below:
What is interesting is that the America’s economy declined during that period. The global financial crisis was strongly felt in America and lead to a parlous financial state in the country (Reserve Bank of Australia, 2013). However, Evans was right in predicting these factors but contrary to his prediction, which would also be an exchange-rate flub for any economist, the US dollar became strong owing to0 one major contributor. The contributor is that the US dollar attracted a high degree of investors, as it becomes a safe haven for them thereby appreciating against all other major world currencies. Based on this example, it is important to note that logic does not apply when predicting the exchange rate over the coming given time.
2010/2011 Australian dollar exchange rate movements
The Australian dollar traded at a record parity with the US dollar since it first became a freely traded currency. The Aussie dollar traded above US$1 for a sustained period of days in November but depreciated around that mark into 2011. However, on 27 July 2011, the Australian dollar reached an all-time record high of the dollar trading at a $1.1080 against the USD. Sources: (Reserve Bank of Australia, 2013)
Factors that contributed to the appreciation of Australian dollar against the US dollar over this period of time as noted by economists and speculators is the sovereign debt crisis that hit Europe around this period and Australia’s strong ties with powerful Asian economies and in particular China who are their material importers (Reserve Bank of Australia, 2013). These factors are explained in details in answering question c below:
2012/2013 Australian dollar exchange rate movements
The 2012-13 budget predictions was that the exchange rate would ease from a record post-float high owing to the possibility that Reserve Bank of Australia (RBA) would lower its interest rate. The predictions by economists such as Wayne Swan was that a surplus move would enable the lowering of the interest rates and thus ease the exchange rate during a time the exchange rate was high. Rightly, so, in June 2013 the RBA had lowered the cash rate by 50 basis points and lowered it again in July 2013 to 3.50 per cent. However, the expectation and prediction was that owing to this cash rate lowering by the RBA, the exchange rate would fall and opposite to this prediction, the exchange rate went up as demonstrated in the graph below.
Key Factors that have affected the Australian Dollar
In this section, this paper provides some evidence based details of the Australian Dollar against the US dollar exchange rate over the last 5 years. In doing this, the paper briefly explains the significant movements that have been observed over this period. The three Gs’ represented in this paper namely Geology, Government Policy and Geography have been significant in the developments of the movements of the $Au over the past year. However, it is important to note that Australia’s dollar is counter-cyclical and volatile in an uncommonly manner (Reserve Bank of Australia, 2013).
Most of the major world economies that rely on Optimum Currency Area (OCA) factors as well as Capital Openness factors. Compared to these major economies, Australia still has a low production of manufacturing exports. The major Australian exports go to Asian economies as discussed previously in this paper. This means that Australia have a certain level of independence from other major economies of the world. The current health of the AU$ is closely attached to the commodities prices and the volatility that the Australian economy has created in the past.
The significant movements of the $Au over the past year as demonstrated in the information provided above, has been established by several key factors that have affected the currency. These key factors are presented as the 3 G’s denoting Government policy, Geography and Geology (The Australian dollar Buoyant, 2013). These three factors has had a great impact of the Aussie dollar factor has influenced the speculation of the currency or in other words the outcome of the currency has been expected over this time.
Geology refers to the wealth of natural resources available in Australia including oil, agricultural products, gold, diamonds, uranium, iron ore, nickel and coal. These natural resources are in high demand by other countries and acts as the basic commodities of export and trade with other major world economies. Commodities (both metals and grains), and other related factors such as crop planting, harvests, weather, mine output and metal prices has a major impact on the movement of the Aussie dollar. Data related to geology is not hard to find and can be obtained from Australia’s Bureau of Agricultural and Resource Economics and Sciences (ABARES). This is an independent research organization within the Australian Government Department of Agriculture, Fisheries and Forestry. ABARES is responsible for producing regular reports freely available on the internet.
Besides the ABARES, there are many other financial information sources such as Wall Street Journal and Bloomberg where investors have been able to access information freely. Such investors have been able to take note of other related information such the employment, interest rates and daily news flow in the particular country. Details that include such issues as the scheduled meetings of the central bank new government policies have had a significant impact on the exchange rates of the Australian Dollar /US dollar. This means that investors were adequately equipped with relevant information pertaining to investing in Australia and by this, their response was instrumental in the speculation of the currency that demonstrates that the outcome of the currency was expected.
Government policy especially pertaining to macroeconomics has acted as the “big picture” for the overall performance of the Australian economy (Apergis, 2014). The Australian government has set up policies that are of much importance in influencing the economy of that country. The policy regime in Australian has been a compatible one encompassing monetary, fiscal and sound exchange rate policies, and the related institutional framework which has been instrumental in the success or the of the macroeconomic policies in the country. The good macroeconomic policies in Australian have acted as a signal to investors worldwide on the reliability of future performances of Australian’s economy thereby influencing such investors to place their money in the Australian’s assets. This in turn has influenced and increased the demand for the country’s currency thereby making the outcome of the currency’s movement to be expected.
Geography refers to the positioning of the Australian economy, which has enabled it to be a choice trading partner with numerous fast-growing Asian economies (Madura, & Fox, 2011). The trading partnership between Australia and these economies involves trade in goods and services that has led to a stable economy. The result of the stable economy has acted as an incentive into the determination of the Australian currency showcased by the movement of the currency’s exchange rate. That said, China’s economic developments have had a major impact on the Aussie dollar. China and India are both huge importers of Australian commodities and Australia on the other hand imports machinery and other consumer goods from China and India.
Significant industry operating in the Australian Dollar
A significant industry operating in the Australian currency that it is bound to be affected by the movement of this currency is the alcohol industry (Eun & Resnick, 2009). The factors identified in part c, explains the currency risks that are faced by companies operating in this industry. While a depreciating Australian dollar is positive for parts of the Australian economy, simply because it makes exports cheaper, that does not automatically translate to a boom for the alcohol sector. The price of alcohol may not be the most significant drivers of Australia’s exchange rate as compared to other commodities such as mining. However, based on the analysis of the past two years, the linkage of the alcohol prices has been broken. While the alcohol prices have decreased owing to a saturation and production of quality cheaper brands of wine in the alcohol industry, the dollar on the other hand stayed up (Iglesias, 2012). The falling of the dollar may help companies operating under other industries operating in under the Aussie dollar. This can however happen if the alcohol prices have gone down due to saturation of the domestic market in the country. This means that the companies’ profits/company tax revenue would not improve because, logically, their product’s prices will still be going down (Jackson, et al. 2012). Several actions can be taken by companies operating under the mining industry to reduce the exposure that they are currently facing. The first action is Market Diversification (Alliances) by companies operating under the alcohol industry in Australia. These companies should endeavor to enlarge the company’s business from the domestic market to international market. The companies should insist on searching business cooperation not only locally but abroad as well to achieve high effect service provisions (Karfakis, et al. 2013).
Such an expansion would definitely improve the performance of these companies in the stock exchange. However, a thorough research and careful planning is another action that the companies need to do in order to ensure the right timing.
Predictions for 2014/2015
The 2012-13 prediction by the Treasury was an estimated exchange rate of $US1.03. Indeed the exchange rate went down from March 2012 to June 2013 owing to the interest rate cuts and the budget (Madura, & Fox, 2011). This is illustrated in the graph 3 below:
However, that does not automatically mean that the exchange will continue to fall in the period 2013-14. The exchange rate as on Sunday 19/01/2014 was 1 AUD to 0.87735 USD the dollar and has the Aussie Dollar has fallen to 0.9049 USD as on Tuesday 18th February, 2014. With the AUD now based at that level, it demonstrates that the Treasury has gotten it right because since March 2013, the dollar has taken the same path it did in the same period of 2012-2013 (RBA, 2013).
The prospects of the Australian Dollar in the period March 2014 to march 2015 would not be very different from the exchange rate that has been witnessed during the same period last year. The difference is that in 2013, minerals prices went up and the US Federal Reserve began an open-ended quantitative easing policy. The Australian dollar this year is likely to depreciate based on preliminary reports that Ben Bernanke will be announcing when the Federal Reserve will terminate its loose monetary policy. If the Federal Reserve does that, the US dollar will appreciate above all other major world currencies. The Australian dollar being one of the most overrated currencies would then be expected that it might fall than the other currencies. However, if this policy is not put to an end, then the Australian dollar is expected to stay at the current historically high level of within 0.86 USD and 0.90 USD (RBA, 2013).
In addition, there has been an inflation of major commodity prices in most developed economies in the past year. Based on this fact, high resource prices have led traders to concerns for the growth sustainability and the health of economies in Europe, Japan and North America. However, as these major world economies are faced with these concerns, the Australian economy in 2013 continued to look healthier (Eun & Resnick, 2009). This places the Australian dollar as an accepted alternative for investors looking to go extensive on commodity exposure in 2014. Most investors are looking for economies that in addition to having a commodity exposure, has Asian resource demand while going moving away from the major world economies mentioned above because they are likely to suffer due to increased input expenditure. Based on these three issues, the Australian currency is likely to remain at the historically high level it is in currently (Madura, & Fox, 2011). This specific issue makes the Australian Dollar a good currency in which to do business in the year 2014/2015 (Reserve Bank of Australia, 2013).
Conclusion and Recommendations
Besides the effort of the companies that trade in the stock exchange market will need to take in order to reduce their exposure to currency risks involved in the market, the government also needs to take some actions in order to ensure a balanced exchange rate. One of these actions is to control the interest rates and inflation in the country (Bekaert & Hodrick, 2009). This can be achieved by the country’s independence from heavy reliance on commodities and the rather small domestic industrial base in the country. This dependence has in the past led to persistent heavy account deficits for most of the country’s post-world war II economic developments.
Australia is at an advantage in that it has relatively small amount of debt in comparison to its GDP percentage. However, as aforementioned the major concern in the country in relation to stabilizing the Australian currency is the government spending. Increased government spending over the past couple of years has become a potential concern. The Australian government should therefore get its government spending under control (Melecky, 2008).
Apergis, N. (January 01, 2014). Can gold prices forecast the Australian dollar
movements. International Review of Economics and Finance, 29, 75-82.
Bekaert, G., & Hodrick, R. J. (2009). International financial management. Upper
Saddle River, N.J: Pearson Prentice Hall.
Eun, C. S., & Resnick, B. G. (2009). International financial management. Boston,
Hunt B., & Terry C. (2008) Financial institutions and markets, 5th edn, Victoria.
Iglesias, E. M. (December 01, 2012). An analysis of extreme movements of exchange
rates of the main currencies traded in the Foreign Exchange market. Applied Economics, 44, 35, 4631-4637.
Jackson, J, McIver, R, Bajada, C, (2012) Economic Principles, 2nd edn, Sydney,
Mc-Graw Hill Irwin,
Lien, K. (2010) Yen action could lead to volatility: exchange rates, The Australian,
Retrieved 18th February 2014 from http://www.theaustralian.com.au/business/wealth/yen-action-could-lead-to-volatility-exchange-rates/story-e6frgac6-1225927002767
Madura, J., & Fox, R. (2011). International financial management. Australia: South
Melecky, M. (June 06, 2008). A Structural Investigation of Third-Currency Shocks to
Bilateral Exchange Rates. International Finance, 11, 1, 19-48.
Pugel T., (2012). International Economics. 15th Ed. New York: McGraw-Hill Co. Inc.
Reserve Bank of Australia, (2013) RBA: Exchange Rate Data, viewed 18th February 2014 from http://www.rba.gov.au/statistics/hist-exchange-rates/index.html
Sozovska, A., (2008). Exchange Rate Regimes in Transition Economies. Skopje: St.
Kirili Metodij University.
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Viney, C. (2007). Financial institutions, instruments and markets, 5th edn, Sydney.
McGraw Hill Irwin.
The development and documentation assists in creating a relevant understanding of internal controls over financial reporting. Under the ERISA, the fiduciary responsibilities seek to provide proper administration functions that include maintenance of the financial books and records for planning. Internal controls assist in identifying the errors and frauds that establish safeguards. Effective internal controls reduce the risks of asset loss, and ensuring effective plan information. They ensnares that information in the financial statements are reliable, complete and accurate. In addition, it further enforces compliance with the laws and regulations in the organization. This matches the achievement of financial reporting objectives to evaluate reasonable assurance (Ge & McVay, 2005). Most importantly, the installation of effective internal controls ensures minimization of opportunities for frauds. This discourages frauds and promotes the accomplishment of their objectives. In addition, an internal control plays detective roles in the identification of errors and frauds over the financial reporting processes (International Federal of Accountants, 2012).
In financial reporting, auditors are required to assess the effectiveness of internal controls. In assessing the design for effectiveness of internal controls, the auditor needs to consider the policies, procedures put in place by management in risk mitigation, and the control environment in which the entity operates as well as the communication frameworks that facilitates information flow to organization employees concerning their duties. The auditor needs to understand documents of the internal controls placed by management proper understanding of the internal controls enables the audit team to identify policies and requirements of the management (Frederick, 2012). The auditor needs to exercise oversight over management monitoring levels to employees in risk mitigation.
Frederick, D. M. (2012). Auditors’ representation and retrieval of internal control knowledge. Accounting Review, 240-258.
Ge, W., &McVay, S. (2005). The disclosure of material weaknesses in internal control after the Sarbanes-Oxley Act. Accounting Horizons, 19(3), 137-158.
International Federal of Accountants (2012). Evaluating and improving internal control in organizations. Final Pronouncement June 2012. Retrieved from: http://www.ifac.org/sites/default/files/publications/files/Evaluating%20and%20Improving%20Internal%20Control%20in%20Organizations%20-%20updated%207.23.12.pdf
Tesco PLC is the largest retail services company in the UK and the second largest in the world with operations in 14 countries around the globe. The company employs over 520,000 people. The company operates over 3,200 stores worldwide, which delivered a cumulative profit of over 1 billion. Its core business is in large format stores dealing in food and other convenience products. Additionally, Tesco deals in telecom services such as mobile and broadband and also offers financial services. The financial services sector offers services in household and motor vehicle insurance, personal loans, and credit cards.
Tesco currently operates in the following international markets: Republic of Ireland, Poland, Hungary, Czech Republic, Slovakia, Turkey, South Korea, Thailand, China, Malaysia, Japan, India and the US.
Tesco PLC is a global store dealing in groceries and general merchandise. The company is headquartered in Chesnutt, United Kingdom and it is the world’s third largest retailer measured in revenue terms after Walmart and Carrefour. It comes only second to Walmart measured by profits.
Financial Analysis of Tesco
For purposes of analyzing the financial performance of Tesco PLC, we will review the company’s financial statements and observe some key trends over the last few years. The financial statements of a company show the company’s financial performance over a given period and they are therefore widely used by both internal and external parties to assess and evaluate the financial strength of the company. We will consider the three most important financial statements for Tesco namely the statement of comprehensive income (income statement), the statement of financial position (balance sheet), and the statement of cash flows. Further, we will look at Tesco’s key financial ratios and compare them with the performance of the industry to determine the company’s ratings in the industry and how well the company compares with its key competitors.
Table I below shows the Income Statement of Tesco PLC over the last four years. The company had experienced a steady growth in its net income from £2.3 billion in 2010 to £2.6 billion in 2011, to £2.8 billion in 2012, only for this net income to fall sharply to only £124 million in 2013.
Table 1: Tesco Income Statement
Millions of British Pounds As of:
|Cost of Goods Sold||52,198.0||55,330.0||58,519.0||60,242.0|
|Selling General & Admin Expenses, Total||1,575.0||1,658.0||1,594.0||1,510.0|
|OTHER OPERATING EXPENSES, TOTAL||1,575.0||1,658.0||1,594.0||1,510.0|
|NET INTEREST EXPENSE||-417.0||-334.0||-297.0||-320.0|
|Income (Loss) on Equity Investments||33.0||57.0||91.0||54.0|
|Other Non-Operating Income (Expenses)||151.0||19.0||44.0||-14.0|
|EBT, EXCLUDING UNUSUAL ITEMS||2,904.0||3,209.0||3,641.0||2,794.0|
|Impairment of Goodwill||-131.0||—||—||-495.0|
|Gain (Loss) on Sale of Assets||377.0||432.0||397.0||-339.0|
|Other Unusual Items, Total||26.0||—||—||—|
|EBT, INCLUDING UNUSUAL ITEMS||3,176.0||3,641.0||4,038.0||1,960.0|
|Income Tax Expense||840.0||864.0||874.0||574.0|
|Minority Interest in Earnings||-9.0||-16.0||-8.0||4.0|
|Earnings from Continuing Operations||2,336.0||2,777.0||3,164.0||1,386.0|
|EARNINGS FROM DISCOUNTINUED OPERATIONS||—||-106.0||-350.0||-1,266.0|
|NET INCOME TO COMMON INCLUDING EXTRA ITEMS||2,327.0||2,655.0||2,806.0||124.0|
|NET INCOME TO COMMON EXCLUDING EXTRA ITEMS||2,327.0||2,761.0||3,156.0||1,390.0|
Source: Tesco Annual Reports
The management of Tesco PLC employs a reasonable level of debt in the company’s capital structure which is well in line with industry norms. In addition, although the company lacks enough liquid assets to meet its current obligations, it has sufficient operating profits to service its debts as and when they fall due. The company’s receivables do not compare favorably with the industry, being far below the industry average. Tesco has 2.42 days worth of outstanding sales. This signifies the fact that the company is not efficient enough in the collection of its revenues. As far as inventory management is concerned, Tesco PLC has a good rating since the Inventory Processing Period compares favorably with the industry average at 22.18 days.
Table 2: Tesco PLC Balance Sheet
Millions of British Pounds As of:
|TOTAL CASH AND SHORT TERM INVESTMENTS||3,929.0||2,744.0||2,968.0||1,979.0|
|Finance Division Loans and Leases, Current||2,412.0||2,514.0||2,502.0||3,094.0|
|Finance Division Other Current Assets||204.0||706.0||580.0||1,055.0|
|Other Current Assets||597.0||579.0||551.0||689.0|
|TOTAL CURRENT ASSETS||11,765.0||12,039.0||12,863.0||13,096.0|
|Gross Property Plant and Equipment||31,783.0||32,570.0||34,772.0||35,643.0|
|NET PROPERTY PLANT AND EQUIPMENT||24,203.0||24,398.0||25,710.0||24,870.0|
|Finance Division Loans and Leases, Long Term||1,844.0||2,127.0||1,901.0||2,465.0|
|Finance Division Other Long-Term Assets||863.0||938.0||1,526.0||818.0|
|Deferred Tax Assets, Long Term||38.0||48.0||23.0||58.0|
|Deferred Charges, Long Term||559.0||628.0||677.0||739.0|
|Other Long-Term Assets||2,981.0||3,002.0||3,717.0||3,966.0|
|LIABILITIES & EQUITY|
|TOTAL CURRENT LIABILITIES||16,015.0||17,731.0||19,249.0||18,985.0|
|TOTAL COMMON EQUITY||14,596.0||16,535.0||17,775.0||16,643.0|
|TOTAL LIABILITIES AND EQUITY||46,023.0||47,206.0||50,781.0||50,129.0|
Source: Tesco Annual Reports
A company’s cash flow statement provides information on the company’s cash receipts and cash payments over a given accounting period. This financial statement also has a secondary objective which is to provide information on cash basis on the company’s operating, investing, and financing activities.
The cash flow statement gives information about Tesco PLC’s cash receipts and cash payments during an accounting period, showing how these cash flowscan be link the closing cash balance to the opening balance as shown on Tesco’s statement of financial position.
Table 3: Tesco PLC Statement of Cash Flows
Millions of British Pounds As of:
|Depreciation & Amortization||1,107.0||1,217.0||1,255.0||1,304.0|
|Amortization of Goodwill and Intangible Assets||174.0||191.0||191.0||111.0|
|DEPRECIATION & AMORTIZATION, TOTAL||1,281.0||1,408.0||1,446.0||1,415.0|
|Amortization of Deferred Charges||103.0||—||—||121.0|
|(Gain) Loss from Sale of Asset||-372.0||-429.0||-392.0||245.0|
|(Gain) Loss on Sale of Investment||—||—||-5.0||—|
|Asset Write-down& Restructuring Costs||105.0||-13.0||75.0||1,124.0|
|Other Operating Activities||-63.0||-43.0||388.0||1,068.0|
|(Income) Loss on Equity Investments||-33.0||-57.0||-91.0||-54.0|
|Net Cash from Discontinued Operations||—||-34.0||-251.0||-884.0|
|Change in Accounts Receivable||124.0||-238.0||-417.0||255.0|
|Change in Inventories||34.0||-467.0||-461.0||-94.0|
|Change in Accounts Payable||453.0||1,756.0||1,035.0||684.0|
|Change in Other Working Capital||545.0||-519.0||150.0||-1,220.0|
|CASH FROM OPERATIONS||4,745.0||4,239.0||4,408.0||2,837.0|
|Sale of Property, Plant, and Equipment||1,820.0||1,906.0||1,141.0||1,351.0|
|Sale (Purchase) of Intangible Assets||-159.0||-370.0||-334.0||-368.0|
|Investments in Marketable & Equity Securities||-689.0||-138.0||-816.0||1,337.0|
|CASH FROM INVESTING||-1,877.0||-1,873.0||-3,183.0||-278.0|
|Long-Term Debt Issued||862.0||2,217.0||2,905.0||1,820.0|
|TOTAL DEBT ISSUED||862.0||2,217.0||2,905.0||1,820.0|
|Long Term Debt Repaid||-3,642.0||-4,195.0||-2,765.0||-3,054.0|
|TOTAL DEBT REPAID||-3,642.0||-4,195.0||-2,765.0||-3,054.0|
|Issuance of Common Stock||167.0||98.0||69.0||57.0|
|Repurchase of Common Stock||-24.0||-31.0||-303.0||—|
|Common Dividends Paid||-968.0||-1,081.0||-1,180.0||-1,184.0|
|TOTAL DIVIDEND PAID||-968.0||-1,081.0||-1,180.0||-1,184.0|
|Other Financing Activities||-2.0||-2.0||-92.0||-4.0|
|CASH FROM FINANCING||-3,607.0||-2,994.0||-1,366.0||-2,365.0|
|Foreign Exchange Rate Adjustments||49.0||-46.0||24.0||26.0|
|Miscellaneous Cash Flow Adjustments||—||—||-6.0||-19.0|
|NET CHANGE IN CASH||-690.0||-674.0||-123.0||201.0|
Source: Tesco Annual Reports
From the above table, the company’s cash flow from operations fell from £4.4 billion in 2011 to £4.2 billion in 2012 but then improved again to £4.8 billion in 2013. This is an indication of improvement in the company’s operations.
Table: Tesco PLC Key Financial Ratios
|After Tax ROE||11%||7%||2%||1%|
Source : http://www.nasdaq.com/symbol/teso/financials?query=ratios#ixzz2t6kqijcs
Profitability ratios are used to measure a business’s ability to generate profit as compare to its expenses and other relevant cost during a specific period of time. It is a projection of how productively a firm can cope with its assets and debts. Tesco’s profitability ratios have improved over the last three years which shows that the company’s profit generating ability is improving (Troy 59).
Liquidity ratios indicate entity’s ability to meet short term liabilities from current assets available. There will be a going concern implications if company unable to meet its liabilities. Tesco’s liquidity ratios show that the company will be able to meet its liabilities as and when they are due.
|Conclusion The above financial analysis of Tesco PLC has revealed that despite the economic slowdown in the United Kingdom and other Western economies where the company runs operations, the company continues to flourish and to grow its market share. The ratio analysis on the company has revealed that that the company’s has had an improvement on its returns on investment which can be attributed to effectiveness and efficiency in working capital management. The company’s profit margin also continues to improve which is an indication of improving profitability hence increased returns to shareholders.|
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Tesco Financial Statements .