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Accounting For Business Decisions: Harvey Norman Company Add in library

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Questions:

Part A

Provide an executive summary of your company’s background relating to business structure, operations, services and all other business activities that are conducted, etc.

Part B

Recently you received the following offers from the organizers of Melbourne Tennis Open 2015:

Now you can buy premium tickets to the coming Melbourne Tennis Open 2015 with signatures of your choice of popular tennis players like Rafael Nadal, Roger Federer to name a few. However, there are only 3,000 tickets that have these collectible features.

• Retail price: $300 each
• Tennis club members: $280 each
• To order, complete the online order form @ www.MTO2015.com.au.
• Allow 5 days for delivery

Required:

1. Describe the alternatives the organisers have in relation to recognizing revenues. Which would you recommend and why?

2. Would your answer differ if you included in the sale of the tickets that if the customers are not happy the tickets may be returned within one month?

3. Let us assume that the organisers contracted a selling agent that takes care of all selling and marketing responsibilities, gets 10% as commission. The policy states that no return
no exchange. When should the organisers recognize revenue?

4. With regards to the authenticity of the signatures, do you think the accounting profession have the skills to provide the services to authenticate? Discuss and show examples.

5. Discuss the importance of Cost of Goods Sold(COGS) in this case. How is it applied?

6. Let us say that the signatories will get a fixed fee for the effort, when would the organisers recognize the expense?

7. Assume that the signatories will get a 5% commission on the sales of their signed tickets.When would the organisers recognize the costD

 

Answers:

Part A

Introduction

This paper focuses on providing an insight to the structure of the financial statements and contribution of these elements in the decision making and strategy development of an organization. In this assignment, a public company listed on the Australian Stock Exchange will be chosen and the annual report will be scrutinized for undertaking research on the financial statement (Drury, 2004). In this paper, the balance sheet, income statement, cash flow statement and shareholders’ equity. Comparison of the major elements with the previous year will be conducted in this paper.  

Background of the Company

Harvey Norman was established by Gerry Harvey and Ian Norman in 1982. In the year, 1987 Harvey Norman Holdings Limited was listed on the Australian Stock Exchange (ASX). The company has been focusing on integrated franchising, property and retail businesses. It has been found that Harvey Norman has been operating under a franchise system and delivering excellent retail offerings to the customers. The product range is wide and the advanced technology along with the market leadership helped in the achieving organizational success. The company has granted franchises to the independent business operators under major three brand names such as Harvey Norman, Joyce Mayne and Domayne. The franchisees are engaged in selling products in various categories such as small appliances, electrical goods, flooring, carpets, bedding, furniture and computerized communications.  The organizational culture of Harvey Norman is multifaceted. Hence, it becomes difficult to describe it specifically due the orientation of the franchise system. Specific proportion of the earnings of franchisee and the revenue is spent for in the local community (Harveynormanholdings.com.au, 2015).

 

Analysis of the Financial Statements of Harvey Norman

Balance Sheet Analysis

Balance sheet of an organization depicts the assets and liabilities of the company. All types of assets including current asset, fixed asset, and intangible assets are represented so that the financial position of the company can be understood. On the other hand, it is important to indentify the long terms as well as short term obligations of the company. It significantly helps in the decision making process. This section will focus on comparing the major five elements of balance sheet for 2013 and 2014 of Harvey Norman (Epstein and Lee, 2000). The following table indicates important five elements of balance sheet for the consecutive two years and percentage change.

Particulars

Values are in '000

 

 

2013

2014

% change

Total Current Assets

 $  1,531,913.00

 $  1,607,167.00

4.912%

Total Non-current Assets

 $  2,533,118.00

 $  2,618,169.00

3.358%

Total Current Liabilities

 $  1,262,232.00

 $      834,057.00

-33.922%

Total Non-current Liabilities

 $      867,119.00

 $      471,998.00

-45.567%

Total Stockholder's Equity

 $  2,363,855.00

 $  2,491,106.00

5.383%


From the above table, it can be understood that the current asset of Harvey Norman has increased by 4.912% (Harveynormanholdings.com.au, 2015). It indicates that the access to the liquid assets or easily convertible asset has increased. It has a positive implication for the company (Hansen and Mowen, 2000). Additionally, it must be noted that excess current asset is not favorable and it indicates that the company has not been able utilize its assets. From the above table, it is also implied that the non-current asset which is consisted of capital asset, fixed asset and intangible assets has enhanced (Ferranti, 2003). It means the overall asset of the company is increasing and Harvey Norman has enough capital to expand its business activities. On the other hand, current liabilities of the company have declined. It means that the company is not receiving high credit period by the suppliers. Similarly, the above table demonstrates a significant decline in the non-current liabilities. These values imply that Harvey Norman has been paying off its liabilities and its obligation has declined considerably. Total stockholder’s equity has also increased in 2014 by 5.38% from the previous financial year.

 

Income Statement Analysis

Income statement helps in indicating the amount of revenue and expenditure incurred throughout the financial year. Income statement is one of the important financial statements that help in providing an insight to the profit and loss of the company (Epstein and Lee, 2000). This section will focus on analyzing the income statement of Harvey Norman. Principle elements of the income statement will be compared with the previous financial year. The following table compares the major elements in the income statement and demonstrates the percentage change:

Particulars

Values are in '000

 
 

2013

2014

% change

Total Operating Revenues

$  1,323,481.00

$  1,513,662.00

14.370%

Cost of Goods Sold

$      944,229.00

$  1,064,892.00

12.779%

Total Expenditure before tax

$  1,247,380.00

$  1,198,834.00

-3.892%

Earnings per common share

$              0.1339

$              0.1993

48.842%

 

From the above table, it is evident that the operating revenue of Harvey Norman has increased by 14.37% in 2014 in comparison to the previous financial year (Harveynormanholdings.com.au, 2015). It is a positive implication for the financial performance of the company.  This value indicates the company has been able to enhance its sales and customer base has enhanced. Additionally, the cost of goods sold has increased by 12.779%. As the sales volume has increased, it is obvious that the cost of goods sold will increase (Hansen and Mowen, 2000). However, it must be noted that the proportion of increase in sales or revenue differs from the increase in the cost of goods sold. The rise in cost of goods sold is lower in comparison to the rise in revenue (Freedman and Jaggi, 2000). It implies that Harvey Norman has been able to work efficiently to control its cost of production. From the above table, it can be found that total expenditure excluding tax has declined by 3.892% from the previous financial year. It significantly implies that Harvey Norman has been able to achieve higher level of operational efficiency in 2014 in comparison to 2013. Hence, it can be stated that the operational performance of the company has improved leading to enhance the financial performance. Earnings per share are an important indicator for the investors. It has been observed that the earning per share has improved which indicate the company is performing well enough. Additionally, this positive indication will help in attracting more investment for the company.

 

Cash Flow Statement Analysis

Cash flow statement helps in depicting the cash position of the company. It includes the list of cash transaction for different activities such as investment activities, operational activities and financing activities. Cash flow statement is essential for fundamental analysis as it depicts how much actual cash has been generated by the company. Additionally, the cash flow statement analysis helps in understanding the potential of the company to pay for its operational activities and growth in future. This section will focus on analyzing the cash flow statement of Harvey Norman and the major elements will be compared in context of previous years’ performance. The following table demonstrates the important elements of cash flow statement for Harvey Norman for the last two years (Hirsch, 2000).

Particulars

Values are in '000

 

 

2013

2014

% change

Net cash Flow from operating activities

 $      239,217.00

 $      338,935.00

42%

Net cash Flow from investing activities

 $   (208,181.00)

 $   (113,117.00)

-46%

Net cash Flow from financing activities

 $      (46,562.00)

 $   (235,213.00)

405%

Net cash or cash equivalent at the end of the year

 $      124,567.00

 $      115,172.00

-8%


From the above table, it has been found that the net cash flow from operating activities of Harvey Norman has enhanced by 42% (Harveynormanholdings.com.au, 2015). It clearly indicates that the company has been undertaking its operational activities efficiently and it has been able to generate he positive cash flow from the operations. Hence, it can be stated that it has a positive implication for the company. Cash flow from investing activities record the activities associated with investments (Pavlovic and Bogdanovic, 2013). It has been found that the cash outflow regarding purchase of new equipments, plant etc was higher in 2013. Additionally, payments made for purchasing investment property for the company was higher in the previous financial year (Harveynormanholdings.com.au, 2015). Hence, it has been found that the cash outflow for investing activities was greater (Freedman and Jaggi, 2000). On the other hand, cash inflow due to sale of plant, equipments and some properties is greater in 2014 in comparison to the previous year 2013. Thus the net cash out flow from operating activities has declined in the latest financial year (Hirsch, 2000). Cash flow associated with the financing activities majorly associated with activities of financing such as borrowing, loans, repayment of loans, interest paid etc. It has been found that the cash outflow associated with the financing activities of Harvey Norman has significantly enhanced in the 2014 in comparison to 2013 (Hansen and Mowen, 2000). From the financial statement, it has been found that the company has to pay greater amount of dividend and had to repay higher amount in the latest financial year. Hence, the net cash outflow from financing activities has extensively increased. The net cash balance shown in the cash flow statement of a company indicates that the amount of cash or cash equivalent available to the company at the end of the financial year. In case of Harvey Norman, it has been found that the net cash balance of the company in 2014 has declined by 8% from the previous year (Piao and Ni, 2011). Though the cash inflow from operating activities has significantly increased, cash outflow is significantly high due to the investing activities as well as financing activities. Hence, a decline in the net cash balance is observed in case of Harvey Norman in the year of 2014.

Stockholder’s Equity

The stockholder’s equity is indicated in the balance sheet of a company. in case of Harvey Norman, it has been found that the equity of stockholder’s has increased by 5.38&% in 2014 in comparison to the previous year.  It has a positive implication for the company however, it must be noted that higher value of stockholder’s equity indicates greater dilution of the ownership (Riahi-Belkaoui, 2001).

Conclusion

This paper has efficiently scrutinized the financial statement a public company, Harvey Norman which is listed on Australian Stock Exchange. It has been found that the company has achieved greater operational efficiency in 2014. The balance sheet analysis of the company indicates that the current asset as well as no current asset of the company has increased. On the other hand, short term and long term liabilities of the company has declined. It indicates that the company has not been permitted greater credit period and paying off its liabilities. Analyzing the income statement of the Harvey Norman, it has been found that the revenue of the company has enhanced which has a positive implication for the company. Additionally, expenditures regarding operational activities have declined which implies that the company has been able to achieve operational excellence. The cash flow statement of the company has implied that the net cash balance of the declined by 8%. The major reason behind the decrease in net cash balance is the high cash outflow due to financing activities and investment activities.

 

Part B: Case Study

1. The organizers of Melbourne Tennis Open 2015, has decided to offer premium tickets of the Melbourne Tennis open along with the autograph of the popular tennis players which can be chosen by the customers. There are only 3,000 premium tickets to offer the customer. It has been decided that the retail price of the tickets will be $ 300 and the price of the tickets will be $ 280 for the tennis club members. These are the two alternatives available to the organizers of Melbourne Tennis open to recognize the revenue. I would recommend that the organizers must choose the retail price for selling the premium tickets as the revenue will be higher in this case.

2. Now, it is stated that the organizers of Melbourne Tennis Open 2015 are deciding to keep an option for returning the ticket if the customers are not happy with it. The customers will be able to return the ticket within one month from the date of purchase. In this situation, selection of the retail price will not be suitable for recognizing revenue. If the customers return the ticket there will be greater loss. Hence, choosing the mixture of two options will be suitable for the organizers of Melbourne Tennis Open 2015. For the tennis club members the ticket will be sold at $ 280 and for other price will be 300 dollars (Hirsch, 2000).

3. It has been assumed that a selling agent has been chosen and the organizers of Melbourne Tennis Open 2015 have entered into a contract with the agent. According to this contract, the selling agent will be responsible for taking care of all the marketing and selling activities. The selling agent will get commission at 10% of the sales. There will not be any policy for returning or exchanging. In this case, the organizers will recognize revenue at the time of sales and after paying the 10% of the price of ticket which is given to the sales agent as commission.

4. Accounting profession has the skill in order to provide a service for authenticating. Authenticating, authorization and accounting is the service provided by various organizations such as CISCO. Thus, the autographs of the popular tennis players given with the premium tickets can be authenticated with the aid of this service (Cisco, 2015).

5. Cost of goods sold helps in estimation of the cost of manufacturing the good or direct cost. Direct cost includes direct cost of material, direct labor and direct overhead. It has been observed that in case of manufacturing the cost of goods sold can be easily determined.  However, in case of service, the direct cost is difficult to calculate. The reason is direct material, direct labor etc are not available in case of service. So, the component, cost of goods sold cannot be used in this case (Hansen and Mowen, 2000).

6. It has been assumed that the organizers of Melbourne Tennis Open 2015 have decided to pay a fixed fee to the tennis players whose signature will be put on the premium tickets. Now, it the question is when the organizers have to pay for it. At the time of agreement or at the time of getting the autographs, the organizers of Melbourne Tennis Open 2015 need to pay the fixed amount to each of the tennis players nominated for putting signatures on the premium ticket (Hirsch, 2000).

7. It has been stated that the organizers of Melbourne Tennis Open 2015  has decided to give 5% commission on the revenue to the tennis players who are giving their autographs on the premium tickets. The commission will be dependent on the value of sales for the tickets signed by each popular tennis player. Hence, it is clear that the expenditure regarding the commission paid to the tennis players will be realized at the end of the selling of tickets (Drury, 2004).

 

References

Cisco, (2015). Authentication, Authorization, and Accounting Overview  [Identity Based Networking Services]. [online] Available at: https://www.cisco.com/en/US/products/ps6638/products_data_sheet09186a00804fe332.html [Accessed 5 Feb. 2015].

Drury, C. (2004). Management and cost accounting. London: Thomson Learning.

Epstein, M. and Lee, J. (2000). Advances in management accounting. New York: JAI - Elsevier.

Ferranti, K. (2003). Digging deep into derivatives: balance sheet management – making strategic decision‐making better. Balance Sheet, 11(3), pp.20-22.

Freedman, M. and Jaggi, B. (2000). Advances in environmental accounting & management. Amsterdam: JAI.

Hansen, D. and Mowen, M. (2000). Management accounting. Cincinnati: South-Western College Pub.

Harveynormanholdings.com.au, (2015). Harvey Norman Annual Reports. [online] Available at: https://www.harveynormanholdings.com.au/annualreports.htm [Accessed 5 Feb. 2015].

Harveynormanholdings.com.au, (2015). Harvey Norman Corporate Profile. [online] Available at: https://www.harveynormanholdings.com.au/companyprofile.htm [Accessed 5 Feb. 2015].

Hirsch, M. (2000). Advanced management accounting. London: Thomson Learning.

Pavlovic, M. and Bogdanovic, J. (2013). Cash flow statement. Skola biznisa, (3-4), pp.129-147.

Piao, Z. and Ni, M. (2011). The Sensitive Dynamic Study of Business Investment Decision-Making on Cash Flow. AMR, 403-408, pp.394-399.

Riahi-Belkaoui, A. (2001). Advanced management accounting. Westport, Conn.: Quorum Books.

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