Financial Accounting Assignment: Financial Analysis of XYZ Beverage Shop & Faltu Inc.

Question

Task:
Prepare a financial accounting assignment answering the following questions:

Question 1: The first two excel spreadsheets in the attached Excel file show the balance sheet and income statement of XYZ Beverage Shop. Using the information in the spreadsheet.

(a) Estimate the company’s operating, investing, and financing cash flows for 2019. Make sure to show your calculations. (Note: the figures in the tables are rounded to the nearest decimal and thus might not exactly add up).

(b) Briefly explain what the three different types of cash flows you estimated above tell you about the company’s uses and sources of funds.

Question 2: Carefully read through the financial statements of Faltu Inc. provided in the Excel spreadsheet. Faltu Inc. is a global fashion and jewelry company.

(a) Interpret Faltu’s financial statements without calculating any ratios. What do the financial statements tell you about the company?

(b) Using financial and accounting ratios, evaluate the financial position and financial performance of Faltu Inc. How well is the company doing?

Make sure to show calculations of the ratios and to explain in one or two sentences how to interpret the numbers.

Consider the supplemental information about the financing arrangements of the company in the spreadsheet and assess the company’s ability to service its debt.

Answer

Financial Accounting Assignment Question 1
Part 1

XYZ Balance Sheet
Balance Sheet as of:	Dec-31-2017	Dec-31-2018	Dec-31-2019	Changes (2019-2018)
Currency (millions)	EUR	EUR	EUR
ASSETS
Cash And Equivalents	219.1	1,631.0	5,000.96	3,369.98
Short Term Investments	-	130.0	500.0	370.0
Total Cash & ST Investments	219.1	1,761.0	5,501.0	3,740.0
Accounts Receivable	3.1	152.6	41.9	-110.7
Inventory	3.4	197.1	412.7	215.5
Prepaid Exp.	10.6	120.2	146.9	26.7
Other Current Assets	22.9	197.7	1,483.6	1,285.8
Total Current Assets	259.1	2,428.7	7,586.0	5,157.3
Gross Property, Plant & Equipment	40.0	1,012.6	2,457.7	1,445.1
Accumulated Depreciation	(0.9)	(107.6)	(519.3)	-411.7
Net Property, Plant & Equipment	39.1	905.0	1,938.4	1,033.4
Other Intangibles	0	0	38.9	38.9
Other Long-Term Assets	38.7	151.4	232.6	81.2
Total Assets	337.0	3,485.1	9,524.4	6,039.4
LIABILITIES
Accounts Payable	-	176.7	633.0	456.3
Accrued Exp.	5.5	258.3	593.1	334.9
Short-term Borrowings	382.2	8.0	0	-8.0
Current Portion of Long-Term Debt	-	72.8	261.9	189.1
Current Portion of Leases	-	108.7	11.5	-97.1
Unearned Revenue, Current	-	126.5	144.9	18.5
Other Current Liabilities	0.6	156.5	2,664.9	2,508.4
Total Current Liabilities	388.3	780.9	4,309.4	3,528.5
Long-Term Debt	-	227.0	310.4	83.4
Total Liabilities	388.3	1,134.3	4,619.7	3,485.4
Pref. Stock, Convertible	-	4,278.3	0	-4,278.3
Total Pref. Equity	-	4,278.3	0	-4,278.3
Common Stock	-	1,256.2	82.4	-1,173.8
Additional Paid In Capital	5.0	65.0	11,845.9	11,780.9
Retained Earnings	(56.4)	(3,246.7)	(6,959.3)	-3,712.6
Comprehensive Inc. and Other	-	(2.1)	(64.4)	-62.3
Total Common Equity	(51.4)	(1,927.6)	4,904.7	6,832.3
Total Liabilities And Equity	337.0	3,485.1	9,524.4	6,039.3

 

Cash Flow from operating activities
Net income for the year (Before extraordinary items, tax and dividend	-2,950
Add
Depreciation	412
Other operating expense	15
Less
Net Interest Income	-48
Currency exchange gain	-20
Operating Profit Before Working Capital Changes	-2,591
Add:
Increase in accounts payable	456
Increase in accrued expenses	335
Increase in other current liabilities	2,611
Decrease in trade receivables	111
Less
Increase in inventories	-216
Increase in prepaid expenses	-27
Increase in other current assets	-1,286
Net operating cash flows before taxes	-606
Tax paid	-4
Net operating cash flows after operating activities	-610

Cash Flow from Investing activities
Purchase of PPE	-1,033
Purchase of Intangible assets	-39
Purchase of other long term assets	-81
Net cash flows from investing activities	-1,153

Cash flow from Financing activities
Proceeds from borrowings	-83
Redemption of preferred capital	-4,278
Payment of preferred dividend	-554
Interest paid	-32
Issuance from equity stock	10,607
	5,660

 

Part 2
The net operating cash flows of XYZ are negative because of reduction in the profits earned by the company in 2019. Also, the company has relied more on current liabilities for its operating activities of the business which has contributed positively to its operating cash flows. At the same time, the company had purchased inventories, allowed further trade credits to its customers and paid of certain expenses in advance of their due dates which has led to increase in current assets resulting in negative operating cash flows. Further, company has paid tax in the current year which resulted in outflow of cash.

The net cash flows from investing activities are negative majorly because of further purchase of property plant and equipment. Also, XYZ has invested in acquiring the intangible assets apart from various other long-term assets. As there were no asset disposals which could contribute to inflow of cash from investing activities, the investing cash flows are negative.

The net cash flows from financing activities are positive as XYZ has issued further equity which contributed to inflow of cash. At the same time the redemption of preference capital and dividend payment thereon has led to reduced positive cash flows from financing activities

Question 2
Part 1
The financial statements of Faltu Inc, shows that the revenue of the business kept on fluctuating so are the cost of goods sold and the operating expenses which resulted in fluctuating profitability of the business. However, out of the past 7 years since 2008, 2013 has remained the year with highest loss even despite of highest revenue generation because of the factors like high cost of goods sold, operating expenses, non-operating expenses and the occurrence of unusual events resulting in losses. The company had incurred high losses in 2010 as well because of reduction in its sales revenue which did not result in proportionate reduction in cost of goods sold and operating expenses. In both 2010 and 2013, the EPS has turned to negative. Also, because of increased costs, the cash flow from operating activities has been reported as negative in the said years. The total current asset balance in the last 8 years has always remained higher than the total current liabilities of the respective years which shows that the business could maintain its liquidity in the market. The quantum of total liabilities and total equity in the capital structure has resulted in in-optimum capital structure as it could be observed that company is heavily relying on debt sources to finance its business requirements. There have been heavy capital expenditures done by the company in the past 8 years resulting in consecutive negative cash flows from investing activities whereas there were no major asset disposals in the past 8 years. In 2010, the debt issued by the company was significantly higher than the debt repaid and so was the same in 2013 because of losses incurred in business. The cash flows from financing activities have remained positive throughout the period of last 8 years except 2009 because of higher debt repayment and other financing activities.

Part 2

Profitability Position of Faltu Inc:
Gross Margin Ratio shows fluctuating trend over the past 8 years and it indicates the percentage of revenue left after meeting the cost of goods sold. Highest GP ratio was reported in 2009 where the lowest was reported in 2013 due to disproportionate increase in cost of goods sold.

Net Profit margin ratio shows the percent of revenue left after meeting all the expenses of the business whether operating or non-operating. The results of net profit margin shows that company could not save any portion of its sales after meeting its business expenses. Rather, it had to incur losses from 2010 and onwards because of increased cost of operations and non-operating expenses. Out of the past 8 years, Faltu Inc had to suffer highest losses in 2013.

Return on equity shows the percent of profits generated for the shareholders by utilising the funds provided by them. As determined above the profitability position of Faltu Inc is quite concerning hence its ROE has been reported as negative only which indicates that the company has remained unsuccessful to generate returns for its shareholders. Only in 2008, the company could generate certain returns for its shareholders.

Return on assets ratio shows the percentage of profits generated by deploying its overall assets. The results of ROA shows that company could generate profits by effectively utilising its assets post 2009.

Liquidity Position of Faltu Inc
The current ratio shows the proportion of current assets and current liabilities and indicates if the company has sufficient current assets to meet its current liabilities. In the present case the current ratio seems above 1 in all the past 8 years which shows that company more current assets than its current liabilities. However, the said ratio kept on fluctuating and never reached a level of ideal ratio which is 2:1

Efficiency Position of Faltu Inc.:
Inventory turnover ratio shows the rate at which inventory of the company is sold. Inventory turnover ratio of the company kept fluctuating but during the last 4 years since 2012, it has reported inclining trend showing its viability to turn its inventory into sales more quickly than before.

Receivable collection period shows the number of days taken by a company to convert its receivables into cash. The said period kept on increasing since 2010 which indicates that company is not able to manage its receivables properly.

Solvency Position of Faltu Inc.
The debt-to-equity ratios shows the level of optimum capital structure. In present case, the capital structure of the firm is quite in-optimum since 2010 as it is quite high because of high portion of debt in the capital structure in comparison to equity. This shows company is facing high solvency risk.

The interest coverage ratio shows the number of times interest cost can be borne by the operating profit. After 2008, the ratio shows that company has inadequate profits to meet its interest expenses.

Part 3
From the balance sheet of Faltu Inc for all the years since 2008 reviewed in this financial accounting assignment, it can be seen that company is facing high financial risk as it is excessively relying on debt financing for its business. The debt covers both current as well non-current liabilities. The cash overdraft is a current liability. However, non-current obligations like capital lease which is to be matured in 2017 and has a interest rate ranging from 0.40% to 24% is there. As the company’s solvency position seems quite unstable it is predictive that it would generate more borrowings in future and hence it would become difficult for it to meet its financial obligations both in terms of interest and principal. Further, Lion loan agreement carries an interest obligation of 20% per annum which is difficult to be paid with the current financial position as company does not have adequate profits. Moreover, lion loan agreement and various other borrowings are not even secured i.e. backed with assets, hence, it would be difficult for the company to service these debts. The cash overdraft could be paid as company has sufficient current assets to meet its short-term obligations. The debt obligations which are secured would be paid using assets of the business in case the company does not have sufficient finance to repay the same. The senior secured notes due in 2020 carries a high principal payment and interest obligations and the same cannot be paid out of current profits as the company is not in the state of generating profits.