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FINANCEFORMANAGERS SEMESTER12011/12

ASSIGNMENT1

PartA.
Theprimaryfinancialstatementsproducedbyawiderangeofentitiesarethebalancesheet, theincomestatementandthecashflowstatement.Thesestatementstakentogetherprovide theessentialdatarequiredtoanalysethefinancialpositionandperformanceofabusiness. The balance sheet, also known as the statement of financial position, presents the accumulatedwealthofabusinessataparticularpointintime,aswellastheformin which this wealth is held (Atrill and McLaney). It also shows how finance has been raisedandhowithasbeendeployed. Theincomestatementorprofitandlossaccount,asitissometimescalledpresents howmuchprofit(orloss)abusinesshasgeneratedduringaperiodoftime(Atrilland McLaney).Theincomestatementlinkstothebalancesheetatthebeginningandend ofanaccountingperiod. Finally,thecashflowstatementshowsthesourcesandusesofcashduringaparticular period (Weetman). It explains changes in the cash position caused by operating, investingandfinancingcashflows. These three financial statements will have to be used in conjunction one with another to provideagraterpictureofthefinancialhealthofthebusiness. Thecurrent assetsisoneofthemostmeaningfulitemstobeanalysedinthebalancesheet for a company like Marks and Spencer. It includes all the resources that are reasonably expected to be converted into cash within one year in the normal course of the business (Weetman).Itisimportanttolookatthecurrentassetsinrelationtothecurrentliabilitiesto get a feel for the companys liquidity. This is, the companys ability to meet its shortterm obligations,suchasitsworkingcapitalneedsanditsdebtobligations.Thetwomostcommon usedratioswhenassessinganentitysliquidityarethecurrentratioandthequickratioor acidtest.

1,641.7 = = . 2,210.2

1,641.7 685.3 = = . 2,210.2

Althougha2:1currentratioand1:1quickratiotendtobeconsideredideal,lowerratioscan be understandable for retail companies due to the nature of their business. Nevertheless, 0.74:1currentratioand0.43:1quickratiothatM&Sreportedsuggestthatthefirmmayhave difficultymeetingcurrentobligations.Lowvalues,however,arenotalwaysfatal.Assuggested in the academic article Zero income survival times for ten fashion retailers, if the company

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hasgoodlongtermprospects,itmaybeabletoenterthecapitalmarketandborrowagainst thoseprospectstomeetcurrentobligations.Thenatureofthebusinessitselfmightalsoallow M&Stooperatewiththeselowratios.Sinceitsinventoryturnsovermuchmorerapidlythan the accounts payable become due, there is a timing difference that can allow the firm to operatewithcurrentratiolessthanone. The Directors report points out that 28.6% of the current assets are held in cash or cash equivalents, which includes shortterm deposits with banks and other financial institutions, withandinitialmaturityofthreemonthsorlessandcreditcardpaymentreceivedwithin48 hours. Whenanalysingtheincomestatement,itisimportanttolookattheProfitfortheyearfigure. The profit for the year, also called Net profit, is the income that is attributable to the owner(s) of the business and which will be added to the equity figure in the balance sheet (Atrill and McLaney). This figure is calculated by deducting all the expenses incurred in generating the sales revenue for the period and taking account of nonoperating income. As partofhisresearchforMarketingMetrics,P.Farrysconductedasurveyofnearly200senior marketingmanagersontheimportanceofthisfigure.91percentrespondedthattheyfound the net profit metric very useful, as it is one of the most important aspect of a forprofit organization. For Marks and Spencer, one can see that in 2011 the net profit totalled 598.6 million. This meansandincreasecomparedtothe523.0millionnetprofitobtainedthepreviousyear.To gain perspective on this figure we can work a horizontal analysis. When expressed as a percentage,onecangainafeelforthesignificanceofthechangesthattookplaceinthelast year.

2011 (2010) 100 (2010) 598.6 523.0 = 100 = . % 523.0

Atfirstsightitlookslikeanexcellentrateofgrowth,butwewouldneedtoseeitinrelationto thesectortogetabetterideaoftherealperformanceofthecompany. IntheDirectorsreportthisisconsideredasabrilliantperformancedrivenbygrowthinlike forlikesalesintheUKandagoodachievementintheInternationalbusiness.Moreover,this report points out that, in November 2010, the company set out plans to invest additional 850m. to 900m. over the next three years. These expenditures are the reason for the growth rate not to be as high as in previous years. However, they are confident that this investmentwilldeliverfuturebenefits.

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AnotherimportantfiguretoanalyseistheCapital expenditures(CAPEX),foundonthecash flow statement under Purchase of property, plant and equipment. This figure includes the foundsusedbythecompanytoacquireorupgradephysicalinordertomaintainorincrease thescopeofitsoperations.Capitalexpendituredecisionrepresentsoneofthemostimportant decisionstakenbyacompany,asitisdirectedtowardsexpansionofthelevelofoperations. The capital expenditures figure on 327.3 million in 2011 for Marks and Spencer is an important sign of the continuing developing of the business. Although these expenditures translateintoareductionoftheprofitfortheyear,theinvestmentdecisionprovidesabetter frameworkforfutureactivities. As pointed in the Directors report, these expenditures are part of a threeyear plan to enhance the companys UK business and develop a multichannel and international capabilities. The Chief finance officer emphasizes that we continue to invest in our supply chainandtechnologyinlinewithourplantobuildaninfrastructurefittosupportthefuture growthofthebusiness,andheadded:wearetargetinganinternalrateofreturnofbetween 12%and15%.

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