David Jones Limited - Financial Statements Case Study

1. Introduction

Financial statements are important reports. They are used to analyze a company's past, present and future performance (Johnson, 2004). Each of these statements uses specific information that has been "identified, measured, recorded, and retained" during the accounting process (Bazley M & Hancock P, 2010). Our text book, identifies the four basic financial statements as: a balance sheet (also known as a statement of financial position), which portrays the financial position of the company by listing all of the assets and liabilities of the business at the end of the period, the difference between the two being the company's net worth; an income statement, on the other hand, shows whether a company's operations have resulted in a profit or loss from the beginning to the end of the accounting period; and finally, a cash flow statement, reports on the company's cash separating them by operating, investing and financing activities (Bazely M. & Hancock, P. 2010).

The aim of this report is to examine the financial statements of David Jones Limited for the year 2010 to determine its main operating activities, its main sources and uses of cash, along with its financing and investing activities and finally to confirm what were the company's most reported assets.

2. Background of David Jones

David Jones Limited has department stores in the United Kingdom and in Australia. Some of the territories that the company serves are South Wales, Queensland, and Australian Capital.

The company currently runs 37 department stores. In addition to sales of goods, the department store chain has recently involved itself in the food industry and in the personal service industry, offering services such as spa, salon, and barber services. Despite diversification into new industries, the principal operating activities of David Jones in 2010 remained as sale of goods and credit cards.

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3. Operating activities

Operating activities are those activities of an organization which have a direct effect on the cash flows of the organization (Helfert, 2001). These activities form the core business of the organization and have a major effect on its net income. By looking at David Jones' income statement the main operating activities were revenue from the sale of goods, and the cost of goods sold. By assessing these two main activities, one can determine the company's gross profit by simply subtracting cost of sales from revenues. The next major source of income for the company listed under "other income", included commissions, along with fees received from the David Jones' store card. Next the remaining major costs involved in operating the business, were staff salaries, advertising expenses, and depreciation and amortization expenses, etc. After all other income is added and operating expenses subtracted, what is left is known as the operating profit (also known as the operating income). Dividing this figure by revenues yields an operating margin of approximately 11.8% for David Jones revealing the profitability of the company's principal business. Finally after items such as taxes are deducted and interest payments are accounted for we come to the net profit (more commonly known as the net income (Phillips, Libby, & Libby, 2005, p. 577). Dividing the net profit by the revenue, would reveal a profit margin of approximately 8.3% which represents how much of every dollar of sales the company keeps for profits.

3.1 Difference between accrual and cash flow effects of operating activities:

The accruals concept states that net profit is the difference between revenues and expenses incurred, that is revenues - expenses = net profit (Wood, F. 1998 p. 138). Revenues and expenses on the income statement can differ from that period's cash receipts and disbursements because of two factors: accrual accounting and nonoperational sources of cash. Accrual accounting typically results in revenue recognition being separated from the actual receipt of cash, and expenses are treated likewise.

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Non operational sources and uses of cash do not contribute to the firm's income and expenses, but they can play a critical role if insufficient cash is available to meet obligations resulting from financing, such as debt repayment or an expected dividend.

Therefore the main differences between the cash flow and accrual effects of the main operating activities of David Jones' company would be because some part of sales would have been made on credit terms (sales receivables) while some of the expenses incurred by the company may be still unpaid (payments to suppliers and employees) . This results in receivables because of the uncollected earned revenue and payables due to the unpaid incurred expenses.

4. Earnings per share

Earnings per share tell us the net profitability of a company, and reveal the portion of a company's profit that is allocated to each share of the company (Horowitz, A, 2010). The basic earnings per share was calculated using the net profit after tax divided by the weighted number of ordinary shares as noted on (page 89) in the annual report.

Averaging the number of shares held in the company is done because ordinary shares are subject to change over the period that the income is earned. The basic earnings per share is the best measure of earnings of a company attributable to each share because diluted earnings per share is based on contingent events in its determination.

The information about the earnings per share can be found on the statement of comprehensive income. Therefore, if you owned 10,000 shares of David Jones, your earnings would be higher in 2010 than in 2009 as follows: earnings in 2010 would be $3,400 (0.34 cents per share) and $3,100 (0.315 cents) in 2010 and 2009 respectively. These figures are based on the company earnings per share for the two years.

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5. Cash analysis: Sources and uses

The statement of cash flows provides a rundown between the inflow (receipts) and outflow (payments) of cash during the indicated date range (Weygandt, 2008).

Operating cash flows are those that are related to the companies' operating activities, which are those activities, reflected in the income statement. Examples