Accounting for Business Decisions SME Rating

Question: Describe about the Accounting for Business Decisions for SME Rating . Answer: Introduction The current piece of research is conducted with the purpose of understanding and analyzing the financial structure of the company in order to undertake better business decisions. For the following purpose the analysis of the financial structure of AGL ENERGY Ltd. The stated Ltd Company is one of the leading operational company based in the country of Australia. This company is one of the publicly listed firms engaged in the business of providing services and products associated with energy in the economy of Australia. The researcher has conducted the analysis of the following company with the view of developing suitable recommendation for the areas in which the company lacks behind. Statement of Financial Position BALANCE SHEET of AGL ENERGY LTD (AGLNF) Fiscal year ends in June 2012 2013 2014 2015 2016 Cash and cash equivalents 1813 281 456 259 252 Short-term investments 179 187 114 156 267 Total cash 1992 468 570 415 519 Receivables 1621 1844 1743 1894 1975 Inventories 185 133 191 396 414 Prepaid expenses 39 45 32 40 39 Other current assets 294 346 716 714 640 Total current assets 4132 2836 3252 3459 3587 Gross property, plant and equipment 7166 7295 7541 9289 9157 Accumulated Depreciation -842 -1120 -1305 -1657 -2628 Net property, plant and equipment 6324 6176 6236 7632 6529 Equity and other investments 462 372 390 614 217 Goodwill 2640 2640 2758 2792 2791 Intangible assets 532 510 490 474 441 Deferred income taxes 611 729 631 682 953 Other long-term assets 38 104 218 180 86 Total non-current assets 10606 10530 10723 12374 11017 Total assets 14738 13366 13975 15833 14604 Short-term debt 614 44 45 442 22 Capital leases 2 1 1 Accounts payable 1153 1280 1106 669 903 Deferred income taxes 11 155 49 86 102 Deferred revenues 250 Other current liabilities 579 712 807 1175 1526 Total current liabilities 2610 2192 2007 2373 2553 Non-current liabilities Long-term debt 3682 3048 3653 3422 3067 Capital leases 14 15 16 17 19 Deferred taxes liabilities 349 99 50 Other long-term liabilities 951 672 661 1206 1039 Total non-current liabilities 4996 3835 4380 4645 4125 Total liabilities 7606 6027 6387 7018 6678 stockholders' equity Common stock 5227 5354 5437 6696 6696 Retained earnings 1884 1987 2249 2175 1243 Accumulated other comprehensive income 22 -2 -98 -56 -13 Total stockholders' equity 7133 7339 7588 8815 7926 Total liabilities and stockholders' equity 14738 13366 13975 15833 14604 In the above statement of balance sheet of AGL ENERGY Ltd, it can be observed that the total assets have fallen drastically from the year 2012 to 2014. In the view of Armstrong et al. (2016), at the end of 2014, the balance of the total current assets improved. On the other hand, the above statement shows that the total noncurrent assets of the company were the highest in the year 2015 and the lowest in 2013 on comparison between the stated five years. On the contrary, the total current liabilities had decreased consecutively through the last three years and then it started increasing in the year 2015 and 2016. According to Barsky and Catanach (2013), the total noncurrent liabilities have been in a state of alternative increase and decrease through all these given years. Percentage change in the BALANACE SHEET of AGL ENERGY Ltd Fiscal year ends in June 2015 Changed Percentage 2016 Assets Current assets Cash Cash and cash equivalents 259 -2.7 252 Short-term investments 156 71.2 267 Total cash 415 25.1 519 Receivables 1894 4.3 1975 Inventories 396 4.5 414 Prepaid expenses 40 -2.5 39 Other current assets 714 -10.4 640 Total current assets 3459 3.7 3587 Non-current assets Property, plant and equipment Gross property, plant and equipment 9289 -1.4 9157 Accumulated Depreciation -1657 58.6 -2628 Net property, plant and equipment 7632 -14.5 6529 Equity and other investments 614 -64.7 217 Goodwill 2792 0.0 2791 Intangible assets 474 -7.0 441 Deferred income taxes 682 39.7 953 Other long-term assets 180 -52.2 86 Total non-current assets 12374 -11.0 11017 Total assets 15833 -7.8 14604 Liabilities and stockholders' equity Liabilities Current liabilities Short-term debt 442 -95.0 22 Capital leases 1 -100.0 Accounts payable 669 35.0 903 Deferred income taxes 86 18.6 102 Deferred revenues Other current liabilities 1175 29.9 1526 Total current liabilities 2373 7.6 2553 Non-current liabilities Long-term debt 3422 -10.4 3067 Capital leases 17 11.8 19 Deferred taxes liabilities Other long-term liabilities 1206 -13.8 1039 Total non-current liabilities 4645 -11.2 4125 Total liabilities 7018 -4.8 6678 stockholders' equity Common stock 6696 0.0 6696 Retained earnings 2175 -42.9 1243 Accumulated other comprehensive income -56 -76.8 -13 Total stockholders' equity 8815 -10.1 7926 Total liabilities and stockholders' equity 15833 -7.8 14604 The researcher has calculated the percentage difference of the items in the balance sheet of AGL ENERGY LTD for the year 2015 and 2016. The total current assets of the company have increased by a percentage of 3.7. As opinioned by Biao (2013), this increase in the quantity of assets of the company has occurred due to purchase of new assets by the company. It may also result from the accommodation of the stock of goods for sale. The total non currents assets of the company have decreased by 11 per cent in 2016 in comparison to the previous year. As stated by Habib and Hossain (2013), the reason for this decrease in the total assets may have occurred due to sale of the assets for funding the business or to extract the scrap value of the same. In addition to this, the current liabilities have also increased in the year 2016 by a percentage of 7.6. On the other hand the total noncurrent liabilities of the company have decreased by 11.2 per cent. As stated, the increase in the total current assets of the company is less than the increase in the current liability of the same. In the opinion of Beck et al. (2013), this explains the inability of the company in meeting its current contingencies. On the contrary, the total noncurrent assets of the company have decreased while the total current assets have increased. In the words of Cour-Thimann and Winkler (2012), the decrease in the total noncurrent assets of the company highlights the impotency of the company to write off the future contingencies and liabilities. As opinioned by Cull et al. (2013), an increase in the current liabilities is not in favor of the company given the current assets are not sufficient to meet the liabilities, the company will require to make its purchases on credit so as to retain the limited assets. In the words of Rensburg and Botha (2014), this in turn will generate more liability for the company. Here, the noncurrent liabilities of the company have decreased indicating that the company has nit indulged in long term borrowings. It should also be noted that the noncurrent assets of the company has also decreased. According to Joshi et al. (2013), there is a subsequent possibility that the company might have sold its total noncurrent assets to write off the total noncurrent assets leading to a decrease in both. In this context Stubbs et al. (2013), stated that the short term financial condition of the company is not in favor of the company, its shareholders as well as investors. As it has been seen that the assets do not compensate the liabilities due to which it has to borrow from the creditors. In the words of Biddle (2015), this further creates imbalance in the current ratio of the company as a result of which the creditors along with the investors may refrain from providing goods on credit and making further investments that may have an adverse effect on the work proceedings of the company. Stockholders Equity As stated by Crawford and Power (2015), the net value of any particular company is demonstrated by the shareholders equity of the same. This is one of the measures that help the analysts to understand the financial condition of the company. In this context, the shareholders equity of AGL ENERGY Ltd has been stated in the above mentioned balance sheet of the company. Here, the common stock of the company remained unchanged in the year 2016 in comparison to the previous year. On the contrary the retained earnings of AGL ENERGY Ltd have decreased to a percentage of 42.9 in the current year on drawing a comparison with the preceding year. In addition to that, the retained earnings of the company have also decreased justifying the decrease in the total noncurrent liabilities as it is evident that the company used its retained earnings to pay off the liabilities. It may also be witnessed from the above given balanced sheet of the company that the total shareholders equity of AGL ENERGY Ltd has decreased by 10.1 per cent. As it has been analyzed that the current liabilities of the company is more than its current assets along with that the total assets not increasing in proportion to the increase in total liabilities. In the words of Altman et al. (2013), this influences the shareholders equity of the firm as the shareholders fund of a particular company is computed by deducting the total assets of the company from the total liabilities of the same. Hence, the shareholders equity of the company displays a weak financial condition of the company. As stated by Bonner et al. (2013), the outstanding shares of a company can be computed by dividing the net profit earned by the company after taxation with the earnings per share of the company. In accordance to the income statement of the company, the net income for the year 2015 is 218 whereas the earnings per share is 0.33. Hence, the outstanding share of AGL ENERGY Ltd for the year is approx 606. Similarly, the outstanding share of the company shows a negative balance of approx 678. Statement of Profit and Loss INCOME STATEMENT of AGL ENERGY LTD (AGLNF) Fiscal year ends in June 2012 2013 2014 2015 2016 Revenue 7454 9715 9543 10678 11150 Cost of revenue 5918 7451 7227 7856 8110 Gross profit 1536 2264 2316 2822 3040 Operating expenses Other operating expenses 1339 1597 1337 2255 3321 Total operating expenses 1339 1597 1337 2255 3321 Operating income 197 666 979 567 -281 Interest Expense 84 245 243 250 236 Other income (expense) 50 42 24 20 43 Income before income taxes 163 464 760 337 -474 Provision for income taxes 48 75 190 119 -67 Net income from continuing operations 115 389 570 218 -407 Other -1 Net income 115 389 570 218 -408 Net income available to common shareholders 115 389 570 218 -408 Earnings per share Basic 0.23 0.7 1.02 0.33 -0.6 Diluted 0.23 0.7 1.02 0.33 -0.6 Weighted average shares outstanding Basic 482 550 558 654 675 Diluted 482 551 558 654 675 Percentage change in the INCOME STATEMENT of AGL ENERGY Ltd Fiscal year ends in June 2015 Changed Percentage 2016 Revenue 10678 4.420303428 11150 Cost of revenue 7856 3.233197556 8110 Gross profit 2822 7.725017718 3040 Operating expenses Other operating expenses 2255 47.27272727 3321 Total operating expenses 2255 47.27272727 3321 Operating income 567 -149.5590829 -281 Interest Expense 250 -5.6 236 Other income (expense) 20 115 43 Income before income taxes 337 -240.652819 -474 Provision for income taxes 119 -156.302521 -67 Net income from continuing operations 218 -286.6972477 -407 Other -1 Net income 218 -287.1559633 -408 Net income available to common shareholders 218 -287.1559633 -408 Earnings per share Basic 0.33 -281.8181818 -0.6 Diluted 0.33 -281.8181818 -0.6 Weighted average shares outstanding Basic 654 3.211009174 675 Diluted 654 3.211009174 675 EBITDA 966 -76.5010352 227 In the words of Freeman et al. (2014), the income statement of the company refers to the financial statement of a particular company that displays the financial condition of the same over a particular period of time. The following income statement of AGL ENERGY LTD shows the various aspects of income and expense of the company during the year 2015 and 2016. For the better understanding of the differences of the income statement between these two years, the researcher has computed a percentage difference between the two. The revenue or income generated in the income statement shows an increase of approx 4 per cent in the year 2016 in comparison to the preceding year. Besides that, the total expense of the company has also increased considerably to a percentage of approx 47 per cent. According to Wang (2014), this demonstrates that the company has made more investments in its operations with the purpose of generating more revenue. However, the percentage increase in revenue is less than the percentage increase in the operating costs incurred by the company. In addition to this, the company has not mentioned any non operating income or loss incurred by the company in its income statement. In addition to the above, the earnings per share of the company have decreased by around 281 per cent. As opinioned by Kraft (2014), the basic fall in the earnings of the common share may be assumed to be the inefficiency of the company in managing its operating and other expenses that have resulted in a negative balance of the net income due to which the revenue generated by the company has gone down. In the view of Christensen and Nikolaev (2013), due to negative net balance of the company, the earnings on each share have also had a negative impact on account of which the shareholders of the company suffered a loss. Thus, it may be concluded that the operations of the company in accordance to the income statement have been inefficient for the company as it led to a reduction in the generation of revenue and earnings per share of AGL ENERGY Ltd. Statement of Cash Flow CASH FLOW of AGL ENERGY LTD (AGLNF) Fiscal year ends in June 2012 2013 2014 2015 2016 Cash Flows From Operating Activities Other non-cash items 466 602 699 1044 1186 Net cash provided by operating activities 466 602 699 1044 1186 Cash Flows From Investing Activities Investments in property, plant, and equipment -722 -530 -670 -772 -539 Property, plant, and equipment reductions 138 1 2 6 8 Acquisitions, net 218 -33 -112 -1380 640 Purchases of investments -89 -72 -126 -83 -30 Sales/Maturities of investments 0 165 56 Purchases of intangibles -43 -44 -25 Sales of intangibles 5 Other investing activities -38 -38 162 -2 2 Net cash used for investing activities -531 -550 -769 -2175 81 Cash Flows From Financing Activities Debt issued 1730 285 2075 2647 550 Debt repayment -1299 -1544 -1547 -2580 -1371 Common stock issued 884 2 1218 1 Repurchases of treasury stock -4 -6 -6 -7 -8 Cash dividends paid -186 -214 -269 -344 -446 Other financing activities -105 -10 Net cash provided by (used for) financing activities 1125 -1584 255 924 -1274 Net change in cash 1060 -1532 185 -207 -7 Cash at beginning of period 753 1813 281 466 259 Cash at end of period 1813 281 466 259 252 Free Cash Flow Operating cash flow 466 602 699 1044 1186 Capital expenditure -803 -611 -723 -806 -545 Free cash flow -337 -9 -24 238 641 Supplemental schedule of cash flow data Cash paid for income taxes -181 -71 -191 -147 -166 Cash paid for interest -122 -257 -217 -216 -186 In the following cash flow of AGL ENERGY Ltd, the company displays an increase in expense of operating activities of the company to be the highest in 2015. On the other hand, the net investing activities of the company are showing the highest negative balance in 2015 compared to the given five years. In addition to that the net financing activities of the company have also been the highest in 2015 than the rest of the stated years. On comparing the cash flow statement of the last two years that is 2015 and 2016, it can be analyzed that the cash flow from in 2015 is comparatively lower than the cash flow of 2016. According to Blankespoor et al. (2013), the reason for this may be the increase in the flow of operating and financing activities of AGL ENERGY Ltd. In addition to this, the difference in cash in the beginning and end of the financial year id more in 2015 than in 2016. In the words of Kothari and Lester (2012), this shows that the company used more of its liquid assets in 2015 to pay for its liabilities and expenses. Conclusion The analysis of the financial structure of AGL ENERGY Ltd has helped the researcher in developing a better understanding of the internal workings of the company and the impact of the same on the overall financial structure of the company. In addition to this, the research done may also help the managers and shareholders of the company to analyze the areas that require their attention and a major development. This in turn may benefit the shareholders, investors and the company as whole. Besides, on analyzing the researcher has also developed the skill of providing suitable recommendations for the problem areas. Recommendation In context of the analysis of the balance sheet, income statement and the cash flow statement of AGL ENERGY LTD the researcher has made a number of recommendations for the benefit of the company. Here, the company may lay its focus on the integrated marketing and communication programe that involves the use of different media platforms for the purpose of advertisement. An increased amount of advertisement may influence the sales positively and help the company to generate more revenue. Further, the company can also implement the cost optimization strategy that helps in reducing and controlling the operational and manufacturing costs of the business proceedings. Besides, it may also help the company in getting rid of the non value adding costs that increase the expenditure of the company and do not generate any benefit to the company. In addition to this, AGL ENERGY Ltd may also initiate the early repayment of debt that may save the money of the company in later years to spend on other productive departments of the company that may help it to increase the revenue and lure the investors. Another possible way of increasing the income and regulating the expenses of the company can be targeting the sales and cost of the company for a given period in the duration of the financial year per say a month. The company may then analyze each month the costs incurred and the sales generated and the revenue earned thereon. This in turn may facilitate the company in a better understanding of the areas that are in need of development and the areas that are functioning with full potentiality. All these strategies combined may help AGL ENERGY Ltd to overcome the major drawbacks of the company and achieve the organizational goals. Reference List: Altman, E.I., Giannozzi, A., Roggi, O. and Sabato, G., 2013. Building Sme rating: is it necessary for lenders to monitor financial statements of the borrowers?.BANCARIA,10, pp.54-71. Armstrong, C., Guay, W.R., Mehran, H. and Weber, J., 2016. 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