Analyzing Cash Flow: Harvey Norman Holdings Ltd And Myer Holdings Ltd

Answer :

HI5020 Corporate Accounting

Executive Summary 

The assignments primary objective is to find the changes made to the owner’s equity and how the changes were effected. Also, the statement of cash flows of both the companies were discussed as to whether the selected companies were generating enough cash flows from their own operations to fund the expansion etc. also the aim of the assignment is to find the taxes paid by the company in the most current year and how the cash tax paid is different form the provision for taxes. Further the assignment would strive to find out if the other comprehensive incomes of both the companies includes items which could have been included in the income statement itself. 

A Brief Introduction 

Harvey Norman 

Harvey Norman Holdings limited is Australia based holding company deals in retailing of furniture’s, beds and bed accessories, computers and communication equipment etc. the Harvey-Norman brand operates under a franchise-based store system for delivering high quality retail service to its customers. The company allots franchisee certificates to independent retailers under the brands such as Harvey-Norman, Domayne and Joyce Mayne etc. company’s franchisees currently operates in more than 168 stores and is currently the segment leader in the audio visual and technology segment. 

Harvey Norman as a group was formalized in the year 1982 by entrepreneurs like by Gerry Harvey & Ian Norman and the company got listed in the ASX in the year 1987. At the end of the period ending 30.6.2016, the approximate market capitalization of the company is estimated to be $5.129 billion. 

MYER LIMITED 

Myer Holdings Limited happens to be the largest departmental store operator which offers full line of products. Myers operates more than 60 stores in Australia. The company generated sales of $3.2 billion in 2016 and has seen a footfall of over 130 million customers in the same year. The company has been employed over 12,500 people across its operations and employs the services of over 1200 suppliers. The type of merchandise being offered at the Myer departmental stores include children’s apparel, cosmetics, beauty products, electrical goods and equipment’s, toys and footwears and personal use accessories like handbags etc. along with general category merchandise. 

OWNER’S EQUITY

(i) List each item of equity and write your understanding of each item. Discuss any changes in each item of equity for your firms over the past year. 

Harvey Norman 

Harvey Norman Holding Limited has more than 500,000 shareholders (2017) holding 1,113,054,911 shares’ approx. which has declined from 1,112,554,911held in 2016. The approximate value of the contributed equity for Myers limited in 2016 was estimated to be $ 385,296,000 and the same is $ 386,309,000 in 2017.  

Owners’ equity of the company for the last 2 fiscal years is presented as follows:

As seen from the above table the shareholders equity for the Harvey Norman Holdings limited ahs increased in 2017 on the back of significant increases in both the reserves and surplus and the company’s retained profits. 

Reserves and surplus of the Harvey Norman Holdings limited includes the following reserves:

1. Asser revaluation reserves 
2. Available for sales assets reserves 
3. Employee benefit reserves 
4. Cash flow hedges reserves etc.

The retained earnings of the Harvey Norman Holdings limited is presented as follows:

A total of $189.13 million of final dividend was paid by the company in 2017 . 

MYER LIMITED 

Myer’s Holding Limited has more than 50,000 shareholders holding 821,267,587 share approx. which has declined from 821,274,615 held in 2016. The approximate value of the contributed equity for Myers limited in 2016 was estimated to be $ 739,338,000 and the same is $ 739,329,000 in 2017.

Owners’ equity of the company for the last 2 fiscal years is presented as follows:

The calculation of contributed Equity capital of the company is presented as follows:

The retained earnings of the Myers Holdings limited is presented as follows:

The Reserves of the Myers Holdings limited is presented as follows:

(ii) Provide a comparative analysis of the debt and equity position of the two firms that you have selected. 

Harvey Norman 

The Harvey Norman Holding Limited’s capital structure seems to be quite well balanced. In 2017, the amount of total lability has declined from $1,743,126 to $1,376,837 signaling a reduction of debts in a significant manner. The debt to equity also remains quite lower and manageable for the company in both the years. This means the financial risk of the company is quite low and getting lower as well in 2017 (Carl S. Warren and James M. Reeve, 2012, 12th edition). 

The Debt ratio of the company has been pegged at 32.86% in 2017 and the same has declined from 39.3% in the previous year. This indicated towards the fact that the company’s debts used for financing total assets is $39.3 for every $100 assets in 2016 and the same declined to $32.3 in 2017. Thus approximately 1/3^rd of the assets owned by the company was financed through external funding and balance from shareholders equity. Thus, the leverage of the company is managed quite well and kept under control all the time (Eugene Brigham, 2009). 

MYER LIMITED 

The Myers capital structure seems to be quite well balanced. In 2017, the amount of total lability has declined from $848,577 to $805,661 signaling a reduction of debts. The debt to equity also remains quite lower and manageable for the company in both the years. This means the financial risk of the company is quite low and has more or less remained unchanged in 2017 (Belverd E. Needles, 2012, 11TH EDITION). 

The Debt ratio of the company has been pegged at 42.88% in 2017 and the same has declined slightly form 43.5% approx. registered in 2016. This indicated towards the fact that the company’s debts used for financing total assets is $43.5 for very $100 assets in 2016 and the same declined to $42.8 in 2017. Thus approximately 2/5^th  of the assets owned by the company was financed through external funding and balance from shareholders equity. Thus, the leverage of the company is managed quite well and kept under control all the time (AnnualReport, 2017). 

CASH FLOWS STATEMENT 

(iii) items listed in the cash flow statement of  selected companies and changes there in. 

Harvey Normans cash flow statement includes the fowling items in general:

While the company’s receipts form customers have increased for the year ending 30.6.2017 the franchisee fees received by the company has declined by approx. 10% for the same period. The company has expected spend more cash on acquisition of PPE. Harvey Normans management has also been consistent in repaying the existing debts and other borrowings in 2017 (AnnualReportHarveyNorman, 2017). 

Myers Holding’s cash flow statement includes the fowling items in general:

While the company’s receipts from customers have decreased for the year ending 30.6.2017 the franchise fees received by the company has declined in 2017.  The company has expected spend more cash ($88,452,000) on acquisition of PPE. In both years under analysis the Myers management has bene able to reduce existing borrowings by $5,000,000 and $295,000,000. 

(iv) Provide a comparative analysis of your companies’ three broad categories of cash flows (operating activities, investing activities, financing activities) and make a comparative evaluation for three years. 

Cash flow from operating activity 

The operating cash flow for Harvey Norman is positive for both the years but the amount has declined by 7% in 2017. That’s a worrying sign for the management as the franchisee fees received by the company has declined by approx. 10% for the same period. For Myers the cash flow from the operating activity has been positive as well but more or less it has remained stagnant on the back of declining receipts from its customers (Belverd E. Needles, 2012, 11TH EDITION). 

Cash flow from Investing activity 

Investing cash flows of both Harvey Norman and Myers is expectedly negative in both the years but more importantly the negative cash flow in investing activity is fully covered by operating cash flows. 

Cash flow from Financing activity 

Cash flow from financing activity  has remained negative for both the companies in both the years as both the forms have paid large sums as dividend in both the years. Repaid existing borrowings to reduce leverage and issued not much of new debts. As a result of which the closing cash for the firms have been lower than previous years. 

(v) Also provide a comparative analysis of the two companies that you have selected explaining the insights that you can get from the comparative analysis. 

1. Both Harvey Norman and Myers have done well, regarding covering the investing requirements from its operating cash flows. That’s a good sign of the forms not taking new loans for investing in new assets. 
2. While Harvey Normal has issued new equity and taken syndicated loan of $70,000,000 in 2017, Myers have done extremely well to not take nay loans as the company ahs not found new investing and profitable opportunities. 
3. The cash reserve depletion for Harvey Norman is far higher than that of Myers limited in both the years. 

OTHER COMPREHENSIVE INCOME STATEMENT (vi) What items have been reported in the other comprehensive income statement for each company? Harvey Norman 

The items which are listed as part of the comprehensive statement of income for the Harvey Norman limited includes the followings:

1. Loss and gain from foreign currency translation for subsidiary business. 
2. Losses and gains from available for sales listed short term investments. 
3. Losses and gains from cash flow financial derivative hedging instruments 
4. Revaluation profits made from revaluation of land and buildings and other PPE
5. Tax effect of the loss and gain from cash flow financial derivative hedging instruments 

Myers Limited 

For Myers Limited the items which are listed as part of the comprehensive statement of income includes the followings:

1. Loss and gain from foreign currency translation for subsidiary business. 
2. Losses and gains from cash flow financial derivative hedging instruments 
3. Tax effect of the loss and gain from cash flow financial derivative hedging instruments 

(vii) Why have these items not been reported in Income Statement/Profit and Loss Statements? 

The items which are reported under the comprehensive incomes are listed separately and not included in the income statement because of the following reasons:

1. These items are yet to be realized. 
2. These items are not of usual business items and hence kept outside the income statement
3. These items of gains and losses are non-owners specific 
4. The income statement only includes those expenses and revenue which are realised and thus to capture the real effect of unrealized assets and gains etc. these items of extraordinary nature are included in the OCI (Beams, 2012).

(viii) Comparative analysis of the items in OCI

In 2016, the OCI has resulted in the gain of $42,906,000 for Harvey Norman and this has increased the total comprehensive income made available to the shareholders. In 2017, the OCI has resulted in the gain of $17,225,000 for Harvey Norman and this has increased the total comprehensive income made available to the shareholders. 

In 2016, the OCI has resulted in the loss of  $14,707,000 for Myers Holdings Limited  and this has increased the total comprehensive income made available to the shareholders. In 2017, the OCI has resulted in the gain of $876,000 for Harvey Norman and this has increased the total comprehensive income made available to the shareholders. 

(ix) Should other comprehensive income be included in evaluating the performance of managers of the company? 

The income statement only includes those expenses and revenue which are realized and thus to capture the real effect of unrealized assets and gains etc. these items of extraordinary nature are included in the OCI. This means the financial performance of the managers of an entity shall be evaluated on the basis of the realized gains and losses only and these items are included in the income statement only. Thus, OCI items must not be sued to evaluate the performance of the managers (BERK & DEMARZO, 2016). 

ACCOUNTING FOR CROPORATE INCOME TAX 

(x) What are the tax expenses shown in the latest financial statements ?

Harvey Normans tax expenses in the form of tax provisions shown in the income statement is $186,840,000 and the same for 2016 was $142,423,000.

Myers Holding Limited’s tax expenses in the form of tax provisions shown in the income statement is $18,274,000 and the same for 2016 was $20,152,000.

(xi) Calculate the effective tax rate for both companies 

The effective tax rate for the Harvey Norman company is found out to be (2017) 29.20%

($186,840,000/$639,806*100)

The effective tax rate for the Myers Limited is  found out to be (2017) 60.48%

($18,274,000/$30,213,000*100)

As seen form the above calculations Myers Holdings limited has a much higher tax rate than that of Harvey Norman holdings limited.

(xii) Deferred tax assets/liabilities that is reported in the balance sheets of Harvey Norman and Myers Limited  

Deferred tax assets arise in the books because of the company has already paid taxes in advance and shown as assets as the same would be used to reduce taxes paid later. 

Deferred tax liabilities are shown in the books because he company has deferred paying a tax on an item like installment sale etc. and the tax paying liability has been deferred and that means more taxes in the later periods. 

In 2017 (30.6.2017) Harvey Norman has reported a deferred tax asset of $0 and a deferred tax liability of $267,219,000. 

In 2017 (30.6.2017) Myers has reported a deferred tax asset of $0 and a deferred tax liability of $84,574,000. Both the companies would have to pay higher tax liabilities in the future. 

(xiii) Was there any increase or decrease in the deferred tax assets or in the deferred tax liability ? 

For Harvey Norman the deferred tax assets was no different in 2017. However, the deferred tax liability for the company has increased in 2017 to reach $267,219,000 from $226,254,000 reported in 2016 (BAKER & CORTRELL, 2011).  

For Myers Holding Limited the deferred tax assets was no different in 2017. However, the deferred tax liability for the company has decreased in 2017 to reach $84,574,000 from $88,444,000 reported in 2016.  

(xiv) Calculate the cash tax amount for both companies using the book tax amount, changes in the deferred tax assets and deferred tax liability 

Cash tax amount paid by the Harvey Norman limited for 2017 is as follows:

Cash tax amount paid by the Myers Holdings  limited for 2017 is as follows:

(xv) Calculate the cash tax rate for both companies. 

Cash tax rates for both the companies are calculated as follows:

The effective cash tax rate for the Harvey Norman company is found out to be (2017) 22.799%

($145,875,000/$639,806,000*100)

The effective cash tax rate for the Myers Limited is  found out to be (2017) 73.29%

($22,144,000/$30,213,000*100)

As seen from the above calculations Myers Holdings limited has a much higher cash tax rate than that of Harvey Norman holdings limited.

(xvi) Why is the cash tax rate different from the book tax rate? 

The cash tax rate for Harvey Norman is lower than effective tax rate as deferred tax liabilities has increased but for the Myers Limited the same has increased because of a decline in the deferred tax liabilities (ATRILL & EDDIE, 2012). 

Conclusion 

Both Harvey Norman and  Myers Limited’s capital structure seems to be quite well balanced. The debt to equity also remains quite lower and manageable for the company in both the years. This means the financial risk of the company is quite low and has more or less remained unchanged in 2017. Approximately 2/5^th  of the assets owned by the company(Myers) and 1/3^rd for the Harvey Norman  was financed through external funding and balance from shareholders equity. Thus, the leverage of the company is managed quite well and kept under control all the time. So financial leverage remained lower for both. However currently the Myers limited is spending too much paying taxes because of past adjustments and capital gain taxes. Harvey Normans tax structure remains quite lower in comparison to Myers overall.