Construction Management For Use Of Financial Interpretation

Cash flow Statement analysis

Describe about the Construction Management for Use of Financial Interpretation.

The purpose of this report is to understand the application of the financial terms and concepts, which is required in the preparation of a comprehensive report for Garry’s Woodworks. The various types of the implementation of financial interpretation has been prepared on the basis of the comprehensive report prepared by using ratio analysis of the Garry’s Woodworks on the basis of then liquidity ratio, efficiency ratio and profitability ratio. The application for the financial analysis is further based on the understanding of the concepts related to the understanding of the financing, cash flow budgeting and management, which is relevant to the data, selected for the purpose of the evaluation. The concept of returns on investment has been presented based on the discounted cash flow, which not only shows the DCF after a period of three year but also shows the expected terminal value of the project. The aforementioned financial analysis is done on the basis of five year DCF method (Acharya et al., 2014).

Based on the several methods used for the financial interpretation, we will be able to decide whether Murray’s Bank will be able to finance the required amount of $300,000. The later part of the report is based on the recommendation based on the different type of the obtained financial results. The overall analysis thus infers to show the viability of Garry’s Woodworks to avail the finance from the Murray’s Bank (Friewald et al., 2014).

According to (Kaplan & Atkinson, 2015) the cash flow statement shows the changes in the cash flows of Woodworks. The various types of the items under then cash flows states about the total amount of the cash generated of the company as of 15.03.2016. The cash statement has been prepared on a monthly basis, which further shows then classification of the different categories assets shows the various types of the operating activities, the reporting of the company’s income statement on the basis of the accounting of the several components related to accounting to cash. The various types of the investing activities shows the reporting of the purchase and the sale of the long-term investments of the PPE of Garry’s Woodworks. Some of the supplemented information of the company is based on the items which does not have any involvement n the cas and the reports and the amount of the interest paid for the income taxes (Collins et al., 2014).

The closing balance of the cash flow statement analysis clearly states that the company has maintained a good amount of the cash flows with an amount of $ 279642. This will be ideal to get the loan from the bank. The cash flow analysis further states that company incurred the then major amount of the cash inflows only for the first month (Jenkinson et al., 2015). Some of the items from the inflows include Wood-cutting accessories, Deposit for Industrial Room, Chainsaw, Market Research for sourcing the new customers and Furniture Wood required by the carpenter (Louis & Sun, 2014).

As stated by (Jiménez & Ongena, 2012),  the balance sheet is the statement, which shows the representation of the company’s asset and then liabilities along with the shareholder’s equity for a specific time period. The aforementioned item helps to shows the various ownerships of the different items of Garry’s Woodworks (Adrian & Shin, 2014).

The various types of values obtained from the balance sheet shows that the company is having a total current assets of $ 365765 and total liabilities of $ 48000. The balance sheet shows the total equity and liabilities. The owner’s equity is observed to be $ 300000, the total equity, and the liabilities have been observed to be $ 56632. In order to show that the maintenance of the balance sheet figures in accordance with a construction management company the fixed asset portion consists of the components such as the Wood Cutting accessories and the various type of the wood cutting machines available to the company (Oliver, 2014). The fixed assets also shows the possession of the relevant assets such as the Furniture wood, Market Research cost and the possession of the main cutting tool such as the chainsaw which is required for the purpose of wood cutting (Del Negro & Sims, 2015).

The profit and loss statement provides a financial summarization of the expenses, revenues, costs incurred by Garry’s Woodworks, this statement is based on the financial year ending after 31^st March 2016. The nature of the information provided in this statement is related to the company’s profit generation capability by increasing the revenues and reducing costs or both. Profit and loss statement is also referred to as statement of operations, statement of financial results, income statement and income and expense statement (Knight, 2012).

The total income of the company in the year 2016 has been observed to be $ 894800. The various types of expenses considered for the purpose of study includes cost of material, packaging cost, credit card charges, rent for industrial room, employees salary and depreciation of unsold materials. The deferred revenue expenditures are related to those expenditures, which has its benefits derived over a number of accounting periods after the year 2016 (Paterson, 2016). Some of the deferred expenditure of the companies has been observed in the area such as market research, website designing and market rights. The net income before tax of the company has been observed to be $ 155188. The net income after tax is $ 108632 (Christensen et al., 2014).

Although the profit of the company is less than the selling amount charged in the advertisement that is $ 300000. Garry’s Woodworks has sufficient amount of assets to deploy for the purpose of generating more revenues and thereby increasing the amount of net profits after tax (Shekhar, 2013).

The discounted cash flow method of valuation is useful for the purpose of estimation of the attractiveness of investment opportunity if Murray’s bank approves credit to buy the facility of Garry’s Woodworks. This method uses the future cash flow projections and the discount of aid in order to arrive at the value of present value. The net value obtained through DCF analyses a higher trend in the current cost of the investment hence the bank should consider financing the loan to Garry’s Woodworks (Driessen et al., 2012).

The DCF value for the 10-year computation has been observed to be $ 571117. This positive value of DCF represents a higher current cost of the investment. States that after a period of 10 years even after the money value is discounted the project is estimated to generate revenues of more than $ 500000. The return on equity has been considered as a market standard rate of 36.21 %. The terminal value calculated by the projected cash flow for the final year divided by the discount rate that the long-term growth rate. The positive terminal amount for the represented by the discounted cash flow method can act as a powerful tool for the future growth prospects of the company. The owner’s capital has been considered as the asking price of the carpentry business, which is for sale. This amount is rightfully considered as $ 300000 to arrive at the DCF value of the project. The growth rate of the future cash flow is considered constant with the going rate of 20% throughout the 10 years of the projected value (Mousavi et al., 2013).

In order to create further scope of decision-making for financing credit to the company is based on the liquidity ratios, efficiency ratios analysis. The liquidity position of the company has been evaluated based on the availability of the liquid finance such as cash, Deposit made for Industrial Room and the closing stock value of the previous financial year ending has been observed to be as the liquid assets of the company (van den End & Kruidhof, 2013).

The current ratio of 7.62 based on the figures of current assets and current liabilities for the financial year ending 31^st of March 2016. The high amount of current ratio suggests the scope of company to repay the loan amount of $ 300000. Although the company has a significantly high current ratio however it needs to utilize its assets in a better way for further scope of improvement in the business activities. For the scope of further decision-making, the asset turnover ratio of the company shows the efficiency of Garry’s Woodworks to use its assets in generating more sales from the revenues. As the company has scope of utilizing its assets for operational diversity that the turnover ratio has been observed to be higher (Hu et al., 2013).

The return on equity shows the measure of profitability of the company, this value is computed by the net income and shareholder’s equity. The early of the company suggests the amount of profit on every dollar of shareholders equity computed from the previous financial year. The ROE value of 0.266 suggest that company has the ability to incur more profit without needing much capital (Bodie et al., 2014).

The bank should finance the credit of $ 300,000 to Gary’s Woodworks due to the following reasons:

The total amount of cash flows has been observed to be $ 279642. Moreover, the current assets amounting to $ 365765 is enough to finance the credit to

It has been further observed that the total amount of the fixed assets has been observed to be $ 90867 and the total of the overall assets has been observed to be $ 456632. This further roves that the firm can easily repay the loan amount of $ 300,000.

The income statement of the company clearly, states that the company is having a net profit after tax amounting to $ This shows that the company is having enough capability to repay the loan amount.

The financial analysis based on the liquidity ratio, efficiency ratio and profitability ratio. The current ratio of 7.62 shows that the company is competent enough to pay its operational expenses and it further shows the availability of the liquid cash and availability. The efficiency of the company is shown with the asset turnover ratio. This has been observed to be 1.96. The high asset turnover ratio also suggests that the company is having enough potential to finance the costs of the long-term borrowing to the availability of the high amount of the fixed assets. The profitability ratio further shown based on return on equity. The ROE value of 0.266 suggest that company has the ability to incur more profit without needing much capital and hence it can repay the loan with ease.

Conclusion

The various decision-making tools used in the report is based as per the industry standards and the positive side of all the statements highlights about the rational for granting the  finance to Garry’s Woodworks. The selling price of $ 300,000 can be repaid by the yearly cash flows of $ 279642 and total assets amounting to $ 456,632.  Moreover, the analysis tools and techniques used such as the discounted cash flows has taken the growth factor is 20% and the return on equity as 36% based on the practical figures according to the present carpentry business run in Australia. The analysis tools and techniques used in the project suggest that Garry’s Woodworks has enormous potential for future expansion and developing the carpentry services through its sound financial status. The analysis of the case study further shows that the business has sufficient amount of credibility, customer base and hope of growth to repay its long-term borrowings and hence Murray’s Bank should look forward to finance the credit of the asking price.

Reference List

Acharya, V., Drechsler, I., & Schnabl, P. (2014). A pyrrhic victory? Bank bailouts and sovereign credit risk. The Journal of Finance, 69(6), 2689-2739.

Adrian, T., & Shin, H. S. (2014). Financial intermediary balance sheet management. In A Flow-of-Funds Perspective on the Financial Crisis (pp. 177-202). Palgrave Macmillan UK.

Bodie, Z., Kane, A., & Marcus, A. J. (2014). Investments, 10e. McGraw-Hill Education.

Christensen, T. E., Baker, R. E., & Cottrell, D. M. (2014). Advanced Financial Accounting. The McGraw-Hill Companies, Inc.

Collins, D. W., Hribar, P., & Tian, X. S. (2014). Cash flow asymmetry: Causes and implications for conditional conservatism research. Journal of Accounting and Economics, 58(2), 173-200.

Del Negro, M., & Sims, C. A. (2015). When does a central bank׳ s balance sheet require fiscal support?. Journal of Monetary Economics, 73, 1-19.

Driessen, J., Lin, T. C., & Phalippou, L. (2012). A new method to estimate risk and return of nontraded assets from cash flows: the case of private equity funds. Journal of Financial and Quantitative Analysis, 47(03), 511-535.

Friewald, N., Wagner, C., & Zechner, J. (2014). The Crossâ€ÂSection of Credit Risk Premia and Equity Returns. The Journal of Finance, 69(6), 2419-2469.

Hu, F., Xia, W., & Wu, Z. (2013). Measurement of Liquidity Risk of Listed Commercial Banks. In Informatics and Management Science I (pp. 349-355). Springer London.

Jenkinson, T., Landsman, W. R., Rountree, B., & Soonawalla, K. Z. (2015). Private Equity Net Asset Values and Future Cash Flows. Available at SSRN 2636985.

Jiménez, G., & Ongena, S. (2012). Credit supply and monetary policy: Identifying the bank balance-sheet channel with loan applications. The American Economic Review, 102(5), 2301-2326.

Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting. PHI Learning.

Knight, F. H. (2012). Risk, uncertainty and profit. Courier Corporation.

Louis, H., Lys, T. Z., & Sun, A. X. (2014). Conservatism, analyst ability, and forecast error: evidence on financial statement users’ ability to account for conservatism. Available at SSRN 1031981.

Mousavi, S. M., Hajipour, V., Niaki, S. T. A., & Alikar, N. (2013). Optimizing multi-item multi-period inventory control system with discounted cash flow and inflation: two calibrated meta-heuristic algorithms. Applied Mathematical Modelling, 37(4), 2241-2256.

Oliver, K. (2014). Balance Sheet Presentation under IAS 1 and US GAAP.

Paterson, R. (2016). Off balance sheet finance. Springer.

Shekhar, C. (2013). The Profit versus Loss Heuristic and Firm Financing Decisions Matt Pinnuck* Department of Accounting University of Melbourne Parkville, VIC 3010. Accounting, Organizations and Society, 38, 6-7.

van den End, J. W., & Kruidhof, M. (2013). Modelling the liquidity ratio as macroprudential instrument. Journal of Banking Regulation, 14(2), 91-106.

Order an Essay Now & Get These Features For Free:

Turnitin Report

Formatting

Title Page

Citation

Outline

Place an Order