The main purpose of this report is to analyse David Jones’ business performance and to determine whether it is a worthwhile investment. Two main points will be closely examined: classification of non-recurring items and recurring items, and ratio analysis. First, clarifying the generation of income made by ordinary activities and extraordinary activities will enable us to estimate the firm’s real earning power. Second, analysing historical financial data, using ratios, will enable us to understand the quality of the firm’s performance, such as profitability or efficiency. Analysis is also performed by comparison of David Jones’ ratios with others: I have compared Myer’s and industry average data with David Jones.
*Myer’s financial statement is constructed by the use of a half a year of data, from mid 2006 to early 2007. It seems reasonable to assume that the data can be used as one year data.
This report begins by the adjustment of financial statements, originally presented by David Jones. Due to the change in accounting standard in 2005, David Jones’ financial statements were adjusted to reflect that change. Ratio analysis and cash flow analysis is then presented, and then a brief summary of the analysis is given
2. Adjustment and Rearrangement of the Financial Statement
2.1.1 Need of adjustment
Because of the change in accounting standard used by David Jones in 2005, there are several adjustments to be made in order to find the trends of the performance during the last five years. By doing this, the quality of the adjusted financial statements will be greater when used for analysis. It would make the data more consistent across time and more comparable, so that the analysis will be more accurate.
The adjustment is made based upon the new accounting standard, AIFRS. The data under AGAAP in 2002, 2003 and 2004 are adjusted corresponding to the data under AIFRS in 2005 and 2006. Considering that AIFRS will be used in future, and assuming that the future performance of David Jones will be forecasted based on the data now and in future, it would better to adjust to AIFRS than AGAAP.
According to the “Notes to the Financial Statements” of David Jones, the major difference of the two standards is a treatment of “Off Balance Sheet Item”. Specifically, while “David Jones Store Card” receivables and interest bearing liabilities were off balance sheet items under AGAAP, these items are on the balance sheet under AIFRS. Because of the complexity of doing the adjustments, and the fact that the off balance sheet adjustment is more significant than others, this adjustment will be sufficient for the purpose of my analysis. The adjustment is made based on the notes and my assumption. The adjusted income statement, balance sheet and cash flow statement have been made and attached at the end of this report as appendices.
2.1.2 Adjustment of Balance Sheet
a. Accounts Receivable
As shown above, under AGAAP, receivables associated with “David Jones Store Card” are classified as “Off Balance Sheet Item”. Therefore the amounts of accounts receivables under AIFRS in 2005 and 2006 are significantly higher. If the adjustments are made, $351,161 will be added in the accounts receivable in 2002. Similarly, $392,692 and $395,226 will be added in 2003 and in 2004 respectively.
b. Interest bearing liabilities
Corresponding to the significant increases in accounts receivable, there will be an increase in interest bearing liabilities with the adjustment. $364,397, $381,960 and $323,103 will be added in 2002, 2003 and 2004, respectively.
2.1.3 Adjustment of Income Statement
The change in amounts of receivables and interest bearing liabilities will be reflected in the related items of interest revenue and interest expense in the income statement.
a. Interest Expense
Under AIFRS, the financial expenses associated with the store card liabilities are incurred in 2005 and 2006....
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