Construction Management Use of Financial Interpretation

Question: Describe about the Construction Management for Use of Financial Interpretation. Answer: Introduction: 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 Garrys 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 Garrys 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 (Achar ya et al., 2014). Based on the several methods used for the financial interpretation, we will be able to decide whether Murrays 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 Garrys Woodworks to avail the finance from the Murrays Bank (Friewald et al., 2014). Cash flow Statement analysis 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 companys 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 Garrys 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). Cash Flow Statement as of 15.03.2016 Particulars 1st Month 2nd Month 3rd Month 4th Month 5th Month 6th Month 7th Month 8th Month 9th Month 10th Month 11th Month 12th Month TOTAL Cash flow from Operating Activities: Sales : Fixed 40900 40900 40900 40900 40900 40900 40900 40900 40900 40900 40900 40900 490800 Variable 6000 10000 16000 20000 24000 32000 36000 44000 48000 52000 56000 60000 404000 Total Sales Revenue 46900 50900 56900 60900 64900 72900 76900 84900 88900 92900 96900 100900 894800 Cost of Material -32680.20 -26882.10 -32153.10 -37424.10 -47966.10 -53237.10 -63779.10 -69050.10 -74321.10 -79592.10 -84863.10 -84863.10 -686811 Packaging Shipping Cost -150 -250 -400 -500 -600 -800 -900 -1100 -1200 -1300 -1400 -1500 -10100 Packaging Cost for Tins -175 -175 -175 -175 -175 -175 -175 -175 -175 -175 -175 -175 -2100 Credit Card Charges -60 -100 -160 -200 -240 -320 -360 -440 -480 -520 -560 -600 -4040 Rent for Industrial Room -420 -420 -420 -420 -420 -420 -420 -420 -420 -420 -420 -420 -5040 Employee's Salary -2500 -2500 -2500 -2500 -2500 -2500 -2500 -2500 -2500 -2500 -2500 -27500 Labor Cost of Packaging -1500 -1500 -1500 -1500 -1500 -1500 -1500 -1500 -1500 -1500 -1500 -16500 Tax Payment -46556.54 -46556.5 Net Cash Inflow from Operating Activities 13414.8 19072.9 19591.9 18180.9 11498.9 13947.9 7265.9 9714.9 8303.9 6892.9 5481.9 -37214.64 96152.16 Cash flow from Investing Activities: Wood cutting accessories -5250 0 0 0 0 0 0 0 0 0 0 0 -5250 Deposit for Industrial Room -1260 0 0 0 0 0 0 0 0 0 0 0 -1260 Chainsaw -3500 0 0 0 0 0 0 0 0 0 0 0 -3500 Market Research -6500 0 0 0 0 0 0 0 0 0 0 0 -6500 Furniture Wood -100000 0 0 0 0 0 0 0 0 0 0 0 -100000 Net Cash Outflow from Investing Activities -116510 0 0 0 0 0 0 0 0 0 0 0 -116510 Cash flow from Financing Activities: Capital Invested by Owner 300000 0 0 0 0 0 0 0 0 0 0 0 300000 Net Cash Outflow from Financing Activities 300000 0 0 0 0 0 0 0 0 0 0 0 300000 Net Cash Increase/Decrease 196905 19073 19592 18181 11499 13948 7266 9715 8304 6893 5482 -37215 279642 Add : Opening Cash Balance 0 196905 215978 235570 253751 265249 279197 286463 296178 304482 311375 316857 0 Closing Cash Balance 196905 215978 235570 253751 265249 279197 286463 296178 304482 311375 316857 279642 279642 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). Balance Sheet of Garrys Woodworks As stated by (Jimnez Ongena, 2012), the balance sheet is the statement, which shows the representation of the companys asset and then liabilities along with the shareholders equity for a specific time period. The aforementioned item helps to shows the various ownerships of the different items of Garrys 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 owners 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). Balance Sheet as of 15.03.2016 Particulars Amount Amount (in $) (in $) Current Assets: Inventory 84863 Deposit made for Industrial Room 1260 Cash 279642 Total Current Assets 365765 Fixed Assets: Wood Cutting accessories 5250 Less : Depreciation 1050 4200 Furniture wood 100000 Less : Depreciation 20000 80000 Market Research 6500 Less : Deferred Revenue Expenditure 2167 4333 Chainsaw 3500 Less : Depreciation 1167 2333 Total Fixed Assets 90867 Total Assets 456632 Current Liabilities : Outstanding Expenses: Employee's Salary 30000 Labor Cost for Packaging 18000 48000 Total Liabilities 48000 Equity: Owner's Capital 300000 Add : Net Income after Tax 108632 408632 Total Equity 408632 Total Equity Liabilities 456632 Profit and loss statement The profit and loss statement provides a financial summarization of the expenses, revenues, costs incurred by Garrys Woodworks, this statement is based on the financial year ending after 31st March 2016. The nature of the information provided in this statement is related to the companys 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. Garrys 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). Profit Loss Statement as of 15.03.2016 Particulars Amount Amount (in $) (in $) Income: Fixed Sales Revenue 490800 Variable Sales Revenue 404000 Total Income 894800 Expenses : Cost of Material 686811 Less : Stock for Next Month 84863 601948 Packaging Shipping Cost 10100 Packaging Cost for Wooden furnitures 2100 Credit Card Charges 4040 Rent for Industrial Room 5040 Employee's Salary 27500 Add : Outstanding Salary 30000 57500 Labor Cost for Packaging 16500 Add : Outstanding Labor Cost 18000 34500 Depreciation of unsold furniture 1050 Deferred Revenue Expenditure: Market Research 2167 Amortization: Website Designing 1167 Marketing Rights 20000 Total Expenses 739612 Net Income before Tax 155188 Less : Tax @ 30% 46557 Net Income after Tax 108632 Discounted cash flow of Garrys Woodworks The discounted cash flow method of valuation is useful for the purpose of estimation of the attractiveness of investment opportunity if Murrays bank approves credit to buy the facility of Garrys 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 Garrys 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 owners 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 p rojected value (Mousavi et al., 2013). Net Income 108632 Owner's Capital 300000 Return on Equity 36.21% Particulars Growth Rate Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Operating Cash Flow 96152 115383 138459 166151 199381 239257 287109 344531 413437 496124 Less : Capital Expenditure 30000 0 0 0 0 0 0 0 0 0 FCF 66152 115383 138459 166151 199381 239257 287109 344531 413437 496124 FCF Growth 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% Average FCF Growth Rate 20.00% 20.00% Terminal Value 0 0 0 0 1475928 0 0 0 0 2 Total FCF 66152 115383 138459 166151 1675309 239257 287109 344531 413437 496126 Cost of Equity 36.21% 300000 Discounted Cash Flow 48566 62190 54788 48268 357305 175652 154748 136331 120106 105812 Present Value of DCF 571117 Analysis of the performance of Garrys Woodworks 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 31st 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 Garrys 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). Garrys Woodworks Ratio analysis Liquidity Ratio Current Ratio 2016 ($) Current Assets 365765.3 Current Liabilities 48000 Current Ratio 7.62 Efficiency Ratio Asset Turnover Ratio 2016 ($) Net Sales Revenue 894800 Average Total Assets 456631.9 Asset Turnover Ratio 1.960 Profitability Ratios Return on Equity 2016 ($) Net Income 108631.9 Shareholders Equity 408631.9 Return on Equity 0.266 The return on equity shows the measure of profitability of the company, this value is computed by the net income and shareholders 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). Due diligence for providing the financial credit The bank should finance the credit of $ 300,000 to Garys 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 Garrys 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 Garrys 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 Murrays Bank should look forward to fina nce 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. 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