Jones plc CASH FLOW STATEMENT As at 31 December 2012 000 Net Cash Flow from Operating Activities Net

Income Depreciaiton (Non-Cash Expense) Increase in Trade Payables Increase in Dividients Payable Increase in Inventory Increase in Receivables Increaase in Deposits Decrease in Bank Overdraft Decrease in Tax Payable Cash provided by investing activities Proceeds from sale of machinery Cash outlay to acquire equipment Cash provided by financing activities Cash received from 6% loan note cash paid for 10% loan note Common stock issued Change in cash Beginning balance - Cash 000 2,150 700 200 130 (400) (130) (220) (230) (30) 000

20

2,170

1,500 (7,500)

(6,000)

1,800 (300) 2,560

4,060 230 0

Cash Flow statement is different from the income statement and balance sheet. The distinct feature of the cash flow statement is to record transactions that involve the inflow and outflow of cash starting from net income to issuing shares. This statement do not include income that are yet to be received or expenses which are payables or materials bought on credit. So it would be fair to say that cash is different from net income. Income statement is bases on the accrual concept f accounting i.e. recording expenses whenever they are incurred

and not when they are paid for. However, cash flow record transactions when they are paid or received. Similarly, credit sales are included in income statement but not in balance sheet. (Investopedia, 2010) Cash flow statement is divided into three parts, cash flow from operations of the business which include receipts and payments for current assets and current liabilities, cash flow from investing activities, and cash flow from financing activities. The cash flow of Jones plc shows a positive sign because earlier, it was observed in 2011 that the company did not have money at bank at the end of the year. Although the directors financed the company by offering ordinary share and acquiring loan at 6% and getting away with 10% loan note. This shows that the company is moving towards a better liquidity position. Inventory and receivables are the ones taking the cash away from the operations and might cause some liquidity problems in the future if the attention is not paid. Much of the cash has been utilized by the payment to acquire machinery amounting up to 7,500,000. This could have been avoided by taking the machinery on lease which could have reduced the cost and could have made the cash available for operations and further expansion. Switching loans from 10% to 6% can reduce a lot of cost and can make the income statement healthy. So, overall an increase in cash by 200,000 is a positive sign for the company. Ratio Analysis

Liquidity Analysis 1. Current Ration = Current Assets / Current Liabilities This ratio informs the company or any stakeholder about the liquidity position of the company, the companys ability to pay off its short term liabilities. This involves all the current assets and current liabilities including inventory. Although a perfect current ratio vary from industry to industry but normally, having a current ratio of more than 1 is considered to be sufficient and a healthy sign for the company. The current ratio of Jones plc for 2012 is 1.88 which me ans the companys assets are sufficient enough to fulfill its short term debt obligations. 2. Quick Ration = Current assets Inventory / Current Liabilities Quick ratio is also known as acid test ratio is a also a type of liquidity ratio in which the company tries to analyze the liquidity position with its most liquid assets. The formula is almost the same as current ratio but here, inventory is excluded because is not a highly liquid asset. Prepayments are also excluded from the current asset because they are usually a sort of security deposits. The quick ratio of Jones plc for the year 2012 is 0.63 which means that a lot of cash has been tied up in inventory and deposits as mentioned earlier in the cash flow statement that it is occupying a large part of current assets, almost more than 50 percent. So in order to improve this, the company needs to improve this by collecting the payments early from receivables, use an efficient supply chain management strategy to lower the level of inventory for example, six

sigma, Just-in-Time, Total quality management, Good Manufacturing Practices, and many other techniques. Profitability Ratio: 1. Operating Profit Margin = Operating Income / Sales The operating profit margin is different from net profit margin in a way that it does not incorporate interest expense or income and neither the income tax paid. The operating profit margin for Jones plc is 29.29 percent which is a very good figure. This actually shows the level of efficiency with respect to sales, cost, and further expenses. 2. Net Profit Margin = Net Income/Sales Net profit is a bit different from operating profit margin as it seems to incorporate the element of income tax and interest expense. The net profit margin for Jones plc for the year 2012 is 21.7 percent which is outstanding. If we compare operating and net profit margins, we can see that income tax and interest expense are not taking much of the income and the company spending less for giving out interest expense as it can be seen that they company changed its leverage from 10% to 6%. Financial leverage 1. Total Debt to Asset Ratio = Total Debt/Total Assets This ratio is use for assessing the amount of money being used to finance the asset with the help of debt. this is a very useful ratio because of the result is less than 1, this means that

the company is not standing on the basis of debt, but instead relying more on equity which is a positive sign; still it depends from industry to industry. The total debt to asset ratio for Jones plc is 0.25 which means only 25 percent of the assets are financed through debts while the remaining through equity. 2. Total Debt to Equity Ratio = Total Debt/Total Shareholders equity This ratio actually informs the proportion or contribution made by both of them. It depends on the company which approach they are using, be it aggressive or conservative approach. The debt to equity ratio of the Jones plc for the year 2012 is 0.33. this means that the contribution by debt in the financing of the firm is equal to 33 percent compared with the contribution made by equity. Limitations to Ratio Analysis Like every other thing, ratio analyses also have some limitation or drawbacks attached to them. The first and most important drawback of the ratio analysis is that it only deals with numbers and do no incorporate other qualitative factors that may affect the company adversely. Qualitative factors may include product quality, customer service, employee morale, and many others. Another limitation to ratio analysis is that it is mostly based and compared on the past performance of the company or the industry. This can be dangerous because qualitative factors which may have affected the ratios earlier may not be valid now or in future and so making objectives or decisions based on this can be disastrous. One more limitation to ratio analysis is that it is use to compare the companys present performance with past performance which may not be readily available. And lastly, the ratio may not represent the

true and fair picture of the companys performance with regards to investment purpose. Most of the companies delay their payments to suppliers to make the ratios more attractive and to show higher cash at the end of the year. (Jim Riley, 2012) So these are the limitations of the ratio analysis accompanied by analysis of the financial data of the Jones plc.

References Investopedia.com (2013) What Is A Cash Flow Statement?. [online] Available at: http://www.investopedia.com/articles/04/033104.asp [Accessed: 16 May 2013]. Tutor2u.net (2012) Accounting Ratios - Drawbacks & Limitations. [online] Available at: http://www.tutor2u.net/business/accounts/ratio_limitations.html [Accessed: 16 May 2013].