Accounting Business Reporting for Decision Making

CHAPTER 8 Analysis and interpretation of financial statements 365

Britain’s John Lewis, the department store that DJs and Myer dream about, just may be putting a

toe in the Australian market. Chief executive Andy Street has become the post-crash darling of the

UK high street due to his ability to keep pace with changing customer demand. Such is the lead

that John Lewis has over its competitors in ‘omnichannel’ retailing, that Australian department

stores openly hail it as the benchmark in results briefings to media and analysts.

In Australia, both DJs and Myer are trying hard to reinvent themselves. New Myer boss Richard

Umbers is investing $600 million in a new five-year strategy. The whole company is currently valued

at not much more than that and the share price has halved in the last 12 months. And in the past week

came the shock news that DJs chief executive Ian Nairn is departing for personal reasons, although

the speed of that departure under the new South African owners Woolworths has got the rumour mill

turning. In recent times in Australia there has been board scandal, a revolving door of management

and tough new international competition fighting for a share of the shopping wallet.

Source: Fullerton, T 2015, ‘Australian department stores take note as UK retailer John Lewis kicks goals’, ABC News, 9 October.

Required

a. Explain what is meant by ‘P/E times’.

b. Calculate the expected growth in EPS between 2015 and 2016 for each of the retailers.

c. Explain the impact on a retailer’s margins, inventory turnover and liquidity as a result of the

retailer having a large sale offering goods at heavily discounted prices.

d. Explain how tightly managed costs and lean inventory contribute to profit.

e. Explain how you think the one-year return percentage is calculated.

8.19  LO3

The most recent annual statement of profit or loss for Vertigo Enterprises is presented below.

Prepare a vertical analysis of the statement.

Vertigo Enterprises

Statement of profit or loss

Income $ 648 000

Expenses

Cost of sales

Advertising expense

Insurance expense

Rent expense

Utilities expense

Depreciation

Wages and salaries

Interest expense

282 000

63 300

33 600

48 400

3 680

24 600

125 000

9 600

Total expenses 590 180

Profit $ 57 820

8.20  LO3

During 2018, Jo Geter, the sole shareholder in Coconut Plantations Pty Ltd, decided to invest

in automotive manufacturing equipment to reduce direct labour costs. She decided to fund the

investment of $160 000 from retained profits. Financial data (assume average data for balance

sheet items) before and after the investment are shown below.

Before

investment

After

investment

Total assets

Total liabilities

Shareholders’ equity

Interest expense

$ 669 210

279 400

389 810

14 000

$ 854 310

303 950

550 360

18 000

Profit before income tax

Income tax expense (30 per cent)

328 000

98 400

336 500

100 950

Profit $ 229 600 $ 235 550