Accounting and Financial Management
Question 1.
A. Taking into account Centro management experience, there are three main issues that are to be addressed, namely: company directors do not have to consider signing financial reports as formality and remember that they are the ultimate authority which controls financial statements; overload with information cannot be used as an excuse for absence of control over the accounting process; there must be a person who would check financial reports in the company (internal financial auditor) and consult top management regarding financial issues.
B. Eight former directors of Centro were accused in failure to disclose short-term debt of $3 billion. This is a serious misinterpretation which cannot be justified by the lack of basic accounting standards knowledge. The directors should rely neither on the management nor on the auditors when it comes to checking financial reports. Also, directors’ trial to pass the responsibility to auditors affirmed the lack of leadership qualities. The conclusion is that the directors must have at least basic accounting education in order to implement control functions in the company and be responsible for the documents they sign. Centro top management must pay attention to developing leadership attitude and skills of building a strong team.
C. Corporate governance is often referred to general principles of accountability, corporate internal relationships and power. It also regulates relationships between the corporation, management and stakeholders of the company. Obviously, the principles of accountability and regulation of relations between the corporation and the stakeholders were violated by Centro. However, Centro case can be merely an exception from the rule. Australian governance model is fairly considered the best model in the world. Centro new management should pay particular attention to comprehensive education of company management, diversity and development of leadership qualities. As accounting standards change with time, governance model should be changes in accordance with them as well.
D. The contemporary business environment suggests top management wide knowledge and excellent leadership skills. It is a difficult task for a director to succeed in both directions. However, this is a necessary requirement to diverse knowledge and skills possessed by the top management. It could be a good idea to choose directors from former chief accountants who, in addition, show leadership skills and are able to see the overall picture behind financial statements. On the other hand, there is a risk of deepen into accounting disregard of setting strategic goals. This could lead to loosing leadership positions in the market since excellent accounting skills and the ability to develop long-term strategic goals rarely converge. It could be a good idea to choose board members from managers possessing mentioned above skills to achieve necessary balance.
E. In accordance with the court decision, some of the members of Centro Board of directors were penalized. Thus, Andrew Scott, Centro former CEO, was imposed to a fine of $30,000. It would be nice if directors realize that their remuneration correlates with the accountability associated with their sign-off activity. Poor ethical performance and negligent attitude should be penalized because it makes negative affect on all stakeholders of the company and its positive image. Company shareholders stop trusting the company and the company will be driven to bankruptcy. Shareholders of the company were deprived of their dividends. In addition, shares had significantly declined in price undervaluing shareholders’ equity.
Question 2.
A. Financial Analysis
a) Total assets as of the year 2007 made up $8,165,056,000 while total assets as of the year ending 2011 made up $6,714,995,000. Assets decreased significantly in comparison to the level of 2007.
b) The formula for basic accounting equation is as follows: Assets = Liabilities + Capital (Appendix 1). The analysis of accounting equation showed significant decrease of capital and increase of the amount of liabilities in 2011 (Appendix 2).
c) Non-current liabilities as of end of the year 2010 made up $12,397,766,000 in comparison to non-current liabilities as of end of the year 2007 made up $2,846,434,000. There is an essential increase of non-current liabilities observed at the end of the year of 2010.
d) There are no non-current liabilities and non-current assets for the year 2011 because the company stopped its long-term investing activity. A significant part of Centro’s assets was located in US non-current. US economics challenged the company negatively influencing financial results. Centro’s management made a decision to sell US assets to improve financial performance of the company. Selling US debt aimed at reducing the debt associated with US assets. In addition, current liabilities were wrongly interpreted as non-current liabilities. It may occur when non-current liabilities are accounted from year to year and then are wrongly accounted at the end of the period when they should be converted into current liabilities.
e) Data containing total revenue, net profit attributable to members of Centro Properties Ltd and EBIT for the years 2007 and 2011 is shown in the Appendix 3. Despite total revenue for the year 2011 is much higher than in 2007, net profit attributable to members of Centro Properties Ltd is almost the same for each year. EBIT of 2007 is 2.6 times higher than that of the year 2011.
f) Despite net profit for the year 2011 almost 6 times higher that that of the year 2007, net cash flow for the year 2011 is 3.6 fewer than that of the year 2007 showing reduction of company investment activities (Appendix 4). Decreased cash flow is a bad sign for the company future as it offer less money for development of competitive advantage.
g) Net cash inflow from financing activities for the year 2007 is $2,510,333,000 while net cash outflow of $830,359,000 was reported for the year 2011. Financial activities of the company resulted in significant cash outflow (repayments of interest bearing liabilities).
h) The tendency of divestment began in 2007 after the world crisis. It continued in 2011 resulting in total devaluation of company assets. Divestment means the disposal of investment activities. It happens when the company management realizes that the company carries out the activities which are not compatible with core business activities.
B. Computation of Centro’s Ratios
The following ratios are computed using the following formulae:
a) ROE = Net Income/Shareholder's Equity.
ROE (2007) = $470,233,000/$3,565,123,000 = 0.13.
ROE (2011) = $2,800,142,000/$1,078,811,000 = 2.6.
b) ROA = Net Income/Total Assets.
ROA (2007) = $470,233,000/8,165,056,000 = 0.06.
ROA (2011) = $2,800,142,000/$6,714,995,000 = 0.42.
c) Profit Margin (PM) = Net income/Sales
PM (2007) = $470,233,000/$133,029,000 = 3.54 (354%).
PM (2011) = $2,800,142,000/$1,361,747,000 = 2.06 (206%).
d) Asset Turnover Ratio (ATR) = Revenue/Assets
ATR (2007) = $365,799,000/$8,165,056,000 = 0.04.
ATR (2011) = $1,333,173,000/$6,714,995,000 = 0.19.
e) Current Ratio (CR) = Current Assets/Current Liabilities
CR (2007) = $1,337,991,000/$1,753,499,000 = 0.76.
CR (2011) = $6,714,995,000/$5,636,184,000 = 1.19.
f) Cash Flow Ratio (CFR) = Cash Flow from Operations/Current Liabilities
CFR (2007) = $309,524,000/$1,753,499,000 = 0.18.
CFR (2011) = $1,361,747,000/$5,636,184,000 = 0.24.
g) Debt to Equity Ratio = Total Liabilities/Shareholders Equity
D/E Ratio (2007) = $4,599,933,000/$3,565,123,000 = 1.29 (129%).
D/Equity Ratio (2011) = $5,636,184,000/$1,078,811,000 = 5.22 (522%).
Such value of D/E ratio for the year 2011 means that creditors have five as much money as equity holders. This situation is onerous for the company ability to service the debt.
h) Interest Coverage Ratio = EBIT/Interest Expense
ICR (2007) = $524.4m/$189.1m = 2.77.
ICR (2011) = $199.9m/$185.3m = 1.08.
Value of ICR that is less than 1.5 for the year 2011 affirms questionable ability to meet interest expenses while in 2007 it was acceptable.
i) Debt Coverage Ratio (DCR) = Net Operating Income/Total Debt Service
DCR (2007) = $470,233,000/$4,599,933,000 = 0.10.
DCR (2011) = $2,800,142,000/$5,636,184,000 = 0.49.
Low value of DCR (2011) reports negative cash flow (DCR<1). It means that the amount of net operating income is enough to cover only 49% of annual debt payments.
j) NTAB = (Shareholders' Equity - Intangible Assets - Preference Shares)/Total Shares
NTAB (2007) = ($3,565,123,000 - $555,169,000 - 0)/845,115,968 = 3.56.
NTAB (2011) = ($1,078,811,000 - $199,735,000 - $414,102,000)/972,415,000 = 0.48.
k) EPS = Net Income – Dividend on Preferred Stock/Average Outstanding Shares
EPS (2007) = $470,233,000/827,643,000 = 0.57.
EPS (2011) = $2,800,142,000/$972,415,000 = 2.8.
l) DPS = (Dividends (1 year period) – Special Dividends)/Shares Outstanding for the Period
DPS (2007) = $331,433,000/845,115,968 = 0.39.
DPS (2011) = 0.00
m) PER = Market Value per Share/Earnings per Share (EPS)
PER (2007) = $1.13/0.57 = 1.98.
PER (2011) = $0.04/2.80 = 0.01
Comparison of financial ratios for the years 2007 and 2011 is shown in the Appendix 5.
Appendix 1. Accounting Equation for years 2007 and 2011.
2007
(beginning of the year $’000)
2007
(end of the year $’000)
(beginning of the year $’000)
(end of the year $’000)
Appendix 2. Total Assets, Total Liabilities and Capital for the years 2007 and 2011.
(beginning of the year, $’000)
2007
(end of the year, $’000)
2011
(beginning of the year, $’000)
(end of the year, $’000)
Total Assets
Total Liabilities
Capital
Appendix 3. Total Revenue, Net Profit Attributable to Members of Centro Properties Ltd and EBIT for the years 2007 and 2011.
(end of the year, $’000)
(end of the year, $’000)
Total Revenue
Net Profit Attributable to members of Centro Properties Ltd
EBIT
Appendix 4. Net Profit and Net Cash Flow from Operating Activities for the years 2007 and 2011.
Net Profit
Net Cash Flow from Operating Activities
Appendix 5. Comparison of Centro’s Financial Ratios for the years 2007 and 2011
Profit Margin
Asset Turnover Ratio
Current Ratio
Cash Flow Ratio
Debt to Equity Ratio
Interest Coverage Ratio
Debt Coverage Ratio
Reference List
Australian School of Business, 2011. Directors' notes post Centro: how to avoid barking up the wrong tree. [online] Australian School of Business. Available at:
BDO Australia, 2010. Federal Court Decision on Centro Civil Penalty Case. [online] Available at:
Bradley, G., 2011. The lessons of Centro. Astralian Institute of Company Directors, [online] 01 September. Available at:
Brealey, R.A., Myers, S.C. and Marcus, A.J., 4th ed., 2003. Fundamentals of corporate finance. New York: Mcgraw-Hill (Tx).
Brigham, E.F. and Houston, J.F. 12th ed., 2009. Fundamentals of financial management. New York: South-Western College Pub.
CNPR Limited, 2011. Annual report. [Online] Available at:
CNPR Limited, 2007. Annual report. [Online] Available at:
du Plessis, J.J., Hargovan, A. and Bagaric, M. 2nd ed., 2010. Principles of contemporary corporate governance. Cambridge: Cambridge University Press.
Palepu, K.G., Healy, P.M. and Bernard, V.L. 3d ed., 2003. Business analysis and valuation: using financial statements, text and cases. New York: South-Western College Pub.
Scheiwe, D., Harvey, D. and McLaney, 1991. E. Accounting for Business - Australian Edition (Professional Hospitality Guides). Sydney: Butterworth-Heinemann.
Wood, L., 2011. ASIC wins case against Centro directors. Sydney Morning Herald, [online] 27 June. Available at:
