In today's world of competitive business, you need to spend money to make money. It is unrealistic to hope to make a substantial profit sitting by idly making conservative decisions. With its cash, Lululemon Athletica can either purchase more inventory which will in turn bring in more revenue or play it safe and hold on to the money in case of emergency. If they choose to do the later, the company would lose out on potential gains that would have arisen should they have invested their money in more stock. Being the popular company that Lululemon Athletica is today, they should not have any problem selling off their stock. I am all for spending more money on inventory.
Tuesday, May 3, 2011
Monday, May 2, 2011
American Apparel Case Study - 2011
Reviewing the available financial statements from 2007-present, as well as past articles, when did the company start declining? And where?
Even seemingly thriving and “profitable” companies can occasionally fail. Many companies are forced to declare bankruptcy when they do not have the cash to meet their everyday expenses. Recall that net or gross income is calculated by subtracting the total expenses from the total revenue. In the case of American Apparel, their revenue remained relatively stable in the years of 2008, 2009, and 2010. However, beginning in 2008; expenses incurred by American Apparel began to outpace the rate of growth experienced by its revenue. As a result, the company suffered greatly reduced income and eventually a substantial net loss of $86.32 million in 2010. Liquidity of assets is a crucial point to many businesses. It does not matter how profitable your company is; the bottom line is that if you don’t have enough cash to quickly cover the needs of your operations, creditors will be waiting at your door to tear you to bits.
Take a look at the recent financial statements (cash flow statement in particular) – with 14 million injected into the company right away, how should the company allocate this money? Into which activities? And why?
As of 2010, American Apparel is receiving most of its cash flow from financing activities. Operating activities, the bread and butter of clothing companies such as American Apparel, suffered a net negative outflow of in excess of $32.0 million. In recent years, American Apparel has earned large amounts of money through the selling of their merchandise. The negative outflow of cash regarding operating activities seems to suggest that consumers are no longer interested in purchasing products of American Apparel. There is a lot that a company can do with a cash injection of $14.0 million. In my opinion, American Apparel should use this money to develop newer products that customers feel inclined to buy.
website from which I got financial statements of American Apparel
Saturday, April 9, 2011
Petrobank Energy and Resources Ltd.
Summary:
Petrobank Energy and Resources Ltd. (TSX:PBG) has reported in the March of 2011 lower than expected earnings for the fourth quarter. Net income experienced a 94% drop from the same quarter the previous year. Income figures from continuing operations fell from $20.7 million to $1.3 million. Profits of 22 cents per share last year have plummeted to a miniscule cent per. Recall that net income is the result of subtracting the expenses from the revenue. Petrobank’s quarterly revenue fell from $276.2 million to $258.4 million. During this quarter; Petrobank, owner of 59% of PetroBakken Energy Ltd. (TSX:PBN), which focuses on oil pools in Saskatchewan and Alberta, stated that they increased their spending on their Western oil projects. Capital expenditures were up to $300.0 million from $192.8 million. These investments would be displayed under the investment portion of a cash flow statement. The major drop in net income this quarter can be credited to the major increase in investing activities.
Connections:
My article relates to Chapter 5 in the text as it connects to the concept of cash flow. Cash flow problems arise when a company does not have enough cash to meet its daily needs. There are many reasons as to why cash flow problems occur with the main ones being a lack of start-up capitalization, a long cash conversion cycle, or it can be the result of a large portion of the company’s cash being tied up in inventory and assets. Depending on their cause, there are various ways in which cash flow problems can be resolved. Petrobank may be at a increased risk to run into cash flow problems in the near future seeing as their revenue has dropped (reduced cash inflow) while at the same time expenses have risen (increased cash outflow).
Reflection:
The sharp drop in quarterly net income is more than likely a short-term phenomenon. As I have said before, net income is calculated by subtracting expenses from revenue. The reason behind this drop is the fact that Petrobank experienced a slight revenue drop of approximately 7% but more importantly expenditures have gone up nearly 60%. The increase in expenses is the result of increased investment in the company’s western Canadian oil projects. The income statement and net income figure can be quite deceptive as they merely provide a “snapshot” of the performance of a company. Over the years, many companies with positive net income figures have gone bankrupt because they did not have enough money to go around. The cash flow statement helps paint a more complete picture of the “health” of a company. The reason why net income is going down for Petrobank is because they are increasing their investment in the company’s oil projects in Alberta and Saskatchewan. These projects will bring in increased revenue in the future. Stockholders need not worry; you have to spend money to make money.
Thursday, January 20, 2011
The Sky is the Limit
http://www.marketwatch.com/story/apple-shares-rise-on-strong-results-2011-01-19?reflink=MW_news_stmp
Summary:
With the recent release of the iPhone4 and the iPad, demand for apple products have remained as high as ever. As a result, Apple share prices have recently skyrocketed. On January 18, 2011; Apple has reported an astonishing 78% surge in income for their December quarter. Apple probably benefited from the trend of increased sales during the hectic holiday season as many people rushed to purchase Apple products for their loved ones. Nevertheless, a 78% growth in net income for any company is significant. Apple does not show signs of slowing down and remains a great investment opportunity for the future.
Connections:
My article relates to Chapter 3 in the text as it is connected to the concepts of net income and by extension retained earnings. Net income is calculated from subtracting the total expenses from the total revenues. The net income generated by the company is than transferred to the retained earnings account and is divided and distributed to investors in the form of dividends. Apple is able to generate large amounts of income as they dominate the MP3, cell phone, and tablet computer markets. It cost just about the same to produce an apple product compared to how much it cost to produce a similar product of a different brand. However, people are willing to pay perhaps four times as much to get an Apple product. Why? It is seen as “cool” to be in the possession of Apple merchandise today.
Reflection:
I believe it is the ideal time for investors to invest in Apple. Normally the saying is buy low, sell high. Apple shares are currently trading for approximately $332 a piece. For the most part, it is frowned upon to buy into a company when the stock prices are already so high but I will make an exception for Apple. Big as Apple already is, the company just does not show any sign of slowing down. Apple is a big company with even bigger potential. With each new product launch, hundreds of people line up all night in an attempt to purchase the new product. The popularity of Apple products will not die down anytime soon. iPods, iPhones, and even the controversial iPad dominate their respective markets. The growth of this company will continue well into the future. The numbers speak for themselves. Ladies and gentlemen, it is time to invest in Apple!
Thursday, November 4, 2010
United States Stimulus Package
(more in depth)
(a quick summary)
Summary:
Following their economic recession beginning late in 2007, the United States economy has been extremely frail. The entire economy of the U.S. faltered when the demand for housing drastically plummeted during the early stages of 2008. The recession saw the rapid nose-dive of federal interest rates. The rate offered by major banks plunged from a high of 4.25% in December 2007 to a measly 0.25% in December 2008. In an attempt to jump start the highly stagnant economy, the U.S. Federal Reserve has recently ordered the purchase of treasury bonds to the astonishing sound of $600Billion USD. The main purpose behind this massive transfer of money is to lower the cost for consumers and to encourage the increased purchase of goods and services. The bonds will be purchased in multiple installments over the next 8 months.
Connections:
My article is connected to Chapter 2 in the text as it relates to the financial statements produced by a entity and by extension the flow of cash within a business or corporation and the position of a business entity financially. By purchasing such a large amount of U.S. treasury bonds, the federal reserve is essentially handing the money over to the treasury for their own use. With the newly acquired funds, the U.S. treasury would then proceed on to inject funds into the economy as they see fit. It is hoped that by injecting financial funds into the economy, the effects of the economic recession would be lessened and new job opportunities created for the public. As a result, the financial position of the U.S. treasury will look much sounder than it had been previously.
Reflection:
The condition of the United States economy is still quite frail following their economic recession which began late in 2007. Pumping $600Billion USD into the economy may indeed help their situation but that is far from a given. Stimulus packages are not a recent thing. In fact, they have been around for decades. This theory of John Maynard Keynes’ (1883-1946) basically mentioned that if the economy isn’t doing too well, the government should increase the amount of money in circulation. Supporters of Keynesian economics believe that the extra money would stimulate the economy by providing more job opportunities for the public. Ideally, the unemployment rate would decrease and the newly employed individuals would spend their money on consumer goods which would in turn create more jobs. Oftentimes in life, things do not always go so smoothly. There could be a lot of serious complications for putting such a big sum of money into circulation. The German economy faltered and suffered from spiraling inflation following the conclusion of World War II as they printed large sums of money in order to meet reparation demands. The increased amount of money in circulation would further devalue the U.S. currency and the inflation level could potentially be pushed higher.
Monday, October 18, 2010
Multi-Million Dollar Mortgage Fraud: Arrest Made
Summary:
Mortgage fraud has become a wide-spread problem in today’s society. Some would even label it as the ideal “white-collar” crime to commit. For a period of time, the crime has been exceedingly popular due to its lucrative nature and the fact that the fraud is not easily detectable. Back during the North-American real estate boom a few years back, banks were eager to hand out mortgages and were very lenient with their terms. Someone with no steady income could easily secure a mortgage for a house. Many ordinary folk were swindled into taking out a mortgage to purchase a house which they were told would be sold later for profit. In the end; the perpetrator walks away with the dough, the buyer is in debt, and the bank is stuck with an overpriced house.
Connections:
The connection my article has with the text is the Generally Accepted Accounting Principles (GAAPs), the various financial statements involved in the world of business and by extension the financial position of an individual or business. Nowadays, in an economic downturn, financial institutions are careful in their procedure of securing a loan. They wish to make sure that they have a way to recover their money should they need to do so. To my knowledge, the authorization of poorly secured mortgages is not directly violating any of the accounting guidelines. However, it is still ridiculous that individuals without steady jobs would be able to take out a mortgage to buy a house. The banks went wrong when they neglected to thoroughly look into the financial position of the individual requesting a loan before granting it. With such an obvious loophole, it was only a matter of time till someone choose to abuse it.
Reflection:
In my opinion; all institutions that handle substantial amounts of money, including banks, should be required by law to follow the guidelines set out by the generally accepted accounting principles. In the case of my article, Robert Manuel Moniz of Montréal gained approximately $5.0M C.A.D. from his scheme. If the bank had been more careful with their procedure of authorizing the mortgage requests, this would likely not have happened. The bank loses the money but in the end, it is us ordinary folk that gets hit the hardest with scams like these. Financial institutions will pass off their loss to users to their service in the form of higher interest rates and service charges.
Wednesday, September 22, 2010
U.K.-based energy company reviews expense accounting
Summary:
National Grid PLC (NGG) is a U.K. based company with electrical and natural gas networks operating both in the United States and the United Kingdom. Earlier this week, the NGG has stated that they will be appointing a consultant to conduct an independent review of the company’s policy in accounting for the expenses accrued by their branches operating on U.S. soil. The decision was made following the announcement that U.S. regulators would be commencing an investigation as to how the company recorded its expenses accumulated in the U.S. It is likely a long shot but could NGG suffer the same sort of fate that Enron Corporation suffered back in 2001?
Connections:
The connection to this chapter is the accounting standards known as the generally accepted accounting principles (GAAPs). The matching principle suggests that both revenue and expenses are required to be matched to their appropriate fiscal periods. It is not logical to allow a business to choose when to account for their revenue and expenses. If that were the case, businesses could easily manipulate their financial statements to their liking. For instance, Enron Corporation had previously falsely reported their revenue in the financial statements produced by the company. As a result, this greatly misrepresented the company’s financial situation. I believe that it is a good move on the part of the U.S. government to open an investigation on the NGG. With the their economy already rather unstable, it is best for the nation to put a stop to all forms of corporate scandals no matter how big nor small.
Reflection:
In my opinion, all businesses should be required to strictly follow the guidelines set out by the generally accepted accounting principles. These guidelines are there to basically set out the black and the white in the world of accounting. If businesses are regulated by set standards, many unethical individuals would not hesitate to take advantage of the consumers. The government should instate various penalties for failing to abide with the GAAPs ranging from fines to potential jail time depending on the level of severity. If the National Grid PLC, or any other business for that matter, is not accounting for their expenses properly, in all likelihood, they are not paying the correct amount of taxes. At a glance, accounting for expenses may not seem like such a big deal. However, recall that you are taxed on the amount you have left after you deduct all your expenses. With that in mind, expense figures can be inflated to minimize the amount of taxes owed. The government needs to take a hard stand in enforcing the GAAPs or we may see some more serious corporate scandals in the future.
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