bossini giordano accounting analysis

Group Assignment

Annual Report Project

Introduction of Bossini
Bossini established its first retail in 1987 with its headquarter located in Hong Kong. It has a total of 1,314 stores in the world, which 523 of them are directly controlled stores in Hong Kong, mainland China, Taiwan and Singapore.1 According to the disclosed annual report of Bossini, their mission is to create appealing, competitive and quality everyday wear for happy living. They hope to be the most preferred everyday wear brand. The working principle and core values of their company are customer oriented, innovate to excel, execute for success, work with passion and live the 7 Habits. The 7 Habits are “Be Proactive”, “Begin with the End in Mind”, “Put First Things First”, “Think Win Win”, “Seek First to Understand, then to be Understood”, “Synergize” and last but not least, “Sharpen the Saw”.

They do not only have 7 Habits but also 7 Practices to motivate their work. The 7 Practices are “Face Reality”, “Keep it Simple”, “Act with the Speed of Light”, “Set Stretch Goals”, “Drive Quality”, “Create and Sustain a Learning Organisation” and finally “Keep the A’s, Nurture the B’s, Discard the C’s”. 2 Bossini also aims to have a long term commitment of bearing corporate social responsibilities. Bossini is accepted by various media as a good brand to corporate social responsibilities since Bossini got various certificate and rewards such as TVB Weekly Outstanding Award 2011 and Caring Company 2004-2012 by Hong Kong Council of Social Service.3 The current economic atmosphere is affected by the Europe Debt Crisis and inevitable uncertainty, all company suffered and Bossini also suffered. Inflation and increase in production cost also challenge Bossini. From 2011-2012, overall revenue of Bossini from the Hong Kong market increased 13% to HK$1,593 million (2011: HK$1,410 million), while operating profit increased 11% to HK$250 million (2011: HK$225 million), resulting in an operating margin of 16% (2011: 16%).4

______________________________
1 From Bossini Annual Report2012-p.4
2 From Bossini Annual Report2012-p.23
3 From Bossini Annual Report2012-p.26
4 From Bossini Annual Report2012-p.16
Introduction of Giordano
Giordano International Limited (Giordano) is a Hong Kong-based retailer of men’s, women’s and children’s quality apparel founded by Jimmy Lai. Starting as a manufacturer of casual clothing in the 1970s, Giordano has grown to a single Hong Kong store in 1981. By focusing on the five corporate business values of quality, knowledge, innovation, service and simplicity, Giordano now is one of the best known and established apparel retailers in the Asia Pacific region. In the present, it employs over 8,000 staff with over 2,700 shops operating in more than 40 territories worldwide. Giordano’s vision is “To be the best and the biggest world brand in apparel retailing”, and its mission is “To make people ‘feel good’ & ‘look great’”.1 Giordano has been publicly listed since 1991 and since then trades on the Hong Kong stock exchange under the ticker symbol 709.HK. It is one of the few Hong Kong-listed companies with a 100% free-float.

For social responsibility, Giordano are “committed to being a successful and responsible corporate citizen”.2 This means that Giordano aims to deliver quality products and service to customers, to sustain the strong financial performance to shareholders, and to commit to creating a positive impact in the communities. To create positive impact in the communities where Giordano conducts business, it supports and volunteers with a myriad of charitable organizations and causes, particularly those associated with education, children, and the underprivileged. It does much of its sourcing in local areas, a move that has helped it avoid damaging currency swings in the past. It was actively involved in distributing clothes to the victims of the Boxing Day Earthquake and the consequent tsunami. It also ensures that the workers producing its products are treated fairly and respectfully.

It hires on the basis of ability and merit, and rewards or promotes on the basis of performance. It provides a safe and healthy environment for its employees and customers to eliminate preventable accidents and health hazards. It conducts business by sustainable and environmentally friendly means most of the time. From the Giordano 2011 Annual Report, it had made $5614 million sales during the year with $3283 million gross profit and $909 million operating sales. Compared with year 2010, Giordano had 18.7% growth in sales, 20.21% growth in gross profit and 0.8% increase in gross profit margin; 30.79% growth in operating profit and 1.5% increase in operating margin. Among the sales in 2011, Mainland China contributed 36%, Hong Kong and Taiwan contributed 31%, Rest of Asia Pacific contributed 24% and Overseas contributed 9%.

Sections in which tabulated financial performance is disclosed Financial and operational highlight
Management discussion and analysis
Corporate governance report
Five year financial summary
Report of directors
Consolidated statement of comprehensive income
Consolidated statement of financial position
Consolidated statement of change in equity
Consolidated statement of Cash Flow
Statement of financial position
Notes to financial statements
Particulars of properties

Contents of Financial Report
Five year financial summary
Consolidated statement of comprehensive income
Consolidated statement of financial position
Consolidated statement of change in equity
Consolidated statement of Cash Flow
Statement of financial position

Management Discussion and Analysis3
Management Discussion and Analysis includes financial performance, operating efficiencies, operating cost analysis, business review including network expansion, marketing and branding, co-branded and licensed products, and operational performance in markets such as Hong Kong, Mainland China, Taiwan, Singapore, and Malaysia. It also includes notes on liquidity and financial resources, assessment on property, plant and equipment, contingent liability, human capital and outlook From an investor’s perspective, I think contingent liability is one of the most important issue that investor should consider before making investment decision. Contingent liability refers to the potential liability to the company which depends on a future event occurring or not occurring. Investor should pay attention to this column as the company is responsible to list out potential liability to the company according to prudence and materialistic concept. As contingent liability usually involve large amount of money, company may have to make a huge amount of provision for that. If the contingent liability becomes a real liability to the company in future, it would have adverse effect on the profitability of the company, which affects the expected dividend distributed to shareholders.

Another important component is operating cost analysis. Operational cost refers to recurring cost that involved in operations. In management discussion and analysis section, cost is divided into different categories such as selling and distribution cost, administrative costs and other operating costs. The analysis of proportion of cost involved in financial year can assist the investor in estimating the management’s ability on cost control. Also, such analysis can help investor to identify the cost structure of the company and analyze the trend of growth in revenue and cost. As operational costs are recurring every year, the comparison of figures between years provides a clue for investor to project the operational effectiveness of company in the future. If the growth in operation cost is greater than growth in revenue in past few years, then investor may predict that the future profitability of the company may be affected, which makes the stock of that company less attractive to the investor. Coverage of the auditors’ report4

The auditors are responsible to express opinoin on the consolidated financial statements based on their own audits in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants. Also, they are responsible to select appropriate procedures including risk assessments to obtain and judge the relevant information for the consolidated financial statements.

Basis of Preparation5
The financial statement is prepared on the basis of Hong Kong Financial Reporting Standards (“HKFRSs”) . It followed the generally accepted accounting principles in Hong Kong and discloses requirements of the Hong Kong Companies Ordinance. Historical cost convention has been used in this statement except that fair value is used in derivative financial instruments and structured deposit. For the values in financial statements, Hong Kong dollar is used as unit and all values are rounded to the nearest thousand except when otherwise indicated. Property, plant and equipment6

For the property, plant and equipment, they are stated in balance sheet at cost less accumulated depreciation and any impairment losses, where the cost is purchase price plus any payments of getting the asset to its working condition and location for its intended use. Straight-line basis is used in calculation of depreciation. The principal annual rates used for this purpose are as follows: Land and buildings 2% to 5% or over the lease terms, whichever is shorter Leasehold improvements 15% to 33% or over the lease terms, whichever is shorter Plant and machinery 9% to 25%

Furniture, fixtures and office equipment 15% to 33% or over the lease terms, whichever is shorter Motor vehicles 15% to 33%

After any property, plant and equipment is in state of operation, any expenditure incurred is stated in income statement in the incurred period. When they are replaced at intervals, they are recognized as individual assets with specific useful lives and are depreciated accordingly. The asset revaluation reserve arising from their revaluation is realized and transferred directly to retained profits on a systematic basis. If the total of this reserve is insufficient to cover an impairment loss, on an individual asset basis, the excess of the deficit is charged to profit or loss. Any subsequent revaluation surplus offset the previously charged deficit. On disposal of a revalued asset, the relevant portion of the asset revaluation reserve realized in respect of previous valuations is transferred to retained profits as a movement in reserves. Any gain or loss on disposal or retirement recognized in profit or loss in the year the asset is derecognized is the difference between the net sales proceeds and the carrying amount of the relevant asset Inventories7

Inventories are measured at the lower of cost and net realizable value and the cost is determined on the first-in, first-out basis.

Revenue Recognition8

Revenue is recognized when it is probable that the economic benefits will flow to the Group and when the revenue can be measured reliably, on the following bases: (a) from the sale of goods, when the significant risks and rewards of ownership have been transferred to the buyer, provided that the firm maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold; (b) interest income, on an accrual basis using the effective interest method by applying the rate that discounts the estimated future cash receipts through the expected life of the financial instrument to the net carrying amount of the financial asset; (c) rental income, on a time proportion basis over the lease terms; and (d) royalty income, on a time proportion basis in accordance with the substance of the relevant agreements.

Accounts for trade receivables9

The account for trade receivables are Debtors and bills receivable.

Accounting Ratio For Bossini (in thousands)10

Ratio/Value
Numerator
Denominator
Answer
A
Current Ratio
854096
360289
2.37
B
Quick Ratio
489099
360289
1.35
C
(Trade) Receivable Turnover
2743707
88626
9.20 times
D
Days’-Sales-In-Receivables
88626
7517
11.79 Days
E
Inventory Turnover
1449703
388581.5
3.73 times
F
Asset Turnover
2743707
1212761.5
2.26 times
G
Return on Assets
11884
1212761.5
0.98 %
H
Return on Common Equity
11884
561574
1.6%
I
Debt Ratio
363915
1089629
33%
J
Times-Interest-Earned
45444
8798
5.17 times

Accounting Ratio For Giordino (In millions)11

Ratio/Value
Numerator
Denominator
Answer
A
Current Ratio
2558
900
2.84
B
Quick Ratio
1953
900
2.17
C
(Trade) Receivable Turnover
5614
616.5
9.11 times
D
Days’-Sales-In-Receivables
616.5
15.38
40.08 Days
E
Inventory Turnover
2331
504.5
4.62 times
F
Asset Turnover
5614
3571
1.57 times
G
Return on Assets
779
3571
22 %
H
Return on Common Equity
779
2657
29%
I
Debt Ratio
1001
3822
26%
J
Times-Interest-Earned
1004
2
502 times
Ratio Analysis

a. Profitability

For profitability, the asset turnover ratio for Bossini is 2.26times and that for Giordino is 1.57 times. The asset turnover ratio shows how efficient the company utilizes its assets to generate sales revenue. As Bossini has a higher asset turnover ratio, it means Bossini is more efficient than Giordino in using its assets make sales revenue. This may be explained by the profit margin of the two companies. Bossini may have a lower profit margin than Giordino, which leads to a higher sales revenue. However, Giordino has a higher return on assets and return on common equity. It means Giordino is more efficient in using its assets to generate net income. In addition, Giordino is more efficient in generating net income from every unit of shareholders’ equity. Bossini may be strong in generating sales revenue, but Bossini has a weaker ability to generate net income from its asstes and use its investment funds to generate net income. Therefore, Giordino is performing better in profitability. b. Liquidity

The current ratio of Giordino (2.84 times) is a bit larger than that of Bossini(2.37 times), but the quick ratio of Giordino(2.17 times) is much greater than that of Bossini(1.35 times). It shows that both firms have enough current assets to pay its current obligations, but the ability to fulfill short term obligation of Giordino is greater than that of Bossini, especially when the inventory cannot be turned into money in short run. The net working capital of Giordino(1658million) is about three times larger than that of Bossini(504millions), which means that there are more capital for Giordino to grow and develop. However, the receivable collection period of Bossini is about half of that of Giordino and Accounts Payable Payment Period of Bossini is slightly longer than that of Giordino, which means that Bossini have enough time to gather money from debtors before payment to creditors. The cash conversion cycles of both companies are similar and the cycle last for about 3 months. The two firms is a going concern and probably will not liquidate in near future. In Details, Giordino is doing better in fulfilling short term obligation using current assets.

c. Solvency

For solvency, the debt ratio for Bossini is 33% and that for Giordino is 26%. The debt ratio shows the proportion of the company’s asset that is financed by debt. As Bossini has a higher debt ratio, it means it has a higher proportion of assets that is financed by debt. Bossini may have a higher risk in daily operation if creditors start to demand repayment of debt. In addition, Bossini has a lower times interest earned ratio. It measures the company’s ability to meet its debt obligations. It shows the company’s ability to meet interest payments as they come due. Bossini has a lower ability to repay interest charge compare to Giordino. Therefore, Giordino is performing better in solvency.

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