Avnet Inc (Essay Sample)

AVNET, INC
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AVNET, INC
Avnet Inc is a leading distributor of electronic components in several parts of the world. It is a kind of Business to Business technological firm. It majorly sells electronic components from different manufacturers and at the same time offering design services on engineering. Avnet’s cash flow shows in and out movement of cash in the firm as a form of payments to the firm’s suppliers and revenues collected from the firm’s customers. It cash flow generally arises from three sources, investing, operating and financing activities. Movements of cash through operations includes current assets and liabilities, movement of cash through investing, property, plant and equipments and while the movement for cash for financing involves dividends and long-term financing of the firm (Friedlob, 1995). The cash flow of Avnet is essential to the firm in terms of liquidity checks and the business ability to meet its obligations as they arise. "According to Bradley, a specialist in corporate finance, the statement of cash flow is very essential in portraying the image of the business." He had posted it publication on Avnet website, , after going through the firm records during a recent public training audit training exercise. Preparing a summary of analysis from consolidated statement of cash flows of Avnet for a period of three years, 2007, 2006 and 2005, can be covered by analyzing its cash flows from operating activities, cash inflows and cash outflows for the three years (American Institute of Certified Public Accountants, 1962).
PART 1
Avnet analysis of cash flow from operating activities:
The firm’s cash flows from operations are normally generated from the business’s normal activities which are part of the general routine of the firm. These activities normally entails cash that has been received and collected from the sale of goods and services, payments made to the suppliers, employees of the firm, taxes and interest payments and cash received from earnings on investments in firm’s securities such as interest and dividends. For the Avnet firm case it is important to note the negative cash flow ($19,114 thousands) in the year 2006 from its operations. It is also important to note that the firm had reported a positive net income of ($204,547 thousands) in the same year 2006 it had a negative cash flow from it operating activities. The negative cash flow from the operations could have possible have resulted from the Avnet’s Receivables, Inventories and Accrued expenses and other net accounts of the firm. Compared to the other two years, 2007 and 2005 the firm had reported a higher number of Accrued expenses ($125,843) compared to ($60,321) of 2007 and ($45,380) of 2005. Accrued expenses are current liabilities to the firm of previous unpaid expenses that have summed up to the current financial period. The increases in these firm’s accounts could also have resulted from the expansion policies of Avnet Inc put in place by the management towards meeting the organizational objectives. Firm’s inventory, accounts receivables and accounts payable can be well calculated and explained from the organizations income statement and statement of financial position for a said financial period of the firm.
Avnet Inc presents its operation section of the cash flow in an indirect format that begins with accrued net income and adjustments are made to come up with the cash that is generated from the operations. Although this approach has been regarded as the best method by the international accounting standards, it does not clearly show the amounts cash from the operations and therefore it is necessary to adjust items that affect income and cash differently.
Some of the adjustments carried out to the firm’s net income to show cash that is generated or used by the operations include: adding back of the expenses that reduced the net income but never used cash during the period, deducting cash payments for accrued expenses during the financial period, deducting of revenues into the firm that did not result to cash flow, adding cash from revenues earned and finally removal of items included in the firms income statement that do not directly relate to normal operations of the firm. The net income in the operations section is pulled directly from the income statement of the firm; this reveals that for the three consecutive years from 2005 to 2007 Avnet’s business operation have been able to generate a high levels of income which tend to be on an upward trend. This shows the success of the management as the objective of every firm is maintain and maximize on the profits of the firm.
Avnet analysis of cash flows from investing activities:
Cash flow generated from firms investing activities measures the organizations investment life and capabilities. Inflows in to Avnet’s firm from investing activities include; revenues generated from sale of old firms assets, firms returns on loans, revenue from the sale of equity or debt by the organization. Inflows may also be generated from firms securities traded as cash. Avnet’s long term expenditure is also recorded under the part of investment activities.
The business spends much in the investments with an objective to make or generate high profits in to the organization in future. In the three financial periods of Avnet there has been much expenditure towards the purchase of property, plant and equipment. During the current trading period this expenses might be a burden to the organization in terms of committing to clear the expenses but in the long run operation of the business this investments will be used by the firm to generate high profits and cater for other business expenses then. The firms continues to commit much of it funds towards acquisitions and investments ($3,563thousands) in 2005, ($317,114thousands) in 2006 and ($433,231thousands) in 2007.
This can be termed as a long term decision of the firm in the prospects of ensuring continuity in generating incomes into the firm for these assets are set to perform in long term. Outflows by the firm towards investing activities may include the acquisition of long term assets and the purchase of equity or debt by the organization.
Avnet analysis of cash flows from financing activities:
The financing part of cash flows of Avnet shows relevant information about the organizations sources of capital which may be provided by both the owners and the creditors. There are three major transactions that are involved in the firm’s cash flow from the operating activities. These are namely stock, debt and dividends transactions. One of the ways of raising the company’s finances is through issuance of stock. Issuing more additional shares to the general public means less income will be anticipated to each shareholder. Stock can be categories into two types. There is the common stock and the preferred stock. The common stockholders have last claim to dividends but they have the voting rights to the firm’s decisions.
On the other hand preference shareholders have priority in claiming of dividends and enjoy a fixed rate of dividend payments all through but they do not have any voting rights in the business (Wittebort, 2001). All these are ways for the firm raising capital to finance its operations. Repayment of debt by the firm is a cash outflow. From Avnet’s consolidated statement of cash flows for year 2005 to 2007 show cash out flows in large amounts for repayments of notes and proceeds from bank debt. In the year 2006 the firm had no repayments of any bank loans but in the other two years it suffered surfacing large loan repayments amounts. There was a steady increase in the amount repaid for notes from 2005 to 2007. This is an indicator of expansion in the business since it was able to qualify for large sources of funds through notes. The capability of the firm to repay the debts within a short duration of time and effectively may mean expansion of the business and can earn it large amounts of debts from various financing institutions (Moody's Investors Service, 1970).
Credit worthiness of Avnet Inc can be referred as it likelihood and capabilities to meet its debt obligations. The most efficient way to evaluate the credit worthiness of Avnet Inc based on only on its cash flow statements is coming up with cash flow ratios that tell on the capabilities of the firm to meet its debt obligations without default. First, it is important computing the accounts receivables turnover (Mattarocci, 2013). This is arrived at by dividing number of annual sales by the accounts receivables. This tells how often the business receives payments from the receivables and the ratio needs to be twelve times approximately to indicate that the firm has a reliable source of funds to surface its debts. Based from the values in Avnet cash flow statements of previous repayments of debts its credit worthiness can be concluded. A firm that has cleared its previous debts effectively without instances of default can be termed as credit worth.
Avnet seemed to be credit worth from its previous debt repayment record, especially in 2006 when it had cleared all it bank debt and received a favorable amount from the proceeds. Regardless of a good record of debt repayments, it is also necessary to analyze the pending and the current amounts of loan that Avnet is surfacing and its capabilities. Addition of extra debt could constrain the operations of the business thereby leading to possibilities of default and the firm as a result cannot be credit worth thereafter (Fabozzi, 2012).
The statement of financial position, the balance sheet, of Avnet Inc shows the financial condition and the general net worth of a firm. A...