Year 12 IB Extended Essays 2017

in lease liabilities which overall had a major effect on the total equity available from the

company. While it is a common sight that retail companies have a majority of assets tied up in

inventory, “the significant increase in Dick Smith’s inventory amplified the risk of

overstatement, and therefore the risk of balance sheet impairment” (TheConversation.com,

2016).

The expansion strategy seen in FY14 and FY15 (Figure 2) required a large amount of finance

in the sector of inventory investment as well as the typical funds needed for capital. This led to

an abundance of pressure on cash flow, resulting in the accumulation of creditors and

borrowing from banks which was not possible to pay off at their current financial position.

Dick Smith was not able to meet the “scheduled payments without breaching the terms of the

Bank facilities” (Elizabeth Knight, 2016) Thus, banks issued Dick Smith with a “breach notice

by its Banking Syndicate on 31 December 2015 and was given 10 days to remedy that breach”

(McGrathNicol). This unfortunate event is the underlying cause of Dick Smith’s amplified

lease provisions due to the extensive increase in store locations.

Stock and Inventory Management was a crucial factor in the destruction of Dick Smith. The

significant increase in inventory (Figure 3) amplified the risk of overstatement, and therefore

the risk of balance sheet impairment. As mentioned earlier in the McGrathNicol report, the

increase in inventory was predominately due to the increase in the store network across

Australia and New Zealand. Thus, the ability to maintain a schedule to pay loans became

increasingly difficult in the FY14/15 due to the staggering amount of money being financed by

banks such as Macquarie. The increases in inventory correlates directly to the increase in store

network, suggesting that the inability to afford the demands of stock numbers for each store is

relative to the dramatic increase in store locations.

Dick Smith continued to present its expansion program as a positive goal for the company,

even though it can be seen that there is a growing disinterest in the products Dick Smith is

actually selling. This can be seen as in Christmas of 2013 the company sold over $75 million

in stock, in comparison to Christmas of 2014 where they had only had the ability to sell $10

million worth of products. A decrease of $65 million in sales during their peak sales time

throughout the year. From this, the increase in out of date products became imminent, leading

to 50% of stock being inactive in the late 2015 months. In order to reduce the amount of stock

being held, Dick Smith was forced to respond with a stock write down, meaning that there were

7