Financial Statements Essay Sample
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Financial Statements Essay Sample
Q.1 Which stakeholders require financial reports and why?
Stakeholders of financial reporting can be grouped into
a) Internal stakeholders a. Managers and Owners: Financial reporting provides a comprehensive view of financial position of an organization, financial analysis is performance based on data provided in financial reports. This information is used by managers and owners to perform smooth operation and formulate contractual term between the company and other organization. b. Employees: Employees use financial reports to understand the job security and use this information to discuss matters such as promotions, ranking and salary hikes b) External stakeholders
c. Institutional Investors: Financial reporting is used to gage the strength of the company which helps institutional investors make logical investment decision. d. Financial Institutions: Such as banks and other leading financial institutions decided whether to help the organization with working capital or issue debit security to it. e. Government: uses this report to verify whether the tax paid is accurate, information is not delusive, rights of public are protected. f. Vendors: use this formation to gage the credit worthiness of the organization g. Competitors: Use this information to consider the likelihood of their success or failure in the market.
Q.2 Write a brief note on the ‘investment’ details required in the B/S. A company may invest a portion of its available funds in such assets, which are not directly identified with its primary activities. Such assets are referred to as investments. Schedule VI of the Companies Act, 1956 requires the following information to be disclosed in respect of investments. Showing nature of investments and mode of valuation, for example cost or market value and distinguishing between: a) Investments in Government or Trust Securities.
b) Investments in shares, debentures or bonds (showing separately shares, fully paid-up and partly paid up and also distinguishing the different classes of shares and showing also similar detailed investments in shares, debentures or bonds of subsidiary companies. c) Immovable properties.
d) Investments in the capital of partnership firms.
e) Balance of unutilized monies raised by issue.
In addition, the under mentioned information should be given a) Aggregate amount of company’s quoted investments together with the aggregate market value. b) Aggregate amount of company’s unquoted investments.
c) All unutilized monies out of the issue must be separately disclosed in the balance sheet of the company indicating the form in which such unutilized funds have been invested. Further, the mode of valuation of investments viz. cost or market value should be disclosed. Q.3 From the internet or from other sources find an Annual Report of a listed company and list out in sequence the content titles, the schedules and the annexure. Write a brief note on why you think they are required.
Annual report of a listed financial company contains
a) Introductory pages: Chairman’s statement, business review and outlook, management discussions. Seek to understand the company’s core business and assess if management is staying focused, addressing risks and remaining consistent in what they say and how they act.
This section helps the reader answer questions such as
i. Is the mission statement and strategic business direction clearly defined? ii. How does the company actually make money?
iii. What are the move forward plans?
iv. Any acquisition planned for expanding capacity, introduction of new product and raise margin? v. Are risks being highlighted and addressed? vi. Is management still on tracks with previously mentioned plans and risk mitigation? b) Corporate governance disclosure: Companies must highlight where they do not comply with the guidelines of corporate governance. c) Financial Statement: Review the financial statements to assess various aspects of the business performance and risks from a quantitative perspective i. Did the net profit rise and fall due to sales, gross margin, operating margin, interest, expenses, and taxes? ii. Is there a rise or fall in cash cycle? And why?
iii. Is the operating cash flow sound?
iv. Is ROE going up or down?
v. Review changes to account policy
d) Other issues:
vi. Assess the segmental breakdown of sales, profitability, assets & capital expenditure. vii. Rewarding shareholders with cash dividends
viii. Is the cash really there?
ix. Audit result?
f) How fast are loans growing vs. industry?
x. Is loan growth too aggressive given economic cycle? xi. Is net interest income rising?
xii. Is non-interest income rising? Is this mostly from steady or non-recurring sources? xiii. Are operating expenses under control? Calculate YoY change in ratio of total expense/total income? xiv. Are loan loss provisions rising? Sufficient?
Q.1 In the B/S what are the disclosures to be made in case of Loans and advances Schedule VI, Part I of the Companies Act 1956 requires loans and advances to be classified and disclosed under the following sub-heads: a) Advances and loans to subsidiaries
b) Advances and loans to partnership firms in which the company or any of its subsidiaries is a partner. c) Bills of exchange
d) Advances recoverable in cash or kind or value to be received e.g. Rates, Taxes, Insurance etc. e) Balance with customs, port trust etc. (where payable on demand). Instructions in accordance with which the loans and advances be made out and spelled by way of side note in the Part I of Schedule VI are as under: a) Loans and Advances due from Directors or other officers of the company or any of them either severally or jointly with any other person or debts due by firms or private companies respectively which any director is a partner or a director or a member to separately stated. b) Loans and Advances due from other companies under the same management with in the meaning of sub section (1B) of section 370 to be disclosed with the names of the companies.
c) The maximum amount due by directors or other officers of the company at any time during the year to be shown by way of a note. d) The provisions to be shown under this head should not exceed the amount of debts stated to be considered doubtful or bad and any surplus of such provision if already created should be shown at every closing under Reserves and Surplus (in the liability side) under a separate sub head “Reserve for doubtful or bad debts”. The information is required to be given separately of:
a) Debts considered good and in respect of which the company is fully secured, and b) Debts considered good for which the company holds no security other than the debtor’s personal security and c) Debts considered doubtful and bad.
Q.2 What should be the disclosure requirement in case of ‘depreciation’ in the Profit and Loss Account of a company? Section 205 (2) of the Companies Act, 1956 states that depreciation should be provided either: a) To the extent specified in Section 350, i. e. the amount calculated with reference to the written down value of the assets as shown by the books of the company at the end of the financial year expiring at the commencement of this Act or immediately thereafter and at the end of each subsequent financial year at the rate specified in Schedule XIV;
b) In respect of each item of depreciable asset for such an amount as is arrived at by dividing 95 per cent of the original cost thereof to the company by the specified period in respect of such assets; or c) On any other basis approved by the Central Government which has the effect of writing off by way of depreciation 95% of the original cost to the company of each such depreciable assets on the expiry of the specified period; or d) As regards any other depreciable assets for which no rate of depreciation has been laid down by this Act or any rules made thereunder, or such basis as may be approved by the Central Government by any general order published in the Official Gazette or any special order in any particular case
Q.3 Compare two annual reports of different companies, copy the ‘cash flow
statement of one year side by side for each company and mark the difference in items.
Cash flow Statement – 2011| Domino’s Pizza NZ| Pizza Hut NZ| Cash flows from operating activities| | |
Receipts from customers| 279,329| 325,912|
Payments to suppliers and employees| (238,226)| (274,291)| Interest received| 1,367| 11|
Interest and other costs of finance paid| (734)| (1,069)| Income taxes paid| (5,699)| (9,964)|
Net cash generated by operating activities| 36,037| 40,599| cash flows from investing activities| | |
Payments for investments and business operations, net of cash acquired| (7,447)| | Loans repaid from third parties and franchisees| 4,202| | Payment for property, plant & equipment| (12,760)| (24,313)| Proceeds from sale of businesses and other non-current assets| 8,729| 4,305| Payments for intangible assets| (4,283)| (357)|
Other investments| (12)| |
Net cash used in investing activities| (11,571)| (20,365)| cash flows from financing activities| | |
Proceeds from borrowings| 2,601| |
Repayment of borrowings| (165)| (5,460)|
Dividends paid| (15,187)| (14,650)|
Proceeds from issue of equity securities| 280| 720|
Net cash used in financing activities| (12,471)| (20,265)| net increase/(decrease) in cash and cash equivalents| 11,995| (31)| cash and cash equivalents at the beginning of the yea| 16,241| 826| Effects of exchange rate changes on the balance of cash held in foreign currencies| (151)| | cash and cash equivalents at the end of the year| 28,085| 795|
With reference to above cash flow statement comparison of 2 major fast food chain in New Zealand we can derive that Pizza Hut is able to generate more cash from its core operations than Domino’s due to higher income from customers in spite of paying higher tax. Pizza hut spent more money on
investment activity than Domino’s in 2011. Pizza Hut’s revenue from financial activity is lower than that of Domino’s pizza due to higher repayment and precedes towards equity security.