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Sample on Accounting and Financial Analysis

22117 Downloads1 I Published: 01 Jul ,2017

What Is Accounting And Financial Analysis?

Accounting And Financial Analysis can be considered as one of the most important aspects of contract business. This analysis helps individual and business investors to examine performance and reliability of accounting information. Further, the accounting analysis assists stakeholder in evaluation of different accounting practices and procedure for keeping different types of business records and transactions for assessment of wide range of business outcomes. Furthermore, accounting evaluation also provides a road map in order to check validity and reliability of accounting standards and norms in consideration of particular business organization (Srinivasan and et. al., 2012). On the other hand, financial analysis helps stakeholders along with major investors for assessment of wide range of information associated with financial performance of business. In this process, different kinds of ratios are calculated for comparison of business performance of particular organization with other companies and industrial norms.

This report carries out financial and accounting analysis in context of Senior PLC. In this process, evaluation of accounting practices is done along with comparison with other organizations. In addition, different kinds of ratios are calculated for many other companies along with Senior PLC for comparison of business outcomes. This information plays a significant role for shareholders to take investment decisions.

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Summary Section

In order to take investment decisions along with selection of particular organization, an individual evaluates various aspects of business with the help of different tools used for analysis of business performance. In this process, accounting analysis and financial analysis. Accounting evaluation provides wide range of information to investors about different kinds of accounting tactics and procedures along with standards followed by an organization that influence accuracy and reliability of financial information (Acton, 2013). On the other hand, financial analysis helps individual investors in comparison of financial outcome or trends from past data along with business performance of other companies.

The report carries out accounting analysis of Senior PLC and financial analysis of three other firms along with Senior PLC. It includes Rolls-Royce Holdings PLC, Meggitt PLC and Ultra Electronics Holdings PLC. On the basis of this evaluation, this report recommends that Senior PLC is an an efficient organization for investment. This report examines several factors that represent various benefits for investing in Simple. In this regards, this study carries out accounting analysis of Senior PLC by considering annual statement of company. In this context, report has addressed that Senior PLC is following proper accounting norms associated with IFRS in formation of different kinds of financial statements (Tauringana and Afrifa, 2013). It enhances effectiveness of financial statements along with accuracy of information. Furthermore, the management of Senior PLC also considers different kinds of amendments made in international financial reporting standards so as organization can facilitate efficient information about business outcomes with an appropriate manner to different investors or other stakeholder. This information greatly influences decisions of individual investors in selection of business entity for investment (Bhowmik and Saha, 2013). Furthermore, enterprise also follows going concern concept of accounting principles that reflects business entity has efficient resources in the form of physical, financial etc. that would ensure long term sustainability of business. This thing ensures individual investors that he would gain efficient earnings and capital gain from long term investment in Senior PLC. By assessing accurate reliable information about financial performance of company on the basis of systematic accounting standards, investors can ensure safety and security of investment for long duration (Melicher, 2011).

The report also carries out financial analysis in which many types of ratios are calculated& associated with profitability, liquidity, return on investment etc. The evaluation of different ratios along with comparison of financial outcomes of Senior PLC with Rolls-Royce Holdings PLC, Meggitt PLC and Ultra Electronics Holdings PLC identifies that Senior PLC has managed better financial position in comparison of other firms (Boyns and Edwards, 2013). This information plays significant role in selection of organization for investment. This study calculates different kinds of profitability ratios of different companies and finds that the profitability of Senior PLC is lower in comparison of other companies but there is too much fluctuations identified in profit of others in different accounting period but Senior PLC has managed stability in earnings in each year. It reflects that company is able it manage external market conditions (Drake and Fabozzi, 2012). This information ensures that an individual can earn content return by investing Senior PLC.

It also evaluates liquidity position of different companies and has addressed that the liquidity of position of Senior PLC is better in comparison of other organizations that reflects that business entity can easily meet its all current liabilities with the help of efficient current assets. This information plays vital role in evaluation of risk in investment (Lasher, 2010). This is because organization is not facing shortage liquidity that would increase operational capabilities of company along with profitability of firm. This information can be considered as one of the most important base for investment decision. This is because investor can get ensure about low risk in long term investment along with strength of business (Aas, 2009). So, investors can assess information associated with capital gain.

This study also calculates debt-equity ratio that indicates volume of debt or loans over the total equity of firm. It is one of the most important tools of financial analysis that provides wide range of information about level of risk in certain investment decisions. There is reduction identified in value of debt-equity ratio of Senior PLC in comparison of other firms that determines decrease value of total debt capital (Lampe And Hofmann, 2013). This reduction will decrease expenditure of business entity associated with investments and increases profit of company. This thing also lowers the risk on investment of shareholders. By investing in Senior PLC, shareholder would earn good profit within less risk. It will also provide competitive advantage in the form of long term capital gain.

Accounting analysis

For evaluating efficiency of business outcomes, accounting analysis plays a vital role for examination of financial results. By conducting accounting study, an individual can assess wide range of information about types of accounting policies, standards and adjustments that are done by the management of Senior PLC in formulation of financial statements (Elearn, 2013). Furthermore, this process assesses wide range of information about financial system of organization. Some most important elements associated with accounting analysis of Senior PLC are explained under these statements:

Key accounting policies

It includes all major norms and standards of accounting that are used by the management of Senior PLC in development of financial statements. As per the industrial norms, Senior PLC has adopted different norms and factors of International Financial Reporting Standards (IFRS) for collecting efficient information of business performance and development of financial statements. In this process, business entity has considered different standards of European Union that assists organization to comply with Article 4 of the EU IAS Regulation (Senior PLC Annual Report and Accounts 2014, 2014). Furthermore, financial statements have been prepared on the historical cost basis. The business entity avoids this approach for the revaluation of certain properties and financial instruments. Accounting statements have also been prepared on the going concern basis by considering a reasonable expectation that the Group and Company have adequate resources for managing continuity in operational existence for the foreseeable future (Grieve, 2013). So, the going concern basis of accounting has been used by managers in preparing these financial statements. Furthermore, the management of Senior PLC also considers accounting period from 1st January to 31st December. On the basis of this accounting principle, company keeps systematic records of all business transactions that have been done within this period in accounting statements.

Areas of the firm’s accounting flexibility

In order to ensure firm's accounting flexibility, the finance department of Senior PLC has adopted various changes and amendments of IFRS in the process of development of accounting statements. Some most important amendments are explained below that influence flexibility of financial system of organization.

  • As per the IFRS 10, business entity should be considered consolidated financial statements (Kierulff and Petersen, 2009). This alteration in standards is not affecting the group's conclusion on control. It does not create any materialistic impact on company's financial statements.
  • The IFRS 11 is introduced as an amended approach associated with the joint-agreements and influences business operations for managing joint activities along with joint ventures. It has not influenced outcomes of financial data or statements
  • The IFRS 12 assists management in disclosure requirements for all forms of interest in other entities (Healy and Palepu, 2007). These norms have enhanced the disclosure of financial statements where they are applicable.
  • The IFRS 10, IFRS 11 and IFRS 12 are mainly associated with Consolidated Financial Statements, Joint Arrangements along with Disclosure of Interests in Other Entities. This kind of transition guidance provides some additional benefits to organization by limiting the need of comparative information .
  • Amendments related to IAS 19 permits Senior PLC to recognize contribution as a reduction in the service cost within particular time period in which the related service and facility is rendered (Jagles, 2013). This approach is mainly used when the amount of contribution from an employee or third party is independent during the number of years of service. It is also considered as the Group’s biggest defined benefit plan that is closed to future accruals.
  • IAS 27 includes wide range of procedures related to accounting operations and disclosure requirements for investments in subsidiaries firms, development of joint arrangement as well as that associates during the preparation of the separate financial statements (Senior PLC, 2015). This standard is not carried out any material impact on accounting statements.
  • IAS 28 explains the accounting activities for management of associates and joint ventures. So, Senior PLC can increase effectiveness of financial outcomes.
  • Annual Improvements to IFRSs 2010–2012 Cycle along with Annual Improvements to IFRSs 2011–2013 Cycle incorporate requirement but non urgency for amendments in accounting practices as per the 11 International Financial Reporting Standards. The amendments that are most relevant to the Group includes IFRS 2 that is Share-based payments amendments and it is also based on different accounting aspects such as vesting condition, market condition, performance condition and service condition (Senior PLC Annual Report and Accounts 2014, 2014).Currently , this change is not representing any kinds of material impact on these Financial Statements. In addition to that, Senior PLC requires operating segments on the basis of IFRS 9 in order to disclose the judgments made by top managers for application of the aggregation criteria to operating segments. The enhanced disclosure of information is included in different accounting statements.
  • The remaining nine amendments in Annual Improvements to IFRSs 2010–2012 Cycle along with Annual Improvements to IFRSs 2011–2013 Cycle are not currently affecting different these Financial Statements (Healy and Palepu, 2007). The major amendments to Standards and Interpretations are also implementing from the current financial year, but currently do not impact the Senior PLC operations such as IFRS 10, IFRS 12 and IAS 27 (Amendments) Investment Entities, IAS 39 (Amendments) based on Novation of Derivative as well as Continuation of Hedge Accounting and IFRIC 21 Levies.

The quality of the firm’s disclosures

The accounting department of Senior PLC has developed wide range of financial statements on the basis of rules and amendments of IFRS. All these standards influence quality of financial outcomes of company. The financial results of Senior PLC are reliable, accurate, authenticated by auditors (Tauringana and Afrifa, 2013). These accounting outcomes meet all requirement of financial information of different stakeholders. It includes shareholders, creditors, banks, consumers etc. On the basis of proper financial information, an individual or group investors can take different kind of decisions on the basis of profitability and earnings of organization.With reference to reliable financial outcomes, creditors develops wide range of new strategies associated with determination of payment period (Melicher, 2011). So, accounting results of Senior PLC meet needs of information of different stakeholder with an appropriate manner.

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Any potential problem areas

The management of Senior PLC has addressed some issues in the process of accounting. Some most important problems areas associated with accounting analysis are explained under this statement:

Application of amendments related to IFRS: The finance department of Senior PLC has identified some issues associated with application of new amendments of IFRS policies and procedures within accounting system of organization (Acton, 2013). This is because business entity should have to restructure different accounting process of data collection along with the evaluation of information.
Mistakes in compiling of information related to different financial transactions: For development of wide range of financial statements associated with various business transactions of Senior PLC, management also faces issues in compiling accounting data assessed from various sources within appropriate manner (Drake and Fabozzi, 2012). Mistakes in compiling process create direct impact on results of different financial statements. It also affects the validity and reliability of information.

Adjustments made by Senior PLC to correct accounting distortions

Adjustments of Retirement benefit costs: The payments to predefined contribution retirement plans are considered as an expenditure as they fall due. In order to mange defined benefit retirement plans, the cost of providing benefits is evaluated by using the Projected Unit Method that contains full actuarial valuations that would be carried out on a triennial basis. It also updated at each balance sheet date. Actuarial earnings along with losses are assessed in accounting period which they occur (Senior PLC Annual Report and Accounts 2014, 2014). These elements are recognized outside the Income Statement and they are presented in the comprehensive income statement of Senior PLC . Past service cost is identified immediately to the extent that the different benefits are already vested. Otherwise, it is amortized by considering the straight-line basis over the period. So, the The retirement benefit duty acknowledged in the Balance Sheet is represented as the present value of the defined benefit obligation and it is adjusted for unrecognized past service costs (Srinivasan and et. al., 2012).

Segment information : The Senior PLC reports different kind of accounting information on the basis of two market segment such as Aerospace and Flexonics. For management goals, the Aerospace Division is categorized into two sub-divisions that include Aerostructures and Fluid Systems that enhances management oversight. But, these segments are considered as as one reporting segments because they have service similar markets and customers on the basis of IFRS 8 (Boyns and Edwards, 2013). On the other hand, The Flexonics Division is considered as a single section. The accounting policies of the two different segments are similar to overall Senior PLC's accounting policies. In addition to that, Adjusted operating profit is considered as the key measure reported to the Group’s Executive Committee for the goal of resource allocation along with evaluation of performance of different segments (Kierulff and Petersen, 2009). Investment income, finance costs and tax are not allocated to segments because these kinds of elements are driven by the central tax and treasury function.

Leasing: The management of Senior PLC has considered different leases as finance leases. In this, the transfer of lease also indicates of transfer of risk and ownership to particular lessee. In accounting statements of Senior PLC, assets that are held by organization under finance leases considered as fair value (Aas, 2009). If the fair value is lower in comparison of present value then the minimum lease payments is determined as inception of lease. The corresponding liability associated to the lessor is considered in balance sheet as finance lease obligation. Furthermore, lease payment is apportioned between finance expenditures and decrease in the obligation of lease for achieving the constant rate of interest on the basis of remaining balance of liability (Jagles, 2013). Finance charges are directly influenced the Income Statement.

Interpretation

Gross profit ratio: This ratio provides information about percentage of gross profit on the total sales of organization. Gross profit is assessed by deducting cost of goods sold from total sales. On the basis of above assessment, it can be stated that there is negative trends identified in the growth of gross profit such as Senior PLC, Rolls-Royce Holdings PLC and Meggitt PLC but the Ultra Electronics Holdings PLC has recorded positive growth in the gross profit of company from the period of 2012 to 2014. The gross profit ratio of Senior PLC, Rolls-Royce Holdings PLC and Meggitt PLC but the Ultra Electronics Holdings PLC is respectively 24.6%,23.30%, 39.80% and 30.7% for the period of 2014 (Rolls-Royce Holdings plc Annual Report 2014, 2014). This information determines that Meggitt PLC has recorded highest gross profit in comparison of three other organizations.

Operating profit ratio: This ratio determines percentage of operating profit on total sales of company. This information plays significant role in investment decisions of investors. On the basis of above ratio of different firms, it can be interpreted that all companies are facing negative growth in operating profit. The operating profit of all companies is going down between the period of 2012 to 2014 (Ultra Electronics Holdings plc Annual Report and Accounts 2014, 2014). The comparison of operating profit ratios of Senior PLC, Rolls-Royce Holdings PLC and Meggitt PLC but the Ultra Electronics Holdings PLC determines that Meggitt PLC is earning maximum net profit in comparison of other organizations. After that, Senior PLC has recorded some stability in operating profit which is higher than other companies. In this regards, the operating profit of Ultra Electronics Holdings PLC is greatly reduced in the period of 2014.

Net profit: This ratio percentage of earnings of an organization after deducting all expenditures and taxation (MEGGITT PLC REPORT AND ACCOUNTS 2014, 2014). The ratios associated with net profit of different companies indicate reduction in net profit of all companies. The comparison of net profit ratio identifies that Simple PLC has recorded very less fluctuation in net profit ratio between period of 2012 to 2014. On the other hand, there is huge reduction identified in net profit of Rolls-Royce Holdings PLC. Furthermore, Ultra Electronics Holdings PLC has recorded very less profit comparison of other firm between the period of 2012 to 2014 (Senior PLC, 2015). So, the above evaluation determines that the management of Simple PLC has managed proper control over the net profit in the period of market down term. It reflects strong business position of firm.

Current ratio: This ratio reflects ability of an organization to replay all its current liabilities. There are several up and downs identified in current ratios of different companies in different time period. But, Simple PLC has kept higher current ration in comparison of other companies (Tauringana and Afrifa, 2013). This information indicates strong liquidity position of company. In this regards, the current ratio of Ultra Electronics Holdings PLC is very low as compared to other enterprises.

Quick ratio: This ratio indicates liquidity position of companies related to cash in hand etc. This ratio is based on quick ratio which is based on total quick assets of firm. There is similar trends identified in quick ratios of all four organization. But, the liquidity position of Rolls-Royce Holdings PLC is better than other three companies (Bhowmik and Saha, 2013). This is because the quick ration of Rolls-Royce Holdings PLC is near to one that reflects good position of firm to meet current liabilities. But, other companies are facing issues to meet current requirement of cash in all years.

Total assets turnover ratio: This ratio indicates volume of total sales on the total assets of companies. On the basis this ratio, Simple PLC has managed highest sales over the total assets of company. After that, Ultra Electronics Holdings PLC has generated good sales volume in comparison of Rolls-Royce Holdings PLC and Meggitt PLC. The total assets turnover ratio of Senior PLC, Rolls-Royce Holdings PLC and Meggitt PLC but the Ultra Electronics Holdings PLC is respectively 1.17, 0.61, .0.40 and 0.87 times of the period of 2014 (Rolls-Royce Holdings plc Annual Report 2014, 2014). It shows organizational ability to generate sales on the total assets.

Debt-equity ratio: This ratio provides information about volume to total debt in the context of total equity. In this regards, Senior PLC, Rolls-Royce Holdings PLC and Meggitt PLC have addressed fluctuation debt-equity ratio but Ultra Electronics Holdings PLC has recorded negative growth this ratio. This ratio indicates growth in volume of debt in context of total equity from the period of 2012 to 2014 (MEGGITT PLC REPORT AND ACCOUNTS 2014, 2014). Senior PLC, Rolls-Royce Holdings PLC and Meggitt PLC have controlled the volume of total debt over the total equity. On the other hand, the volume debt of Ultra Electronics Holdings PLC is greatly increased. Furthermore, Simple PLC has reduced its debt liabilities between the period of 2012 to 2014.

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Earning per share: This ratio indicates earning per share by deducting number of shares from net income of firm. On the basis of above EPS ratio, it can be said that earning per share of each company is going down from 2012 to 2014. In the period of 2012 to 2013, the Rolls-Royce Holdings PLC has recorded maximum earning per share in comparison of other firms (Senior PLC Annual Report and Accounts 2014, 2014). But, Meggitt PLC has generated highest earning per share in 2014. There is huge reduction identified in earning per of Rolls-Royce Holdings PLC and Meggitt PLC. On the other hand, Simple PLC has maintained stability in earning per share of company.

Conclusion

On the basis of above study, it is concluded that financial analysis and accounting analysis are considered as great tool for evaluation of business performance or financial outcomes in investment decisions. This report has addressed that by using adopting fair and appropriate accounting policies and procedures influence effectiveness along with reliability of financial results. It also increases trust of investors on various business operations. This study has found ratio analysis as most important and very effective accounting tool that influences investor in investment decisions

References

  • Boyns, T. and Edwards, R. J., 2013. A History of Management Accounting. Routledge.
  • Aas, R.L., 2009. Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports. Career Press, Incorporation.
  • Jagles, G. M., 2013. Hospitality Management Accounting. Routledge.
  • Lasher, W., 2010. Practical Financial Management. Cengage. Tauringana, V., and Afrifa, A. G., 2013. The relative importance of working capital management and its components to SMEs' profitability. Journal of Small Business and Enterprise Development.
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