International Financial Reporting and Analysis
For the assignment this week, you are provided with two sets of financial statements and then asked to undertake financial analysis on the data. You are also required to calculate earnings per share, both basic and diluted. Finally, you should interpret the measures that you have calculated and provide comments regarding the financial performance of the organisation.
You will find an income statement, statement of financial position, and notes to the financial statements for a fictional company attached below. Each statement shows figures for the past 3 years. After reviewing the financial statements, complete the questions below.
Income Statement for the year to 31 January
2010 2009 2008
??000 ??000 ??000
Total revenue 405,607 378,799 348,650
Cost of sales 306,158 286,515 264,152
Gross profit 99,449 92,284 84,498
Selling general and administrative expenses 76,651 70,500 65,001
Earnings before interest and taxes 22,798 21,784 19,497
Interest expense 2,199 2,103 1,849
Income before tax 20,599 19,681 17,648
Income tax expense 7,199 6,950 6,364
Net income 13,400 12,731 11,284
Basic weighted ordinary shares 10,500 11,000 12,000
Diluted weighted ordinary shares 11,000 11,675 12,300
Statement of financial position
as of 31 January
2010 2009 2008
??000 ??000 ??000
Assets
Current assets
Inventories 37,769 38,362 36,375
Receivables 3,905 3,654 2,840
Cash and cash equivalents 7,275 5,569 7,373
Total current assets 48,949 47,585 46,588
Non-current assets
Land 25,600 25,400 19,000
Buildings 78,000 77,800 75,000
Plant and equipment 24,000 23,500 21,000
Accumulated depreciation (13,120) (10,771) (10,395)
Total non-current assets 114,480 115,929 104,605
Total assets 163,429 163,514 151,193
Liabilities
Current liabilities
Accounts payable 47,721 46,500 43,471
Tax payable 7,669 11954 8,283
Total current liabilities 55,390 58,454 51,754
Long term debt 36,740 35,335 32895
Provisions 6,014 5,117 4,971
Total long-term liabilities 42,754 40,452 37,866
Total liabilities 98,144 98,906 89,620
Stockholders’ equity
Ordinary shares 47,945 48,030 48,070
Retained earnings 17,340 16,578 13,503
Total stockholder equity 65,285 64,608 61,573
Summary of Significant Accounting Policies
General
The company operates three retail stores throughout the United Kingdom and is committed to providing individuals with high-quality products and value to customers. We have fostered a culture that retains devoted and well-trained employees who provide optimal service. Our accounting year ends on 31 January.
Cash and Cash Equivalents
The company considers investments with a maturity of 3 months or less when purchased to be cash equivalents. The company receives a majority of its payments due from banks for third-party credit card, debit card, and electronic benefit transactions (EBT) processed. These transactions normally complete within 24?48 hours and are thus considered cash equivalents.
Receivables
Accounts receivable consist primarily of receivables from suppliers for marketing or incentive programs. Additionally, amounts due from banks for customer credit card, debit card, and EBT transactions that take in excess of 7 days to process are classified as accounts receivable.
Inventories
Inventories are valued at the lower of cost or net realisable value using the retail method. This is computed on the basis of selling price less the appropriate trading margin. All inventories are finished goods.
Non-current Assets
Non-current assets are stated at cost, and management reviews these assets for signs of impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the carrying amount is determined to not be recoverable, potential impairment is based on fair market value.
Cost of Sales
Cost of sales includes all actual product costs and costs of transportation.
Operating, Selling, General, and Administrative Expenses
Operating, selling, general, and administrative expenses include all operating costs of the company except those costs related to the transportation of products from the supplier to the retail stores.
Depreciation
Depreciation for financial statement purposes are provided on the straight-line method over the estimated useful lives of the various assets.
Legal Proceedings
The company is not involved with any current litigation.
Provisions
The company has designated an estimated amount for possible future shop closures and redundancy costs.
Dividends
The company declared and paid the following dividend amounts in each year to 31 January:
Dividends 2010
??000
12,638 2009
??000
9,656 2008
??000
9,500
Retained Earnings 762 3,075 1,784
Beginning Retained Earnings 16,578 13,503 11,719
Ending Retained Earnings 17,340 16,578 13,503
Changes in Ordinary Shares
The company has been undergoing a systematic buyback of ordinary shares in an effort to increase the value of shares, while also reducing the threat of takeover.
Required:
1. Complete a ratio analysis on the attached financial statements for each year provided. Compute the following ratios: operating return on equity, financial leverage multiplier, return on capital employed, asset turnover, net profit margin, current ratio, and gearing ratio.
2. Compute both the basic and diluted earnings per share for each year provided.
3. Include the above calculations in a business report, providing a detailed analysis of profitability, liquidity, solvency, and asset utilisation of the organisation from the information that you have calculated. What details can you glean from this analysis? What trends do you see? What additional information may be needed to provide a clearer picture?