Financial Statement and Importance of the Directors Report - Term Paper Example

Financial Statement Analysis of ITV Plc 1. Reports and presentation The report of the directors and the statement of the chairman is analyzed from an investor’s perspective. 1.1 Importance of the director’s report The director’s report is important because it gives a brief review of the company’s performance during the financial year and its development prospects. It sheds light on the future strategies of the company to make the company profitable. It also includes the performance indicators along with the risks and uncertainties faced by the company and how the company sees to overcome them in the future. 1.2 Comparison of the director’s report and Chairman’s statement The chairman’s statement briefly sheds light on the challenges faced by the company and the measures taken by the company to overcome them while the director’s report is a mandatory part of the financial statement that explains the business prospect of the company and detailed financial analysis and performance. 1.3 Issues in ITV’s business The issues in the business of ITV are that of holding the broadcast audience which is their consumer and customer and that generates the revenue for the company. Another key issue is that of conversion of profit to cash during the year in which the company has struggle. Lastly, the broadcast and online revenues of the company have decreased compared to last year which is also a concern. 1.4 Comparison with BSkyB’s annual report The presentation of the report of BSkyB is more proper and the breakups are provided in a more explanatory format which give better judgment for a user of the financial statement. The director's report also covers a better area of the financial statement and uses graphs and charts to give better understanding to the user of the financial statement. 2. Audit Report An analysis of the audit report and the opinion given by the auditors is given which gives an insight of the company’s fair presentation. 2.1 External Auditors The external auditors of ITV Plc are KPMG Chartered Accountants, who will continue to audit the financial statements of the company in the years to come. 2.2 Audit Opinion The auditors gave an unqualified opinion on the components of the financial statements as a whole i.e. consolidated and the parent company’s financial statements. 2.3 Summary of Audit Opinion The auditors have stated that they have carried on the audit of the company in light of the auditing standards as applicable in UK and Ireland and under their independent examination the financial statements are presented fairly and the Group financial statements are also prepared in line with the Financial Reporting Standards approved by the EU, the Companies Act 2006 and the other requirements of the applicable laws so as to provide the right type on guidance to the viewer of the financial statement. 2.4 Date of the Audit Report The report is dated two months later than that of the date of financial statements because the audit is carried out after the close of the year end of the company after which the auditors examine the financial data and provide their opinion of the fair and true presentation. 3. Performance Analysis The financial performance of the company so as to judge the company from an investor’s perspective is provided in this section. 3.1 Earnings per share In light of the companies Act, it is mandatory for a company to calculate and disclose the earnings per share in its annual report. The basic earnings per share of ITV in 2009 was 2.3p while the loss per share of last year 65.9p. This shows that the earnings per share for the year ended 2009 is higher than that of last year. The earnings per share show the distribution of the profit generated by the company over the number of ordinary shares of the company. I shows that the company has shown better output compared to last year with regards to the shareholders of the company. 3.2 Usefulness of Earnings per share Earnings per share are useful for the shareholders because it tells the shareholder about the worthiness of his investment and the extent of profit each of his shares is generating. In a nutshell, it tells regarding the amount of profit earned per share. 3.3 Difference b/w earnings and dividends Earnings are the profits that a company generates during a year while the dividend is that part of the profit that the company distributes to its shareholder's. The company may distribute all of the earnings in a particular year but cannot exceed that amount. 3.4 Dividend per share Due to the uncertain economic conditions, the company has not declared the interim dividend for the year and therefore the board has not declared the final dividend as well which for the previous year was 0.675 pence per share. 3.5 Ratios for investor’s perspective Ratios that are helpful from an investor’s point of view can be that of Return on Capital ratio and Return on Assets ratio. These ratios are better known as profitability ratios. Return on Assets = Net Income = 94,000 = 3.07% Net Asset 3,055,000 Return on Equity = Net Income = 94,000 = 27.7% Share holder’s Equity 346,000 The ratios indicate the profitability of the company on their assets and shareholder equity respectively. They tell an investor the return the assets are providing to the entity and the benefits that the company can obtain from the use of their assets and equity. 3.6 Problems in comparing the data with other companies The main problem that a person may face while the comparison of the financial data is that of the difference of the industry to which ITV Plc belongs as the expenses and the income generated are quite different from companies of other industry. Companies from the manufacturing industry have income statement components such as the sales and cost of goods sold which a company from the service industry doesn’t. This issue may be resolved thorough the use of ratios as the ratios compare the data with respect to the figures and give an analysis based on percentages which makes the information easily comparable. 4. Cash flow statements The cash flows of the company are analyzed with respect to generation of cash in order to support the company and provide positive return to investors and lenders. 4.1 Generation of cash from Operating Activities The company generated £243 Million of net cash from their operating activities during the year 2009. 4.2 Uses of cash during the year The company utilized the major cash of £508 Million and £116 Million on payment of bank loan and interest on bank loan respectively. Along with this the £150 Million were utilized on purchase of investments and £50 Million for subsidiaries. 4.3 Difference between cash and profit Cash is considered as the liquid asset of a company while the profit is the income which is earned during a particular period, after the deduction of all the expenses during the period, which may be monetary or non monetary. (Biz Finance) 5. Notes to the financial statements The notes to the financial statements structure an essential part of them because they provide relevant information to the items appearing on face of the statements. 5.1 Affect of estimates and assumptions regarding Provisions Provisions are the accounting estimates which a company used in order to estimate the amount of debts which will not be received. ITV Plc used the policy to make provisions when there is a lawful and positive requirement that an outflow will take place and the amount of provision is estimated by taking the time value of money in to account. 5.2 Estimate free financial statements The financial statements of a company not be made estimate free as all the information mentioned in the financial statement is not exactly known to the management due to which the management has to rely on judgments and estimates. E.g. the company does no know the exact period for which the fixed assets of the company will be available for use in order to calculate the depreciation or the number of debtors which will default as at the year end. This is why the management has to rely on the estimates which are considered as most reliable. 6. Limitations of the ITV’s Annual report There are a few limitations of the financial statements of the entity, one of which is the computations and presentation of the proper ratios for the user of the financial statements. The ratios can provide better guide for the user to determine their investment options. A complete detail of the ratios, especially the ratios of liquidity and profitability can be helpful for both the investors and other users of the financial statements. The notes to the financial statements do not provide the proper breakups of some items such as the prepayments and deposits etc which are necessary for disclosure purposes. References Biz Finance. 2010. . Annual Report ITV Plc. 2009. Read More