The Financial Times Guide: Using And Interpreting Company Accounts - Coursework Example

The Financial Times Guide: Using And Interpreting Company Accounts Introduction This is a report that solemnly aims at the relationship between two public limited companies. It has focus on the annual reports of the companies and how their profits and cash flows relate, in different financial periods. Task 1: Explanations why the net profit generated from operations by the business may not be equal to the cash generated by operations over the same period. According to IAS (International Accounting Standards), cash generated is also known as the operating cash inflow of a business. Therefore, this report has the explanations but it has used the terms operating cash inflow of a business. Cash inflow of a business is the main measure of whether the business is able to maintain its levels of operation with or without funding from an outside source (Wendy, 2003). This paper has set stipulations of the net profit generated from business operations, and its distinction from operating cash inflow of a business. The two can be different in various ways. Net profits generated by operations in a business is recorded when the expenses and taxes are subtracted from the total incomes. On the other hand, operating cash inflow is the total amount of money in and out a business in terms of investments and sustaining activities and other operations. Theoretically, the two ought not to be equal during the same period. Like in the case of fig 1.1 (www.stock-analysis-on-net/NASDAQ/Company/Microsoft-Corp/Financial-Statement/Satement-of-Cash-Flows), it is evident that the company makes $21,863 million and $ 16,978 million for the year 2013 and 2012 respectively, in terms of net income. However, reconciliations have to be done on the net income, to get the values for the net cash from business operations. The reconciliation may involve additions to the net income, such as deferred taxes and unearned revenues and others. In addition, subtractions from net income such as excess tax benefit unearned revenues and others. This rounds up to the figures $ 28,833million and $ 31,626million respectively. The figures for the two concepts are completely different since factors involved in each are different as well. Net profits involve revenues while as for cash flow is all the money that flows in and out to maintain various operations of the business (Wendy, 2003). The cash flow of a business is very important to a business. Managers are always focused to maintaining high levels and manageable cash flows, than the profits. Task 2: Direct and indirect methods of presenting operating cash flow The most commonly used method is the indirect method but this paper refers to the two methods both direct and indirect. Direct method Though the direct method, an accountant has to record and make a list of all the major cash receipts of the business and also all the major operating cash payment of the business and then get their difference. This way, he or she deducts cash payments from cash receipts to get the value of the operating net cash of the business (Allan, 2007). Indirect method Through the indirect method, an accountant is expected to record net cash from operations by deducting and adding to the net income. Therefore, he is able to obtain net cash by adjusting or reconciling net income. It only shows the necessary items that are used in adjusting net income (Allan, 2007). Task 3: Public limited companies For this task, the writer has considered using the companies Microsoft Corp. and Apple Inc. and the year ended March 2012 and March 2013 for Microsoft and the year ended June 2013 and June 2012 for Apple. a) Compare and contrast cash flow from operating activities of the two companies. According to fig 1.1 and 1.2 For the year ended 30 June 2013 and 30 June 2012, Microsoft reported net cash from operating activities as $ 28,833 million and $ 31 626 million respectively. Apple Inc. Company also reported net cash operation activities of $ 6707.89 million and $ 6015.59 million. The net profits for Apple are very high as compared to that of Microsoft since Apples’ profits are in millions. Microsoft Company has a significant drop in the levels of net cash. Is evident that, the company had a ($ 31,626- 28,833) $ 2,793 million drop from 2012 to 2013. However, Apple Inc. Company, reported a significant rise in its net cash from operating activities by ($ 6,709.89-6,015.59) $694.03 million. This is quite a rise from the year ended 2012 to 2013. b) How each has been able to manage its working capital over the two periods. As for Apple Inc. Company, it has a working capital of $ 207,000 and $ 176,064 million as at the year 28th Sep 2013 and 28th Sep 2012. The company is able to maintain this king of working capital since it both long and short-term borrowing in the two accounting periods. The loans standing for the two years is (long term) $ 16,960 and $ 0 million for 2013 and 2012 respectively. Also, has equity, reserve and surplus account at $ 121,549 and 118,210 million. This makes it possible for the company to manage its working capital the two financial periods. Microsoft Corp. is also able to manage its working capital though significantly lower than that of Apple. Microsoft has a working capital of $ 142,431 million and $ 121,271 million as at June 2013 and 2014 respectively. This is acquired from different sources such as retained profits, capital surplus, and equity. The working capital for Apple proves to be higher than that of Microsoft by far. a) Financing activities of the two companies Apple has a working a very high working capital. This means that it has to have sources that are able and willing to fund the same amounts. Equity, reserves and surplus at $ 123,549 and $ 118,210 for the two year respectively. However, the same company has a total of $ 83,451 million and $ 57,854 million respectively as long and short-term loans and advances. This means that, despite Apple having quite a huge working capital, little amount of it comes from the crediting sectors. Therefore, it is much easier for Apple to pay up its loans both long and short term ones (Wendy, 2003). Microsoft Company has a working capital of $ 142,431 million and 121,271 million for the two years 2013 and 2012 respectively. Taking the year 2013 as a good example, the paper writer has found out that, Microsoft has a total equity of $ 78,944 million. However, the company has a total of $ 63,487 million as liabilities. This means that the liabilities that Microsoft has are so close to overriding the amount available as equity. Therefore, between the two companies, Apple is in a better position than Microsoft as it has lower risks of bankruptcy. Therefore Apple faces lower risks in its long term funding policy. b) Investment activities Apple has several investments such in addition of property, sale of assets, and sale of long term investments bank investments in the two years. The company has a total of $ 33,774 million as investments for 2013. While as for Microsoft, the investment is majorly on additional properties, purchase of investments and sales of investments. This makes a total of $ 23,811 million for the year 2013. Apple shows to have a less prudent way of investing as it has lots of its money invested in bank deposits for which they will earn some interest. But spends less to purchase investments (Allan, 2007). Microsoft on the other hand has much of its investments in sale of investments. This means that in the year 2013, Microsoft had much invested from sales of property. This means that it went low on its investments as it sold more, despite having spent much buying the same. Therefore, Microsoft has a better investment program. Task 4: comments on overall strategy of the two. The two companies have different ways of approaching the market. That said, it is evident though the updated cash flows in this paper that, Apple Company has managed its cash flows much better than Microsoft has. The paper has enough proof to show that, Apple Company has a better working capital and liability management program. Therefore, Apple has better management than Microsoft. Balance sheet for Apple Inc. From http://investor.apple.com/SECFilingNav.cfm?FilingID=1193125-11-282113&CIK From http://investor.apple.com/SECFilingNav.cfm?FilingID=1193125-11-282113&CIK Work Cited Allan, K. A, Modeling structured finance cash flows with Microsoft Excel. New York: John Wiley & Sons. 2007. Print. Wendy, M. The Financial Times guide to using and interpreting company accounts. 3rd ed. Prentice Hall: Financial Times. 2003. Print. Read More