User Groups And Their Usage Perception Of Financial Statement - Essay Example

User Groups and Their Usage Perception of Financial ment Table of Contents Introduction 3 Company Background 3 Torotack Plc 3 Surface Transformers Plc 4 Users of Financial Statements 4 Investors 4 Lenders 5 Suppliers 5 Management 5 Employees 6 Government 6 Analysis 6 Analysis of Torotack Plc 6 Analysis of Surface Transformers Plc 7 Conclusion 7 Reference List 9 Appendices 11 Introduction Financial statement or report is referred to a record of financial transactions and other activities so that the position of a company can be ascertained (Fridson and Alvarez 2011). A company’s financial statement not only shows its past performance, but also its current strength as well as its potential to perform in future (Peecher et al., 2013). Financial statement generally consists of Income Statement and Balance Sheet. Income statement is a track of company’s performance for a particular time period which describes its revenue and expenses through both the operating and non-operating activities and eventually, detailing its profit or loss from those activities (Ormisto and Fraser, 2013). Balance Sheet is the statement of assets and liabilities of a particular company for a specific time period (Penman, 2007). This paper will outline the significance of the financial statements of Transforms PLC and Torotack Plc along with the users of the same. Both the companies are UK headquartered as well as listed on London Stock Exchange and operate under automobile industry. The major objectives of the study are: Describing user groups of financial statements of both the organizations and their purposes. Analysing the financial information of the organizations from the perspective of user groups. Company Background Torotack Plc Torotack Plc develops licenses and sells low carbon technologies for various applications in automobile industry. The company operates under several segments such as license agreements, development activities and engineering services, which include research as well as creating intellectual property (Torotack group, 2015). Surface Transformers Plc Surface Transformers Plc., founded in 1992, also belongs from automobile industry of the UK. The organization is specialized into manufacturing and selling of carbon fibre reinforced ceramic friction and non-friction materials while developing technologies associated with it (Surface Transformers, 2015). Users of Financial Statements Financial statements are prepared with an intention to make it understandable to anyone who has some knowledge about the business, economic activities and the market (Ormiston and Fraser, 2013). The users of financial statement are assumed to have some knowledge of accounting and its standard so that the person could make some reasonable sense of those statement for the decision making purpose. This discussion is purely emphasised on the use of a financial statement by its different users. Organizations generally possess both the external as well as internal users of their financial statement. The external users are those who are not associated with the organization directly and do not participate in its management, whereas internal users are those who are directly related to the company as their interest is associated with that of the organization (Peecher et al., 2013). Investors Investors generally provide a firm with resources or money and expect a financial gain in return. An investor mainly focuses on profit maximization and risk aversion while demonstrating concern about the Earnings per Share (EPS), dividend, return on the investment etc (Everton, 2013). They are also affected by firm Price-Earnings (P/E) of the firm that determines that how much an investor will earn for single money that he invested in the same firm (Bunn et al., 2014). Both the companies are bearing loss at this phase. If referred to (Annexure 1), the EPS of Torotrak Plc has been showing negative figures for 2014 and 2015. It is not a healthy sign for an organization as it may lose its investors confidence. The P/E is also low, recording (-3.15) as per London Stock Exchange. Surface Transformers is into financial shenanigan but its EPS is stable at (-1.65) and have a P/E of (-7.58). Lenders These are the one who make resource available to any firm or company with an expectation that the money will be repaid along with interest or fees. A company could borrow money from a lender by keeping some asset as mortgage or by showing them a certificate of their healthy financial position which is issued by some Credit Rating firm. Lenders generally look into a firm’s debt repayment capabilities (Raghavan and Mishra, 2011). They generally focus on Debt-Equity ratio (D/E) of a firm which generally emphasises on the amount of organization’s capital funded by debt as well as equity. Both the company has worked on their debt as most of the capital is funded by the equity. The D/E ratio for this company is getting decreased year-on-year (Appendix 2). It shows that the company is repaying its debt though it is facing losses. Suppliers They are the one who provide supply of resources or raw material to the company. The suppliers are concerned about the paying capacity of a firm or company (Hui et al., 2012). In case of Torotrak Plc, debt payables in FY14 has increased in comparison to FY13 (Appendix 2). On the other hand, in case of Surface Transformers Plc, the payables have been reduced showing that debts have been paid off (appendix 4). Management The managerial structure and their perception towards organizational financial statement differ along with the size of the business. In small organizations, the owner is generally the one who looks after the affair of the business. However, in large organizations, the management consist of hired professionals who keep a regular attention on the economic challenges for decision making. They are the one who keeps a check on almost each and every aspect of a company (Everton et al., 2013). According to (Appendix 1) the sales figure for Torotark Plc went up providing the management some relief, but the company has expenses greater than its revenues which is putting it into perils, as the company is still facing losses. While in the case of Surface Transformers (Appendix 3), the company’s revenue plummeted a little in consideration to FY14, as well as it also recorded a loss. Employees Employees can be considered as the most important assets of an organization as they are directly responsible for maintaining organizational task and profitability. However, they expect remuneration for their service and also hope for a hike as time passes. They also emphasise on the organization’s sound health (Korschun et al., 2014). As the company is loss-making, there are chances where the employees also cannot enforce the management for any bonus or hike in remuneration. Government This body governs the state where the company operates; in order to maintain discipline in that state it needs revenue which is mainly generated through collection of tax. These Government bodies are focused on the revenue that can be acquired from tax generation. Tax burden is a company’s ability to pay tax. In case if both the companies are making loss, the tax levied on them is also in respond to their profit. Both the companies are showing a tax burden which is decreasing in case of Torotrak Plc (Appendix 1) while increasing in a negligible manner for Surface Transformers (Appendix 3). Analysis Analysis of Torotack Plc This group recently acquired Flybrid for £11mn (torotack plc, 2015). This clarifies the reason for the company’s financial trouble. However, the company is looking forward expanding their company, their investments in Flybrid shows that the company is thinking in perspective of its long term goal. At this developing stage of the group, it showed an increase in its revenue generation by £252K in context to FY14 though it also suffered a loss of £3.5mn. The profit margin has also dropped from 86% in FY14 to 52% in FY15. The current EPS of this company is also decreased to (-2.84) but is expected to show positive figure in near future as the acquisition will eventually begin to pay. The main revenue generator for the company is from delivering licence, this contributes to near about 80% of the company’s revenue. The revenue generation from licensing segment of the organization is £3.0 million. The net finance income has been in line with that of previous year. However, the tax burden decreased along with the increase in loss, the deferred tax burden of the organization has also decreased to £154K. As per shown in Appendix 2, the payments of the company came down by £60K, which implies that the company is paying off its debt. Analysis of Surface Transformers Plc According to the financial report of the company, the revenue generation has been affected by £0.2m. The gross profit margin has also decreased to 51% in FY15 from 56% in FY14. It had also recorded loss per share of 1.65 in FY15 which remained constant. An increase in outflow of cash by 26% has also been detailed out. According to Appendix 3, the company is working on its cost controlling as the cost of goods sold have decreased by £36K. The administrative cost has contributed the most to the organization’s expenses. There has also been some divestment of fixed assets worth £148K. The payables of the company has also reduced to a huge extend from FY13 to FY14 and remained constant in FY15. The company is also working in paying off its debt as its D/E ratio has gone down. There has been an increase in tax burden and the company has hired some professionals to reduce that and continue to use resources effectively and make the company profitable. Conclusion The above discussion is totally emphasized on the user groups of financial statements of Torotrak Plc and Surface Transformers Plc. The companies have been analysed by considering 3 year financial statement. Both internal and external user groups of the financial statement have been considered such as investors, lenders, suppliers, management, employees and the Government. This analysis shows the various perspectives in which each user analyze a financial statement. From investor’s point of view, it can be considered that company’s share prices are low and as a rational investor, buying shares of this company can prove to be profitable in the future. As the companies are in developing phase, the payables are quite high, but if seen on year-on-year basis, it is also reducing. Hence, a supplier would not bother to stop their supply as they are getting paid. The analysis has illustrated the responsibility of management to evaluate and maintain efficiency and profitability of the firm by emphasizing on their efficiency to retain profit by maximising the utilization of resources. Employees generally look into profit making of the company to understand their potential in terms of providing remuneration in an efficient and timely manner. Government focuses on taxes and as these companies are loss making, the tax levied on them are also low. Finally, it could be concluded that even if the companies are bearing losses (Appendix 1; Appendix 3), they are still trying to control their costs, use their resources effectively and reduce the gap of their losses over year-on-year. Reference List Bunn, O., Staal, A., Zhuang, J., Lazanas, A., Ural, C. and Shiller, R., 2014. Es-cape-ing from Overvalued Sectors: Sector Selection Based on the Cyclically Adjusted Price-Earnings (CAPE) Ratio. The Journal of Portfolio Management, 41(1), pp. 16-33. Everton, S. F. Kang, S. M. and Thornton, P. H., 2013. Managing Institutional Logics: The Effects of Investors’ Social Capital on Venture Performance. In Academy of Management Proceedings, (1), pp. 1240- 1389. Fridson, M. S. and Alvarez, F., 2011. Financial statement analysis: a practitioners guide. New York: John Wiley & Sons. Hui, K. W., Klasa, S. and Yeung, P. E., 2012. Corporate suppliers and customers and accounting conservatism. Journal of Accounting and Economics, 53(1), pp. 115-135. Korschun, D. Bhattacharya, C. B. and Swain, S. D., 2014. Corporate social responsibility, customer orientation, and the job performance of frontline employees. Journal of Marketing, 78(3), pp. 20-37. Ormiston, A. and Fraser, L. M., 2013. Understanding financial statements. United States: Pearson Education. Peecher, M. E., Solomon, I. and Trotman, K. T., 2013. An accountability framework for financial statement auditors and related research questions. Accounting, Organizations and Society, 38(8), pp. 596-620. Penman, S. H. and Penman, S. H., 2007. Financial statement analysis and security valuation. New York: McGraw-Hill. Raghavan, N. S. and Mishra, V. K., 2011. Short-term financing in a cash-constrained supply chain. International Journal of Production Economics, 134(2), pp. 407-412. Surface Transformers, 2015. Annual Report and Financial Statements 2015. [pdf] Available at: [Accessed 2 November 2015]. Surface Transformers, 2014. Annual Report and Financial Statements 2014. [pdf] Available at: [Accessed 2 November 2015]. Torotrak Driving Change, 2014. Torotrak Plc Annual Report 2014. [pdf] Available at: [Accessed 2 November 2015]. Torotrak group, 2015. Torotrak Plc Annual Report 2015. [pdf] Available at: [Accessed 2 November 2015]. Appendices Appendix 1: Income Statement of Torotrak Plc Particular   2015 2014 2013     in £000 in £000 in £000           Revenue   3772 3520 7479 Direct cost   -1792 -494 -1473 Gross Profit   1980 3026 6006 Operating Loss   -8426 -4769 -464 Operating loss before intangible asset ammortization and exceptional items   -7230 -3970 -64 Intangible assets   -765 -127   Exceptional items   -431 -672 -400 Operating loss   -8426 -4769 -464 Net Finance Income   35 36 73 Loss before Tax   -8391 -4733 -391 Income tax credit   626 509 424 Profit/Loss for the year attributable to the owner of the parent company   -7765 -4224 33 Basic and diluted loss per share (Pence)   -2.84 -2.14 0.02 Gross Profit/loss Margin 52% 86% 80% Tax burden -0.0746 -0.10754 -1.0844 (Source: Torotrak group, 2015; Torotrak Driving Change, 2014) Appendix 2: B/S of Torotack Plc Particulars   2015 2014 2013     in £000 in £000 in £000           Assets         Non-Current Assets         Intangible Assets   15221 15719 1650 Property, plant and equipment   1698 1742 855 Investments   273 270 3250 Trade and other receivables   147 161 160 Total Non-Current Assets   17339 17892 5918 Current Assets         Inventories   383 205 83 Trade and other receivables   1016 743 588 Tax receivables   435 604 378 Cash and cash equivalents   7616 14862 8945 Total Current Assets   9450 16414 9994 Total Assets   26789 34306 15912 Liabilities         Non-Current Liabilities         Finance lease and obligation   -311 -243   Joint venture loan     -14 -13 Deffered tax   -2121 -2275   Total Non-Current liabilities   -2432 -2532 -13 Current Liabilities         Trade and other payables   -5373 -5433 -1830 Provisions       -750 Total current liabilities   -5373 -5433 -2580 Total liabilities   -7805 -7965 -2593 Net Assets   18984 26341 13319 Capital and Reserves         Issued share capital   27629 27420 17496 Share premium   9140 9093 55497 Other reserves   -244 -141 -100 Accumulated loss/Retained earnings   -17541 -10031 -59574 Total equity attributable to the equity holders of parent company   18984 26341 13319           Current ratios   -1.75879 -3.02117 -3.87364           Debt-equity ratio   -0.28249 -0.29048 -0.14821 (Source: Torotack group, 2015; Torotrak Driving Change, 2014) Efficiency Ratios         Asset Turnover ratio   0.140804 0.102606 0.470023 Inventory turnover   -4.67885 -2.40976 -17.747 Appendix 3: Income Statement of Surface Transformers Plc Income Statement         Particular 2015 2014 2013   in £000 in £000 in £000         Revenue 1066 1273 1059 Cost of sales -521 -557 -275 Gross Profit 545 716 784         Administrative Expenses:       Before research cost -666 -613 -601 Research cost -933 -955 -895 Total administrative expenses -1599 -1568 -1496 Other operating income 114 66 138 Operating Loss -940 -786 -574 Financial Income     2 Financial Expenses -42 -56 -68 Loss before Tax -982 -842 -712 Taxation 217 168 132 Profit/Loss for the year after tax -765 -674 -580 Other comprehensive income       Total comprehensive profit/loss for the year attributable to members -765 -674 -580 Basic and diluted loss per share (Pence) -1.65 -1.65 -1.71         Gross Profit Margin 51% 56% 74% Tax burden -0.22098 -0.19952 -0.18539 (Source: Surface Transformers, 2015; Surface Transformers, 2014) Appendix 4: B/S of Surface Transformers Plc         Particulars 2015 2014 2013   in £000 in £000 in £000         Assets       Non-Current Assets       Property, plant and equipment 438 586 665 Current Assets       Inventories 317 271 357 Trade and other receivables 367 454 326 Cash and cash equivalents 829 151 457 Total Assets 1996 1462 1805 Liabilities       Non-Current Liabilities       Other interst bearing loans and borrowings -409 -418 -339 Current Liabilities       Trade and other payables -9 -9 -198 Other interst bearing loans and borrowings -379 -395 -299 Total liabilities -797 -822 -836 Net Assets 1199 640 969 Capital and Reserves       Share capital 532 423 384 Share premium 9186 7995 7707 Capital reserves 464 464 464 Accumulated loss/Retained earnings -8983 -8242 -7586 Total equity attributable to the equity holders of parent company 1199 640 969 Debt Equity ratio -1.49812 -1.94326 -2.17708 (Source: Surface Transformers, 2015; Surface Transformers, 2014) Efficiency Ratio       Asset Turnover Ratio 0.534068 0.870725 0.586704 Inventory Turnover Ratios -1.64353 -2.05535 -0.77031 Read More