Introduction to Accounting and Finance - Report Example

Introduction to Accounting and Finance Table of contents 4. Consoli d Cash Flow ment 8 5. The s to the financial ments 8 6. Limitation of Annual report 9 9 Reference 10 1. Introduction to Accounting and Finance 1.1 Importance of Narrative summary The narrative summary gives an overview of the company’s performance in the last financial year. In this section of report the management discloses its strategic plan for coming future. This will hence act as synopsis and provide a brief idea about the past performance of the company as well as future strategy that will be adopted by it. 1.2 Difference between Chairman Statement & CEO’s statements The responsibilities of the chairman and the CEO of the company are quite different from one another. The Chairman of the company is responsible for smooth functioning of the committee or the boards of directors. Hence he is more concerned about the development of appropriate policy which will assist the company to attain its organisational goal. The CEO, on the other hand, is responsible for management related activities and proper implementation of the policies. In the annual report CEO announces the performance of the company in last financial year, its achievements and the associated financial and economical risks. Hence the statements of the chairman and the CEO are slightly different from one another. 1.3 Utility of CEO’s statement for potential investor Before making investment in a company the potential investors conduct a fundamental research to understand financial position of the company. The investors are concerned about company’s ability to generate future financial returns and maintain a sound growth. The CEO’s statement in annual report reflects financial performance of the company in last financial year. It not only discusses the change in revenue and expenditure but it also provides specific reasons behind these changes. The CEO’s statement provides the investors with the basic idea regarding the company’s plans to manage its financial position in up-coming future. 1.4 Risk & Uncertainties associated with British After considering the financial report of British Airways it appears that the company is exposed to several kinds of risks and uncertainties such as: Market risk: Due to economic slowdown the demand has declined in almost all the developed nations and this fall will continue in the coming financial year 2009-2010. Financial risk: Hike in crude oil price in the year 2008 resulted in high operating expenses and the profit margin declined. In near future revenue may further decline. High debt-equity ratio also indicates increased financial risk and possibility of insolvency. High competition: the market in which British Airways operates is quite competitive. Increased globalisation has lead to the entry of many new players which have resulted in high degree of competition. Changing legal policies: To cope with the changing legal policies in UK as well as in other international nations the management of British Airways need to introduce certain changes. This might hamper company’s present performance. 2.1 Role of auditor After the financial report is submitted by the company, it is the responsibility of the auditor to verify all the information through auditing process. The auditor verifies the financial data and determines reliability of financial statement provided by the company. The auditor can be internal who directly reports to the Board of Directors whereas the external auditor crosschecks all the financial statement to protect the interest of investors. Hence the main role of the auditor is to check the authenticity of the data provided by the company. 2.2 External auditor of British Airways & their opinion Ernst & Young LLP is the external auditor of British Airways. According to its opinion the financial statement prepared by the company is as per IFRS standards that were adopted by European Union. It also states that the financial statement of British Airways fulfils all requirements of Companies Act 1985 and the information provided in director’s statement is consistent with the actual financial performance of British Airbus. Hence is can be concluded the auditor’s opinion provide authenticity to the financial report of the company. 2.3 Time gap between preparation of financial year and audit report submission At the end of the year all financial data gets elaborately crosschecked by the auditor. They verify whether the financial report fulfils the criteria of IFRS and Companies Act 1985. They take two month time to conduct the entire process 3.1 Comment on income statement After considering the financial statement of British Airways it appears that company’s revenue for the year 2008-09 had increased slightly. From £8758 million in 2008 it reached £8992 million in 2009. Operational cost also enhanced from £7880 million in 2008 to £9212 million in 2008. There were certain factors responsible for the hike in operational expenses, for example aircraft operating lease increased by 7.4%. Hike of 14.2% was also seen in landing fees and route changer; but the major factor was 44.5% hike in fuel and oil cost due to major rise in crude oil. As a result the total group expenditure increased by 16.9% in 2009 whereas the revenue grew by 2.67% and the company registered a loss of £401 million in 2008-09. 3.2 Hike in crude oil price in 2008 For the last few years, price of crude oil was showing an upward movement; in the month of January 2008 is around $100 per barrel which crossed the mark of $140 per barrel by June 2008. This unbelievable hike in the crude oil affected all the sectors and aviation industry was no exception to it. As per the data revealed by BBC NEWS many aviation industries reported huge loss in 2008-09. Delta Air Lines reported a loss of $6.4 billion in the first 3 months; Northwest Airlines registered a loss of $4.1 billion and was struggling to prevent itself from being bankrupt. . As the economy started deteriorating in 2008, price of crude oil also declined gradually (BBC NEWS, 2008). 3.3 EPS of British Airways in 2008-09 The investors of a company are considered as owners in real sense hence they are more concerned regarding the earning per share (EPS) announced by the company. EPS represents the profit distributed among the equity shareholders after paying tax and other liabilities. So a higher EPS will ensure a higher earning of the investor on his investment made in the company. The potential investors often take ESP of the company to analyse company’s profitability. In 2009 British Airways announced EPS of (32.6) p which means the investors need to share the net loss registered by the company. This negative EPS indicates poor profitability of the company. 3.4 Financial ratios The investors are more concerned about profit earning ability of the company; hence they often refer the net profitability of the company. After calculating net profit ratio it appears that from 8.29 % (2008) it declined to -3.98% (2009). To have a better understanding of company’s operational efficiency, operating profit ratio was calculated. This also registered a downfall from 10.03% (2008) to -2.45% (2009). To determine the short term liquidity, current ratio was taken into consideration. From 0.75% in 2008 it came to 0.67% hence the company’s ability to manage short term liability has declined. To analyse company’s long term solvency state, debt-equity ratio was calculated. After considering this ratio is appears that British Airways has doubled its financial leverage by increasing debt-equity ratio from 1.39 (2008) to 2.44 (2009). Hence the company is facing a high financial risk. 3.5 Problem associated with comparison British Airways has its network throughout the world; hence it can be called a true multinational company. Throughout its history the company underwent many acquisitions and mergers and today it is considered as the largest aviation company of UK in terms of customer base. So it is not justified to compare British Airways with its local competitors. To overcome this problem it is better to use financial ratios which provide percentage because makes the comparison easy. For more accurate figure sector wise comparison can be carried out. 4. Consolidated Cash Flow Statement In 2008-09 British Airways failed to generate much cash flow yet it generated £402 million in 2008-09. The main sectors where the company used cash were payments of financial liabilities, trade payables, provision and interest. The company’s main source of cash was general operations. Other sources were ‘interest received’, ‘insurance recovery’ and ‘dividend received’. Financial statement do not disclose the actual cash generated and used by the company in the financial year, therefore one need to consider the cash flow statement to analyse how the company manages its cash and cash equivalent. 5. The notes to the financial statements The three potentially important items of ‘note of financial statement’ are as follows: Employee benefits Derivatives and financial instruments Foreign currency translation All the above mentioned items are of vital importance when the potential investors analyses the financial position of the company and its ability to perform better in coming future. The Employees benefit explains how the company takes care of its employees and what facilities do they enjoy. A company which has well balanced employee benefit plan will always maintain a highly motivated workforce and company’s productivity will increase. Derivative and financial instrument reflects the financial position of the company whereas its foreign transaction explains company’s ability to hedge currency risk. 6. Limitation of Annual report The financial report of British Airways can be made more useful for the potential investors if it provides a section on financial ratios. If the investor lack core accounting knowledge it becomes very difficult for them to understand the Financial Statement and Balance Sheet of a company, hence certain vital financial ratios need must be provided. In addition to it if the company provides information which assists the investors to understand financial condition, then such information will be of great use for general people. Reference BBC NEWS. 2008. Oil price still near record $142. [Online]. Available at: http://news.bbc.co.uk/2/hi/7476910.stm [Accessed on March 23, 2010]. Read More