Financial Accounting: Bovis Homes - Case Study Example

Financial Accounting: Analysis of the Annual Report of Bovis Homes [N a m e] INTRODUCTION Annual reports reflect not only financial position of the organisation but it is an important way to reflect the internal position of the organisation, comparison of past performance against current performance, and what the management feels about the future success of the organisation. Therefore annual reports are not only read by investors but these reports are read by employees, suppliers, customers, shareholders, distributors, and even competitors so it is important that these annual reports reflect and gave a positive message to everyone. The report is divided into three major parts; first part explains the additional information that are present in the Bovis Homes annual report, second part explains accompanying notes in the financial statements which are helpful in explaining important financial heads or accounts presented in the annual report and the third report analyses the financial position of Bovis Homes with the help of financial ratios. PART ONE: ADDITIONAL INFORMATION SECTIONS The three additional information sections identified in the annual report of the given company, Bovis Homes, are (Bovis Homes): 1. Chairman’s Statement 2. Chief Executive’s Operating Review 3. Principal Risks and Uncertainties 1. Chairman’s Statement: The chairman’s statement in the annual report presents the summary of the overall performance of the company. Chairman of the organisation inform the readers of the annual report, about the summarised the results of the important financial indicators like total revenue, profit before tax, operating margin, earnings per share, net assets, operating cash, etc. Chairman’s statement also provided an overview of the strategy being implemented by the organisation, along with the successful strategies of the last year (Bovis Homes). The summary presented in the start of the annual report, also gives an overview of the dividend paid to the shareholders along with the expected growth rate in the future dividends. Chairman of the company also recognise the efforts of the employees of the organisation in the starting statement and thanks them for facilitating the organisation in the process of achieving the overall targets and goals. In the end Chairman’s statement presents the overview of the market conditions and future prospects. This additional section is useful or beneficial for the readers of the annual report in several ways. First of all the statement of part of the chairman of the organisation in the beginning of the annual reports, depicts that the chairman is devoted and dedicated to provide the important information to the stakeholders of the company. All these information about the performance of the organisation from the chairman of the company increases the authenticity and reliability of the financial information. Apart from this the readers of the annual report can get a quick overview of the important information about the organisation which will facilitate them in the process of judging the profitability of the company. Readers will get a short synopsis of the operations of the organisation and its performance in the previous fiscal year. This section also enables the readers to predict the future performance of the company, along with the future outlook of the whole market. 2. Chief Executive’s Operating Review: The chief executive’s operating review consists of overall analysis of the current operations and strategies undertaken by the organisation. In this section, the chief executive of the company presents his views about the condition of the market. The important trends and statistics of the overall market and industry are summarised and analysed by the chief executive. Chief executive of the organisation presents his view about the overall status of the competition in the industry. Once the analysis of the market and competition has been done, next part includes the operational goals or priorities of the company in the previous year. This is followed by the summary of the output or performance of the company in relation to the set operational goals and targets. In the end a brief overview or outlook is provided by the next financial year along with expected performance of the organisation (Bovis Homes). This section is highly beneficial for the readers of the annual reports, as it summarize the ability of the organisation to meet the set targets and goals. This additional information facilitates the readers of the annual reports in the process of evaluating the overall operational excellence of the organisation. 3. Principal Risks and Uncertainties: In this additional information section of the annual report, the management of the organisation has presented and analysed important risks and uncertainties which are being faced by the organisation. Apart from presenting the risks and uncertainties which are hurdles in the path of the success and growth of the organisation, the management of the organisation has also provided the readers with the important strategies and tactics used in order to minimize the effects of these principal risks and uncertainties (Bovis Homes). The information presented in this section, facilitates the readers of the annual report in the process of evaluating the overall risk being faced by the organisation. This section also enables the readers to judge the ability of the organisation to combat with different risks and uncertainties which can hinder the process of overall growth and success. PART TWO ACCOMPANYING NOTES IN THE FINANCIAL STATEMENTS: There are several notes mentioned in the annual reports of an organization which are helpful for investors, shareholders, employees as well as other stakeholders of the company as these notes help in defining the situation of the organization in a better way and reflect the information in a better way. These financial notes help in defining the financial position of the organization in more depth and thus much better position of the organization is reflected. There are several categories of assets mentioned in the annual reports of the organization which reflect the in-depth analysis of that particular category. Some of the important categorizes that are included in a normal financial statement and are included in the financial statement of Bovis Homes Group PLC are as follows: PROPERTY PLANT AND EQUIPMENT: The category of property plant and equipment in a balance sheet reflects the historical value of the property, plant and equipment that the company has minus accumulated depreciation and impairment losses (or gains). Regardless of what the nature of the fixed assets is and how long the fixed assets can provide benefits to the company, it has to be depreciated according to the International Financial Reporting Standards (IFRS). The value of PPE is depreciated with the passage of time reduces if no further addition has been made to this category of account because the amount of deprecation has been deducted. The value of PPE of Bovis Homes Group PLC in the year 2009 was £11,574 thousands and in 2010 the value was reduced to £11,307. The company has been following the standards and rules of International Financial Reporting Standards. Buildings and computer equipments are being depreciated by the company over 50 years and 3 years using straight line method respectively however the office equipments and plant and machinery are depreciated by the company using 25% reducing balance and 33.3% reducing balance respectively. However, the land owned by the company is not depreciated. In addition to this, any loss or gain that arise because of disposal of an asset is calculated as the difference between the carrying value of the asset and sales price and the gain or loss is recorded in the profit and loss statement of the company. TRADE RECEIVABLES: The other category that has been used in the financial statement of the organization or in the balance sheet is the trade receivables. However, allowances for bad debt or receivables that might not be received by the company are reduced from the account. These allowances for bad debt are recorded in the profit and loss statement of the company which is according to the international financial reporting standards. Receivables that have extended period are recorded as the fixed assets of the company in the balance sheet and receivables that are expected to be received earlier or within a year are recorded in the current assets of the balance sheet. CASH AND CASH EQUIVALENTS: One of the most important categories in the balance sheet is the cash and cash equivalents. Cash and cash equivalents are calculated using cash flow statements which are mandatory for any institution to prepare according to the International Financial Reporting Standards and Bovis Homes Group PLC makes use of cash flow statement to determine the net value of cash that the company has at end of the period. The cash flow statement determines three main heads; cash flow from operations, cash flow from investing activities and cash flow from financing activities. Bovis Homes Group PLC has used all these three heads in preparation of cash flow statement and thus it follows the IFRS. PART THREE Current Ratio: The current ratio of the company determines the ability of the firm to payoff its current liabilities against current assets (Keown, Martin, Petty, Scott, 111). The formula of calculating the current assets of the company is as follows: Current Ratio = Current Assets/ Current Liabilities Current ratio of Bovis Homes Group PLC has been calculated in the following table: 2010 2009 Change in Percentage Current Ratio 6.10 8.65 -29.47% Current Assets 868,634 776,906 11.81% Current Liabilities 142,454 89,862 58.53% The current ratio of the company has reduced by almost 30% from 2009 to 2010. The ratio was 8.65 in 2009 which has been reduced to 6.10 in 2010. The main reason for the reduction in current ratio of the company is because of the increase in current liabilities as current liabilities increased by 58.5% in 2010. Quick Ratio: Quick ratio determines the ability of a firm to convert its current assets quickly to pay off its current liabilities. The difference between current ratio and quick ratio is that inventories are deducted from current assets as it might be difficult for a company to convert inventories into cash quickly therefore it is eliminated from the ratio. The formula for calculating quick ratio is as follows; Quick Ratio = Current Assets - Inventories/ Current Liabilities The following table reflects the quick ratio of the company: 2010 2009 Change in Percentage Quick Ratio 0.73 1.63 -55.01% Current Assets - Inventories 104,274 146,197 -28.68% Current Liabilities 142,454 89,862 58.53% The quick ratio of the company reduced from 2009 to 2010 by 55% because of increase in current liabilities as well as decrease in current assets minus inventories. The current assets minus inventories reduced by 28% and current liabilities increased by 58% thus both contributing towards an increase in quick ratio. Thus it is indicating that the liquidity position of the company has got worsened from 2009 to 2010. Interest Coverage Ratio Interest coverage ratio indicates the ability of a firm to pay off its debt charges or interest charges. The interest coverage ratio of the company is as follows: 2010 2009 Change in Percentage Interest cover 3.85 1.43 169.74% Profit from operations 21,633 17,397 24.35% Finance Cost 5,614 12,178 -53.90% The interest coverage ratio of the company has improved from 2009 to 2010 particularly because of the increase in profits. In addition to this, the reduction in financing cost of the company has helped in improving the interest covering ratio. Gearing Ratio: Gearing ratio of the company reflects the ratio of debt of the company against its assets excluding current assets of the company (Bull, 22). The gearing ratio of the company is as follows: 2010 2009 Change in Percentage Gearing Ratio 9.98% 4.94% 101.81% Non Current Liabilities 78,788 36,024 118.71% Total Equity + Non-current liabilities 789,605 728,590 8.37% The gearing ratio of the company has increased from 5% to 10% which indicates almost 100% increase showing that the long term liabilities of the company had increased drastically. Therefore the position of the company has become riskier however some amount of debt is required to improve the earnings of the shareholders. CONCLUSION Annual reports are an important way to send the message to all the stakeholders of the company regarding its future and show the financial position of the company. It is important that annual reports reflect true picture of the financial position of the organisation and for this reason, different notes are accompany in the annual report to give details of every head of the annual report. In addition to this, annual reports are important in explaining the financial strength and position of the organisation. Works Cited Bovis Homes. Annual reports and accounts 2010. 2 Nov. 2011 http://www.edocumentview.co.uk/bovishomes2011/2011/48169/632094b421b94e10982b46cc4f028031/R%26A_2010.pdf Bull, Richard. Financial ratios: how to use financial ratios to maximise value and success for your business. CIMA Publishing: Oxford, 2007. Keown, Arthur, John Martin, William Petty, and David Scott. Foundations of Finance: The logic and Practice of Financial Management. New Jersey: Prentice Hall, 2001. Read More