Published Financial Statements - Essay Example

Introduction Financial information about a company has always been used by persons inside and outside the company as a basis for making decisions about the organization and their relationship with it. According to Lasher (2008, p. 69), financial information is the sole responsibility of the firm’s management. The accountants within the company create it, the auditors review it, and once prepared; it is published to a variety of audiences who utilize it in making decisions about the organization. The financial information is published as financial statements by the management of the company. These statements are basically a report on the performance of the company. This paper explores why published financial statements should be produced and audited, and analyzes reviews of the published financial statements for Domino’s. Why Published Financial Statements are Produced and Why they Need to be Audited? Published financial statements are used by millions of people who depend on them for vital information. This information is, in most instances, on the financial health of the business concern in question. Tracy (2009) classifies these users as investors and financial analysts, vendors, or creditors, and the management. These users are the ones who make it necessary for financial statements to be published. Financial statements are published for the following reasons; To avail information and data concerning the company’s financial position and performance. This information includes the cash flow and profitability position of the company. This information allows financial analysts to assess the financial position and performance of the company and trends in the performance To avail information to outside investors who comprise people or organizations that may be interested in buying the company’s stocks or lend it money. Lenders need information about the company’s stability and cash flow. Publication of financial statements avails them with this information. To avail information concerning the likelihood of the firm to have enough cash to pay its debts in the immediate future. This information is needed by vendors and creditors in view of the fact that they advance funds to the company in form services and products. To avail information concerning the failures and successes in each of the many facets of running a business to the management. The management makes use of this information to identify relative strengths and weaknesses in operations and to find the areas to put effort to correct problems and enhance performance. Apart from publishing the financial statements, management needs to ensure that they are reviewed by auditors. The auditors are normally appointed to check the correctness and fairness of the financial statements. According to Kumar and Sharma (2005), auditors occupy a fiduciary position within a company where they act as trust and confidence references in a company. The Company Acts and the generally accepted auditing standards require that the financial statements of public companies to be audited. Financial statements are audited for the following reasons: To protect the interest of outside stakeholders and investors To limit the extent of the poor accounting practices in public firms To provide the firm with proof to investors about the company’s capacity to operate profitably and within legal limits To provide qualified audit opinion to the company which can be a warning that certain business operations or financial data is questionable To ensure credibility in the reported financial statements due to the impartiality and independence of the external auditors Report on the Analysis of Domino’s Financial Statements To the Board of Directors Domino Company United Kingdom This report is an independent review of the accompanying balance sheet of Domino’s as of June 30, 2009, and the related statement of cash flow for the year ended. This review covers the application of analytical procedures to the management’s financial data and making further inquiries of the firm management. This review is less intensive compared to an audit whose objective is to express an opinion as regards the financial statements as a whole. Accordingly, this review does not express such a thorough and in-depth audit opinion. It is the responsibility of Domino’s management to ensure a precise preparation and fair presentation of financial statements in line with generally accepted accounting principles. Additionally, they are to design, implement, and maintain internal control appropriate to the preparation and reasonable presentation of financial statements. The responsibility of this review is to produce a report in accordance with the acceptable standards for accounting and review. These procedures require the review to carry out procedures to obtain a limited assurance that no material modifications exist that should be carried out on the financial statements. The results of these procedures provide a logical basis for this report. Based on a review of Domino’s financial statements, no existent material modification that should be carried out on the accompanying financial statements; in order to conform to the generally accepted accounting principles in the United Kingdom was found. Nevertheless, a ratio analysis of some of Domino’s figures revealed the following.     2009 2008 Liquidity Ratios Current Ratio 1.0172 1.3093   Quick Ratio 0.9496 1.1832 Profitability Ratios Gross Margin 0.3834 0.3737   Operating Margin 0.0161 0.1728   Profit Margin 0.1153 0.1211   Return on Equity 0.5048 0.8538   Return on Assets 0.1495 0.2407 Activity Ratios Asset Turnover 1.2958 1.9866 Debt/ Financial Leverage Debt ratio 0.7038 0.7180   Debt-to-Equity Ratio 2.3769 2.5463 Domino’s liquidity positions decreased as indicated by a current ratio of 1.0172 in 2009 from 1.3093 in 2008 and a quick ratio of 0.9496 in 2009 from 1.1832 in 2008. The profitability increased as indicated by a decline in the gross margin from 0.3737 in 2008 to 0.3834 in 2009. The profit margin on the other hand fell from 0.1211 in 2008 to 0.1153 in 2009. The activity ratios also decreased as indicated by the decline in the Asset Turnover ratio from 1.9866 to 1.2958. The financial leverage ratios slightly decreased as illustrated by the decline in debt ratio from 0.7180 in 2008 to 0.7038 in 2009. New Stores (New Market) 1. Flexed Budget for 2010 Clarke (2002, p. 351) defines a flexed budget as the budget that would have been prepared if one had known earlier what the actual output would be. In some sense, this budget is a retrospective calculation, and from a control point of view, it enables the isolation of the effects of changes in the level of business activities. These changes in Clarke (2002) result from changes in costs, selling prices and operating efficiencies. Lucey (2002, p. 390) refers to the flexed budget as a flexible budget which recognizes different cost behaviour patterns and is designed to change as the volume of activities also changes. Below is a flexed budget for the new store for the year 2010 based on 2009 budget and related information about this store, that is; its capacity, estimated staff, and costs among others. Income Statement Line-Item Original Budget Flexed Budget (A) Actual Results (B) Flexible Budget Variance (A) - (B) Sales 654,472 499,428 155,044 344,384 Costs:   -   - Pizza bases 42,952 2,577 45,529 42,952 Cheese 21,840 1,310 23,150 21,840 Sauce 10,920 437 11,357 10,920 Toppings 32,760 1,310 34,070 32,760   108,472 5,635 114,107 108,472 Premises   -   - Rent 24,000 2,400 26,400 24,000 Business Rates 12,000 1,200 13,200 12,000 Utilities 15,000 3,000 18,000 15,000 Insurance 8,520 3,480 12,000 8,520 Cleaning 14,500 - 14,500 14,500 Marketing 18,600 - 18,600 18,600   92,620 10,080 102,700 92,620 Employees   -   - Store manager 21,000 25,000 46,000 21,000 shift Leader 25,012 - 25,012 25,012 Casual Staff 135,720 - 135,720 135,720   181,732 25,000 206,732 181,732 profit before franchise costs 271,648 (540,143) (268,495) 271,648 Franchise costs (10% of profits) 27,165 32,219 (32,219) 64,439 store profit 244,483 -    207,209 2. Breakeven point Breakeven is a financial term that describes a business position where the sales revenue is equal to the total expenses. Pinson (2008, p. 98) describes it as the point at which the total costs incurred by a company exactly equals the sales volume, and at which the firm has neither made a loss nor a profit. The breakeven analysis of Domino is illustrated below. fixed Costs   Rent 24,000 Business Rates 12,000 Utilities 15,000 Insurance 8,520 Cleaning 14,500 Store manager 21,000 Shift Leader 25,012 Casual Staff 135,720 Marketing 18,600 Total Fixed Costs (TFC) 274,352 Sales volume target (SV) 108,000 Fixed Cost per unit (TFC/SV) 3 Variable Costs   Pizza bases 42,952 Cheese 21,840 Sauce 10,920 Toppings 32,760 total Variable Costs (TVC) 108,472 Variable Cost per unit (TVC/SV) 1 Selling Price (SP) 9.50 Breakeven point (FC/[SP-VC]) 0.30 Break even for year 32,293 A breakeven of 32,293 will mean that the company needs to have sales of 32,293 rather than the estimated 108,000 per annum for it to recover its costs. 3. Cash flow forecast Cash flow forecasts are usually used to project the flow of cash into and out of a business (Stone, 2003). They are never concerned with the growth or profitability of the company, rather they are totally focused on thee firm’s cash situation or liquidity (Fight, 2006). Domino’s cash flow forecast is illustrated below. Cash Flow forecast for 2010   Receipts   Sales 1,026,000 Total receipts 1,026,000     Payments   Rent 24,000 Business Rates 12,000 Utilities 15,000 Insurance 8,520 Cleaning 14,500 Store manager 21,000 Shift Leader 25,012 Casual Staff 135,720 Marketing 18,600 Pizza bases 42,952 Cheese 21,840 Sauce 10,920 Toppings 32,760 Loan Repayment in March, June, September, and December 240,000 Pizza Oven in March 210,000 Franchise fee 27,165 Total Payments 859,989 Cash Surplus 166,011 Opening Cash Balance 57,200 Ending Cash Balance 108,811 Internal Report for the Sales and Marketing Director The sales and marketing involve three categories of functions: product or market management, sales, and marketing communication (Coe, 2004). Westwood (2002) proposes that sales and marketing functions should never be separated even if sales directors are non-existent in firms. Below is an internal report to the new sales and marketing director of Domino’s. Sales and Marketing Director New Store Domino Company Domino is celebrating its silver anniversary this year with a profit before tax of 25.4 million pounds and system sales of 155 million pounds. These figures illustrate a 10.4% and 14% increase in profits and sales respectively. Some of the events that took place in 2009 include: Opening up of fifty-five new stores and a mobile unit resulting into six hundred and eight stores by the end of the year Near-completion of new commissary in West Ashland Utilisation of surplus capital to restart share buyback programme Dividend payment totalling to 10.5 million pounds enabled the return of 18.1 million pounds in capital Opening up of stores in smaller towns Increase in the average number of stores per franchise to 4.5 Growth in customer base by 26.9% to 3.4 million The expectations for 2010 that Domino’s has, include: Establishing the store in Newmarket Achieving the target of three hundred pizzas per day at an average price of 9.50 pounds Introducing a wide variety of pizzas Reaching an average sales target of 1.026 Million pounds The ideas for future growth include: Revision of store opening plans to fifty-five new stores each year and a target of 1,200 new stores by the end of 2021 Ensuring the return of capital not required in the business through purchase of shares and paying of dividends Utilisation of franchisees to boost sales and store profitability Conclusion In conclusion, a company’s financial information is of prime importance to investors, the management, creditors, and the employees themselves. This is because it portrays the firm’s health and progress. These financial information statements ought to be published and audited so that the opinion of an independent opinion concerning their credibility should be obtained. Domino’s financial statements just like any other financial statement have provided an overview of how the firm has performed in 2009. In addition, this information has been used to forecast 2010 in terms of cash flows and flexed budgeting. In this respect it has enabled an overview of how the company will perform in the following year. References Coe, J. M., 2004. The fundamentals of business to business sales and marketing. McGraw-Hill, New York. Clarke, P. J., 2002. Accounting information for managers. Oak Tree, Cork. Fight, A., 2006. Cash flow forecasting. Butterworth-Heinemann, Burlington, MA. Kumar, R. and Sharma, V., 2005. Auditing: Principles and practice. Prentice-Hall, New Delhi. Lasher, W., 2008. Practical financial management. 6th edn. South-Western Cengage, Mason, OH. Lucey, T., 2002. Costing. Thomson, Bedford Row. Pinson, L., 2008. Anatomy of a business plan: The step-by-step guide to building a business and securing your company’s future. 7th edn. Thomson, Tustin, CA. Stone, P., 2003. Understanding financial accounts. Oxford: How To Books. Tracy, J. A., 2009. How to read a financial report: Writing vital signs out of numbers. NJ: John Wiley & Sons, Hoboken. Westwood, J., 2002. The marketing plan: a step-by-step guide., London: Kogan Page. Read More