Important Disclosures by the Management - Case Study Example

Table of Contents Table of Contents 1 Introduction 2 Important disclosures by the management 2 Financial ratios 3 Analysing the Income Statement 3 Analysing the Balance Sheet 4 Analysing Cash Flow Statement 5 Introduction The companies are mandated by legal requirements to prepare annual reports. These reports give an idea about the financial performance of a company in a year. Annual reports comprise three key statements- Profit and loss account, Balance Sheet and Cash flow Statement. These statements are prepared in accordance with a set of accounting standards. The external parties like stakeholders, creditors, government etc can get a fair idea about the overall functioning of the business from these financial statements. Important disclosures by the management The public companies present a summarised picture of their business operations for the previous year and also make disclosures relating to future plans of the company. Other than the three key statements the annual reports include- Analysis and discussion by the company management; report relating to internal control and report stating the fairness and transparency of the financial statements. Under the management discussion and analysis section there is an explanation with regard to any significant changes in the current year’s performance over the previous years (Warren, et al., 2008, p.785). In the financial statements published by Sony Corporation for the financial year ending 2010 the Sales and operating revenue of the company for the last three financial years has been shown in a comparative way. The operating income of the company for the last three years has also been compared in the form of a bar chart. This shows how this income had dipped in 2009 but recovered, albeit marginally, in the 2010 fiscal. The marginal rise in the revenue is a positive sign for the investors as it signifies that the company has managed to overcome the losses of the previous years. Various other charts relating to Free Cash flow, Capital expenditure and R&D investment have also been shown by the company. These give an idea about the investment practices of the company. Financial ratios Financial ratios can be computed using the financial data of the company relating to net income, sales, financial expenses, debt, equity, assets etc. Using these one can get an idea about the liquidity strength, profitability, debt position, earnings capacity of the company. This is considered to be the most effective tool in assessing the financial soundness of the company (Gibson, 2008, p.452). Analysing the Income Statement For the financial year 2010 Sony has prepared a Consolidated Statement of Income where it has depicted the financial data for three years- 2010, 2009 and 2008. Using the sales and net income for this three year period one can prepare the net profit margin which will give an idea about the company’s ability in controlling costs (Kelly, 2009). For the company there has been a decline in the level of sales over the last three years due to which the profits have also deteriorated. From this it can be inferred that there has been a fall in the profitability position of the company. This is not a good sign as the impact of the falling profits will also be felt on the returns that the company is able to generate for its shareholders. The interest expenses of the company have increased over the last three year period. The Interest expense in 2008 was ¥ 22931 million in 2008 and this increased in the subsequent year to ¥24376 million. However the loss incurred by the company in 2009 shows that the earnings of the company were not enough to support the financial obligations. Despite the loss the amount of interest expense remained more or less the same in 2009 (Sony Corporation, 2010). This is not a good sign as it will overburden the company. As a result of this the interest coverage ratio of the company which is a measure of the interest bearing capacity of the company deteriorated significantly. Analysing the Balance Sheet In the Balance Sheet of Sony Corporation the data relating to 2009 and 2010 have been presented. The Cash position of the company has improved significantly over the last year as evident from the sharp rise in Cash and Cash equivalents of the company. There has been a sharp fall in the short term borrowings of the company which has reduced to less than a third in 2010 as compared to 2009. The rise in the current assets has been more over the rise in current liabilities in the year. From this it can be interpreted that the current ratio of the company has improved over the last year i.e. the liquidity position of the company has improved, even though marginally, in 2010. This implies that the company has resources to take care of its short term commitments (Brigham, 2009, p.87). There has been a considerable rise in the long tem debt position of the company over the year. If a rise in debt is accompanied by a rise in the earnings then there is not much to worry but if this happens in the times of falling earnings then this can be a financial hazard for the company. As in the case of Sony the company has raised its debt despite the fall in the earnings over the last three years. The debt equity ratio of the company highlights its excessive leverage position (Sony Corporation, 2010). Analysing Cash Flow Statement The Cash flow Statement of the company gives an insight into the net cash from operating, financing and investing activities. A rise in the net cash from operating activities is a good sign as it suggests that the company can meet its liabilities out of its profits. For Sony this amount declined in 2009 to ¥407153 million but in the immediately next year this increased to ¥912907 million. This is a positive sign. There has been a fall in the investing activities of the company as evident from the fall in net cash from investing activities from ¥1081342 million in 2009 to ¥746004 million in 2010. In this financial year the company has raised finance from a number of sources as suggested by the rise in net cash flows by financing activities from ¥267458 million in 2009 to ¥365014 million in 2010 (Sony Corporation, 2010). Conclusion The annual reports of a company reflect the financial state of the company. An analysis of the trends in ratios and important financial figures can give the stakeholders an idea about the financial strength of the company. Reference Brigham, F.E. Houston, F.J. 2009. Fundamentals of Financial Management. Cengage Learning. Gibson, H.C. 2008. Financial Reporting and Analysis. Cengage Learning. Kelly, J. 2009. The Neatest Little Guide to Stock Market Investing. Penguin. Sony Corporation. 2010. Annual Report 2010. Available at: http://www.sony.net/SonyInfo/IR/financial/ar/8ido18000003dkyy-att/8ido18000003dl0u.pdf [Accessed on December 3, 2010]. Warren, S.C. Reeve, M.J. Duchac, E.J. 2008. Accounting. Cengage Learning. Bibliography Hey-Cunningham, D. 2002. Financial Statements Demystified. Allen & Unwin. Stanko, B. Zeller, T. 2003. Understanding corporate annual reports: a user's guide. John Wiley and Sons. Stittle, J. 2003. Annual reports: delivering your corporate message to stakeholders. Gower Publishing, Ltd. Read More