Financial and management accounts provide information to stakeholders of a company, so that they see at a glance how it is performing financially.
Financial accountants prepare the reports from information gathered and present them in the various forms; Profit and Loss; Balance sheets; ratio analysis etc. Management accounting then uses this information and manipulates it in order to plan resource, prepare budgets, plan manufacturing and distribution etc. Appendix II demonstrates the various interested parties.
Information is used in different ways dependent on their business need. A lender will assess whether the business is a viable one and that they are likely to get a return on investment; a shareholder will be keen to see that investments are going to provide them with a profit. The Inland Revenue will also review the accounts so that they can check that the directors have prepared the corporation tax calculations in line with the latest tax regulations. All company accounts are held centrally by Companies House and are publicly available.There are various reasons for this: competitors’ may wish to view the reports for industry positioning; they may be used for market trending; and investors may use them to research companies’ finances before investing. It is a legal requirement that each company provides comparative figures for the previous year. Directors’ reports are deemed as legislative and must have official auditors’ reports which are independently checked by a firm of accountants. External accounts are regulated by the following: Companies Act (1995) EU rules and these are mostly concerned with financial disclosure.
Profit and Loss accounts are seen as more of a summary level with Balance sheet being more governed by the Accounting Standards Board (ASB) within the UK and FASB in the USA. The ASB stipulate that Brands should not be included as a measurement standard. In the UK the stock exchange require a set of Interim half yearly accounts whilst in the USA they are required on a quarterly basis. In France and Germany companies are financed more by family and banks than by the industry and therefore there is less emphasis on accountants.Financial ratios are an easy system which can give important trend information about a company’s future potential based on historical data. Finpipe. com, (2003), summarises the use of ratio analysis quite succinctly: “Financial ratio analysis is the calculation and comparison of ratios which are derived from the information in a company’s financial statements.
The level and historical trends of these ratios can be used to make inferences about a company’s financial condition, its operations and attractiveness as an investment. ” Ratios are used to raise questions more than provide answers.For investors it would be key that earnings per share, dividend per share and the price/earnings ratios are strongly considered in order that they can make an informed choice to continue with the investment or not dependent on the trend in market value. Six Continents underwent a demerger and separated into two groups, the M and B Group and the InterContinental group. During the demerger process the press speculation was high due to the fact that the share price had fallen over 50% over the previous two years.
Splitting the company down into the pubs and hotels divisions was seen to be an improvement.In an article written by Bill Mann, (March 27, 2003), he states the following: “It’s a perfect example of the parts being worth more than the whole. ” “Revenues and earnings reflect this: Revenues are down by 40% to about $5 billion per year over the same time period, and earnings from operations are down by about 28%. ” This could be seen as a contradictive situation where the ratios would indicate that this was not a worthwhile investment opportunity in actual fact people were prepared to invest more into individual parts of the company than they were as a whole.As depicted again by Mann’s comments, (March 27, 2003), on the demerger: “What’s interesting about these bids, and their rejection by Six Continents, is that the company’s market cap currently sits at $4. 3 billion. That’s right — it rejected a bid for a portion of the company valued at more than the market prices the entire thing.
Six Continents sits at a price-to-book ratio of just over one-half. ” 5. Ratio Analysis of the M & B Financial accounts The ratio analysis in Table.
1 has been calculated using figures extracted from the M ; B Company Profit ; Loss account and the Company Balance sheet. (See Appendix III and IV respectively)Reviewing financial accounts by using ratio analysis can often give a good indication, to various stakeholders, of trends in a company operation that may not be apparent from first glance. M ; B’s accounts show a Return on Shareholders funds, (ROSF), more commonly known as Return on Capital Employed, (ROCE). These have grown by just over 1% on the previous year but down 2% from 2000.The operating profit increased from the previous year by 20%. Almost 50% of that is composed of profit as a result of disposing of loss-making assets. Conversely M & B invested in the more profitable assets.
This is backed up in the M and B Group financial report, Ernst & Young LLP, (2003), “The M and B Group continued to actively move the mix of its estate towards larger branded outlets, moving from 792 branded outlets at the end of the financial year 2000 to 967 at the end of the financial year 2001.In February 2001, the M and B Group sold 988 pubs with limited growth potential as managed pubs to Nomura. ” A downward trend in asset turnover could indicate that M & B have strategically increased profit margins to give the appearance of a healthy company in preparation for the demerger. Investopedia.
com (2003), state that ‘those with high profit margins have low asset turnover – it indicates pricing strategy’. This could be true of M & B as their operating profit has increased in the last year.