Assessment 1:
Accounting Concepts and Framework Essay
In this essay in respect of my chosen company, Cable and Wireless PLC, the functions and importance of their annual report will be explained. With the use of three different users of Cable and Wireless’ financial statements, their usefulness and why they are useful to the user will be explained. As well as a discussion on the benefits and limitations of the data provided.
One function of Cable and Wireless PLC’s annual report is that it has a responsibility of reporting its current status through the annual report to the investors or shareholders. This is important
A second and one of the most important functions of Cable and Wireless PLC’s annual report is decision making. Many different types of enterprises and users make decisions based upon the information provided by the company about changes in their financial position and the performance. Cable and Wireless’ annual reports are important to its decision making as it allows users, such as potential investors or current shareholders to decide on whether to further invest in the company, or to sell their share of the company. Therefore Cable and Wireless’ annual report can be useful to wide variety of users in their economic decisions. This is extremely important in today’s economic climate, with the recession many companies have been forced to close or go in to liquidation, making the financial statements of a company even more important to its suppliers customers and potential investors.
Finally a third function of annual reports is its affect on public relations. The release of the annual report can be an opportunity for an enterprise to publicise its corporate image.
With the use of Cable and Wireless PLC’s Annual report we are able to see the following financial statements:
- Income Statements
- Statement of Financial Position (balance sheet)
- Cash flow Statement
Cable and Wireless PLC have a number of different income statements within their annual report, including worldwide income statements and CWI income statement, but the summary consolidated income statement provides full information for the group. Cable and Wireless PLC’s Income statements for the year ended 31 March 2009, reports upon the company’s revenue and other operating income of �3,648 million. Expenses of (�3,357 million). After other operations and tax the income statement provides us with the profit/ (loss) for the year of �226 million. Which is an increase upon the previous year of �6 million.
The statement of financial position or balance sheet, is used in reporting the level of its assets and liabilities as well as the ownership equity as at 31 March 2009.
From the companies statement of financial position it is possible to see changes between the years 2008 and 2009. Total assets increased by over �1 billion, however the level of current assets fell and non-fixed asset increased. Total liabilities also increased by over �800 million with both current and non-current liabilities increase. Producing the negative net current assets of (�314 million) compared to the previous year of �18 million yet a net asset increase by �166 million, which equals the level of total equity increase.
The cash flow statement simply reports on the company’s cash flow activities. This is important because a healthy level of cash flow is necessary in the daily running of the company in transactions especially for the paying of suppliers and wages and salaries.
Investors or Shareholders in Cable and Wireless PLC would have an enormous interest in its financial statements, especially in its profit and loss account. This is because shareholders are always in need of knowing whether they will receive a dividend from the company’s profits and what size. The main interests are the growth of the business in terms of volumes of sales, the profitability such as Cable and Wireless’ �226 million profit year ended 31 March 2009. As well as the value of the business or share price and the levels invested by the business. These are all many reasons for why shareholders have such a key interest in the financial statements of Cable and Wireless.
– Information about growth – sale information of competitors
Customers
Customers are a second key user of Cable and Wireless. An example of one of their more recent customers is Tesco, after a �100 million deal tied-up in 2008 (Times) providing Tesco employees with mobile phones. And even more recent Tesco has linked with Cable and Wireless in a five year deal in providing broadband and home phones services. As Tesco have now signed this deal they will be keeping an eye on the ability of Cable and Wireless PLC to continue to exist and show levels of profit. Tesco will have a long term interest in these accounts; they are likely to have an interest in the growth of sales, Cable and Wireless’ new product development and investment put in to the business. Therefore the annual report of Cable and Wireless is especially important
– Sales growth
– New product development
– Investment in the business (e.g. production capacity)
Another user which would be highly interested in Cable and Wireless PLC’s financial statements would be the government. The main purpose being is that Inland Revenue need information on profitability for the purpose of corporation tax. There are many taxes and many other government agencies in which a corporation such as Cable and Wireless PLC must pay. Examples including sales tax, corporation tax, and value added tax (VAT). National insurance contributions, capital gains tax and other local business rates are all different kinds of tax requiring financial information from Cable and Wireless PLC. Therefore the government would be especially interested in the income statement of Cable and Wireless PLC in order to calculate the correct amount of taxation.
Financial accounts can benefit a number of users in different ways. One main benefit to many users is the ability to use ratio analysis. As per Jim Burton, ‘By creating a set of financial metrics, including ratios and other measurements, financial statement analysis can provide invaluable insight about the business.’ For example the use of a profit and loss account to calculate the dividend cover ratio, is used by investors to give a basic understanding of how many times the shareholders’ dividends could be paid out from the company’s profit. Therefore informing the shareholder of how likely they are to receive their dividends. There are other ratios which can be used by investors such as the earnings per share ratio, which investors can use as a good indicator of a firms use of investors’ capital, measuring the profit performance overtime. Potential investors and shareholders can use this ratio to compare it to previous year’s earnings.
However window dressing is a problem when looking at a set of financial statements, because they can mislead the user. As per Ben Best ‘those who prepare financial statements often have an intention to misinform rather than to inform.’ ‘ Window dressing is always a main limitation to the use of annual reports, they present data which can be slightly manipulated in different way for different purposes
In conclusion there are many ways that Cable and Wireless PLC can be used by stakeholders. There are both benefits and limitations; however it is easy to see that the benefit of a company producing annual reports outweighs the limitations.
Referencing
Jim Burton, 2008. Private companies reap multiple benefits from financial statements [online]. Available at:
http://denver.bizjournals.com/denver/stories/2008/01/21/focus4.html
[Date accessed: December 2009].
CABLE & WIRELESS PLC, 2009. Title [online]. Cable and Wireless PLC. Available at:
http://www.cw.com/ [Accessed: October 2009].
http://tutor2u.net/business/accounts/annual-report-and-accounts-introduction.html
BEN BEST, 2009. The Uses of Financial Statements Place of publication: Publisher. Available at:
http://www.benbest.com/business/finance.html [Accessed: December 2009].
THOMAS, Andrew, and WARD, Anne Marie, 2009. Introduction to Financial Accounting. Sixth Edition. Place of publication: Mc Graw Hill.
LILLY PEEL, 2008. Tesco goes mobile with �100m Cable & Wireless deal. The The Times [online], 12 September. Available at:
http://business.timesonline.co.uk/tol/business/industry_sectors/telecoms/article4735906.ece
[Accessed: November 2009].
IAN KING, 2009. Tesco links with Cable & Wireless in broadband and home phones push. The Times [online], 20 November. Available at:
http://business.timesonline.co.uk/tol/business/industry_sectors/retailing/article6924195.ece [November 2009].