Best Essay Service Finance Paper on Globespan Group plc

Finance Questions

Section A

 Question One:  Globespan Group plc

A). Accounting Ratios

  1. Return on capital employed (ROCE)

ROCE=Profit before charging Interest and Tax (EBIT)/Total Assets-Current Liabilities

ROCE for 2007= (19,318) +1,784/22832= -0.7680

ROCE for 2008= 1,290+1,172/24569= 0.100

  1. Gross profit margin

Gross profit margin=Revenue-cost of goods sold/Revenue

Gross profit margin ratio for 2007=2,643/278,693=0.00948

Gross profit margin ratio for 2008=21,469/255,076=0.0842

  1. Turnover of Debtors (Assuming 365 days in a year)

Turnover of debtors= (Trade debtors/Turnover)*365

Turnover of debtors for 2007= (29585/278,693)*365= 39 days

Turnover of debtors for 2008= (41,149/255,076)8365= 59 days

  1. Current Ratio

Current Ratio=current assets/current liabilities

Current ratio for 2007=59187/28810=2.054

Current ratio for 2008=72,126/5176=13.935

  • Gearing Ratio

Gearing ratio=Short-term debt+ long-term debt+ bank overdrafts/Shareholders’ equity

Gearing ratio for 2007= (87,997+9,675)/13157=7.4236

Gearing ratio for 2008= (77,302+6,661)/17908= 4.6886

b).Comments about the company’s performance, strength and the cash flow position

The financial performance of Globespan group improved significantly in 2008 compared to the performance in the previous year. The company reported 692,000 pounds after tax profits compared to 13,085,000 pounds after tax loss in the previous year. The company’s cash position indicated an upward trend in 2008 as compared to 2007. Although it is not in good cash position, there was a significant improvement. According to return on capital employed ratio, the company profitability increased as indicated by the return on capital employed ratio from -0.768 in 2007 to 0.1000 in 2008. The company improved efficiency in employing shareholders capital to create wealth for shareholders. The increase in the current ratio from 2.0 in 2007 to 13.935 in 2008 indicates proper working capital management in 2008 that is crucial for a company’s progressive growth. The decrease in debtors for the year 2008 was as a result of relaxation turnover of debtors’ policy by the company in 2008. The increase in financial performance in 2008 is attributable to decrease in the company’s indebtedness as indicated in the gearing ratio. A significant proportion of the company’s operations were funded from the shareholders’ funds in 2008 as opposed to 2007 when the company highly relied on debts to finance its operations. Most of cash to finance operations was obtained from the sale of tangible assets as indicated in the cash flow statement.

c). Limitations of the analysis and evaluations

Analysis of the company’s statements of accounts is paramount the company’s management  and other interested parties such as investors, shareholders, suppliers, employees and government agencies to examine the past, present and future performance of the firm. The analysis provides the relative measure of the company’s conditions to allow for decision-making. The evaluation and analysis of Globespan group plc is based entirely on financial statements. Financial statements are imitation of financial dealings that a business has and may not be incomplete and inaccurate at times. Companies are influenced by economic, social and financial factors to a great extent. Financial statements only capture and record financial aspects leaving out economic and social aspects. The net profit recorded in the income statement and the financial position as indicated in the statement of financial position are not precise but fundamentally short term reports. The financial statements only take into account the quantitative factors leaving out qualitative aspects such as prestige and reputation of the company to the public, the level of honesty in the management and customer loyalty. Some items are missing in these statements including provisions for bad debt and stock valuation implying the figures provided reflects the accountants’ decisions. Accountants exaggerate financial information to make them appealing in the eyes of investors and shareholders (Ross, 2000). They do not represent the actual and true view of the firm’s financial situation. Financial statements present historical information about the company and tell very little about the future. This therefore implies they do not represent the true view about the company’s future prospects because analysts use the historical information to predict the future. Further, financial statements are prepared on different accounting standards implying they are prone to manipulation by accountants. To advise investors interested in the performance of Globespan group plc, the financial ratios should be benchmarked against industry ratios aggregate economy and how the firm has been performing in the past. The industry ratios allow for comparison of the firm with similar companies in the industry. Aggregate economy allows for understanding and estimation of the company’s performance under the changing economic times and conditions. The information about aggregate economy and industry ratios are necessary to make informed analysis and evaluation of Globespan group plc and consequently advise the investor.

Section B

Question Two

A). Benefits of applying information contained in the cash flow statement for company analysis.

Cash flow statement is one of the most informative statements. Most users of financial statements information prefer applying the metrics derived from the cash flow because it is hard to manipulate compared to other financial statements. Cash flow to debt, free cash flow and cash flow per share are useful parameters that can easily be calculated from the data portrayed in the cash flow. These metrics provide a unique insight of financial health of the company. Cash flow to debt provides information to financial analysts to decide whether a company generates adequate cash to service its outstanding debts falling due within one year period. Credit rating forms use cash flow to debt rate to provide rating for companies that is relied upon by lenders. Free cash flow shows the amount of cash that a company has from the operating activities after capital expenditures have been accounted for. Free cash flow indicates how flexible the company is financially (Morris & Underdown, 2011). The higher the free cash flows are, the more the comp takes advantage of emerging opportunities. The cash flow per share is used by analysts to determine the extent to which a company is able to finance future growth. A high cash flow per share reduces the need for borrowing funds since the firm is capable funding its operations internally without turning to equity markets or external debt.

b). Importance of the three primary activities in a company’s cash flow statement under IAS 7

Cash flow statement is used to show the company’s ability to generate cash as well as how it is spent during the reporting period helping the company’s management to see where cash is going. It comprises of 3 primary sections; operating, investing and financing activities. Financing activities part records the cash obtained and spent during the normal operating activities of the company. It focuses on variations occurring in the current liabilities and current assets ledger accounts. These include accounts receivable, accounts payables, unearned revenue and prepaid insurance. Investment activities section records all the company’s investments including sale or purchase of plant, property and equipment (Ross, 2000). This section focuses on the changes in vehicles, land and buildings, capital equipment among other long-term investments. Financing activities is the last section that records sale or purchase of stocks and bonds. Dividends payment is also captures under this section. The applicable types of accounts include the paid-in-capital account, bonds and notes payable, retained earnings and stock.

c). Advantages on the accrual basis of accounting, meaning of accruals anomaly according to Sloan

Accrual basis of accounting enables firms to recognize revenue and expenditure when they are earned and incurred respectively. It tells the business how it is performing without necessarily waiting for cash transactions to take place. Major benefits of this kind of recording transactions include accuracy because the firm is capable of accurately assessing its debts and income. In addition, accrual accounting enables companies to plan for the future because they do not have to receive cash to estimate the profits for a particular period. Further, it promotes better management and monitoring of finances. Companies are able to predict financial trends and prepare financial statements that represent its true view.

Accruals are less persistent according to Sloan (1996) than cash flows. Companies with the high level of accruals exhibit negative and abnormal future returns on stocks while those with low level of accruals exhibit positive abnormal future returns on stocks. Sloan feels that investors do not completely comprehend the great subjectivity in estimation of accruals. This causes them to make uninformed decisions.

Question Three

A). Classification of operating leases and finance leases according to IAS 17

IAS 17 provides guideline on accounting disclosures and policies that are applicable to leases (lessors and lessees) Leases are classified as operating leases (which leads to recognition of expense by the lessee and the lessor retains and recognizes the asset) or finance lease (that transfers rewards and risks of ownership substantially giving rise to liability and asset recognition by the lessee and a receivable on lessor). The substance of the transaction determines if a lease is an operating lease or a finance lease instead of its form. A lease is often classified as finance lease if; it transfers the ownership of an asset by the end of lease period to the lessee, the lessee can purchase the asset at a lower price that the asset’s fair value when the option becomes executable, the lease period covers much of the asset’s economic life, the asset leased is specialized in nature so that only the lessee is capable of using the asset without significant modifications being done (Ross, 2000). Where the lease includes buildings and land elements, an entity evaluates the classification as either operating or finance separately. The underlying factor in determining whether land falls under finance or operating lease is the fact that land has indefinite economic life.

b). Operational and the accounting implications of consignments and how the IAS recognizes this arrangement.

Consignment inventory refers to the inventory that is sent to the consignee but is still owned by the consignor. The consignee buys the inventory after reselling or consuming it. This arrangement benefits the consignee in the sense that he does not tie up his cash on inventory. This does not however imply that the customer does not incur any cost related to the inventory. In fact the customer bears managing and storing costs of the inventory. The supplier (consigner) is able to market products better by taking them closer to the consumers. The consignor does this without selling the products to the consignee. Upon delivery of the goods to the consignee, the consignor has to determine whether control of the inventory passes on to the consignee. According to IAS, the consignor does not relinquish the control of goods until they are sold to the consumer or until the lapse of a specific period of time. The consignee is under no obligation of paying for the inventory apart from the agreed upon percentage of sales when the consignee sells the inventory (Morris & Underdown, 2011). Consequently, revenue is not recognized for consignment arrangement once the goods are delivered because the control of goods is not yet transferred. In consignment schemes, the consignor transacts with the end consumer. The consignor contract with the consignee is that of providing services (facilitating the sale of consignor’s inventory).

Question Four

A). Key features of U.K code of corporate governance

The concept of corporate governance aims at facilitating effective, prudent management and entrepreneurial that is capable of delivering long-term success to the company. The initial version of UK code of corporate governance was drafted by the Cadbury committee in 1992. Corporate governance refers to the system under which companies are controlled and directed. The board of directors governs the company while shareholders appoints directors and auditors into office to ensure that their company has a proper governing structure The function of the board include execution of strategic aims, supervising the company’s management and reporting about their stewardship and the company’s progress to the shareholders during the general meeting. Their actions are closely monitored and regulated by the law. Corporate governance deals with what the company’s board of directors do and how they set the values of the firm. It acts as a guide to key components of practices of the board. It is based on good principles of governance; transparency, accountability, focus and probity to ensure sustainable growth of the company. The new corporate governance code applies to the accounting periods starting after 29th June, 2010. The code applies to companies incorporated in UK or elsewhere but with premium listing of shares. To follow the code to the latter, board of directors must think thoroughly and deeply about their implications and overall tasks on a continuous basis. The code assists the board of directors to act in the interest of the company. The changes introduced in the code are expected to promote understanding and greater clarity with regards to the board’s communication and the overall performance (Ross, 2000). The major principles of the code include leadership, accountability, effectiveness, relations with the shareholders and remuneration.

Leadership

According to this principle, every company must be lead by an effective board of directors that is collectively responsible for promoting long-term growth of the company. There must be clarity in division of tasks and roles of the board and those of the company’s top management to ensure smooth running of the company. The principle of leadership provides that no individual should have unregulated powers to decision making. The board chair is responsible for chairing the board meetings and ensuring it is effective in all its roles and responsibilities. As part and parcel of the board, non-executive directors have a responsibility of being actively involved in proposing strategies as well as constructively challenging counterproductive ones.

Effectiveness

To enhance discharge of duties and responsibilities, the board members and committees should possess the appropriate level of skills, independence and thorough knowledge of the company. A formal, transparent and rigorous procedure for appointing directors into office should be put in place to ensure that the board makes well informed decisions. Further, the directors should be capable of dedicating their time and energies to the company’s commitments on a regular basis. Newly appointed directors should be inducted and be surfaced with updates regularly. They should refresh their knowledge and skills continuously to meet the requirements of the company. The company’s management should supply the board with timely and quality information to enable it to discharge duties and responsibilities (Ross, 2000). The board members should conduct rigorous and formal evaluation annually of their own performance as well as those of the committees. In addition, all directors should submit themselves for re-election regularly subject to continuous satisfactory performance.

Accountability

The board is obliged to present the most understandable and balanced assessment of the company’s current position and future prospects. Board members are responsible for determining the extent and nature of the risks they are willing to take in order to achieve planned objectives of the company. They have a responsibility of maintaining sound internal control systems and better management of risks. In line with accountability principle, board of directors should establish transparent and formal arrangements and consider how to apply risk management and corporate reporting as well as internal control principles (Ross, 2000). To achieve this, the board should maintain a proper relationship with the company’s auditors.

Relating with shareholders

This principle requires that shareholders and the board should maintain a dialogue based on objectives and mutual understanding. The board has a responsibility of ensuring that it holds satisfactory dialogue with stakeholders. Specifically, the board chair should ensure that all members are aware of shareholders major concerns and issues. In addition, the chair should communicate the views of shareholders during general meetings. In line with this principle, the board should in the yearly report of the company state the steps it has taken to ensure directors develop an understanding of major shareholders views about the company. This would include face-to-face contacts, brokers or analysts briefings, and survey of shareholders views and opinions. During annual general meeting, the directors should propose resolutions on separate issues (Morris & Underdown, 2011). Further, the company should put in place measures to ensure that valid proxy votes that are received during annual meetings are counted and recorded properly.

Remuneration

The level of remuneration should be adequate to retain, motivate and attract directors for successfully running the company. However, the company should not pay more than what is necessary for this purpose. The proportion of remuneration for executive directors should be structured to link individual and corporate performance with rewards. Directors’ remuneration should be elastic and designed to promote long-term progressive growth for the company. The salary committee has the responsibility of judging company’s position compared to other firms. The board has the responsibility of establishing a remunerations committee comprising of two to three independent directors for recommending the level of remunerations of board members as well as for the company’s top management. The remuneration committee should however take into account the risk of remunerations upward ratchet with no corresponding performance improvement. Executive directors’ remuneration should reflect responsibilities and time commitment. Non-executive directors’ remuneration should not include performance related components or share options (Griffin, 2009). Where exceptional options are granted, they have to be approved by the shareholders and any share options given to non-executive director should be held for at least one year once the director exits from the board.

b). Extent to which we can rely on the accuracy of financial numbers in the audited financial statements

Financial statements provide potential investors, shareholders and managers with information for determining the financial health of the company. Publication of audited financial statements is a legal requirement for listed companies in virtually all countries. Financial statements are useful to the interested parties only when they are accurate. Consequently, companies employ third-party auditors who monitor reliability and accuracy of their financial statements. Third party auditors (Arens & Beasley, 2006). The third-party auditors add value to financial statements in the following ways;

Accuracy

Audited financial statements are free from reporting mistakes including data entry errors because auditors crosscheck the accounting procedures that the company has used in recording invoices and transactions used in preparing the financial statements. For example, if the balance sheet reports $1000000 as assets, the auditor checks the accuracy of the figure by examining the invoices and receipts on file. This provides investors and shareholders with the assurance that the financial statements give an accurate view of financial situation of the company. The need for having financial statements audited by a third-party auditor is brought about by the fact that accountants and internal auditors who prepare the financial statements are different from company owners (Arens & Beasley, 2006).

Information asymmetry

Information asymmetry describes what happens when a company lies on financial statements limiting investors and shareholders access to similar information that the company managers have. Shady companies have two sets of financial statements; the ones they use for running the company and those they show to potential investors and government agencies. However, when the impartial auditor is engaged to check the financial statements, he spots irregularities in accounting procedures and methods that indicate that the accounting statements of the company are bogus.

Standardized

Auditors do not only check for correctness of the information presented in the statements but also ensure that there is consistency with international and national accounting standards. This is useful especially for the case of multinational companies that follow different accounting systems (Arens & Beasley, 2006). Consistency is also checked in audited financial statements to ensure the figures and accounting methods applied are not only accurate but also follow uniform and regular reporting methodology.

Reliable

Even where the auditor does not trace any errors in financial statements of the company, having them examined by independent and impartial third-party auditor increases their reliability. For example, lenders require the audited financial statements from potential borrowers since the auditor’s seal approves the financial statements (Arens & Beasley, 2006). The company’s management also benefits by having the company’s financial statements audited because the auditor reveals dishonest employees embezzling the company’s assets and covering their tracks with fake invoices and transactions.

References

Arens, A. A., & Beasley, M. S. (2006). Auditing and assurance services: An integrated approach. Upper Saddle River, N.J: Pearson Prentice Hall.

Griffin, M. P. (2009). MBA fundamentals: Accounting and finance. New York: Kaplan Pub

 Morris, D., & Underdown, B. (2011). Accounting: Theory and practice. Harlow, England: Financial Times/Prentice Hall/Pearson.

Ross, K. E. (2000). Fundamentals of accounting. Cincinnati, Ohio: South-Western.