Introduction
Accounting is one of the most essential parts in a business. In another word, it could be a core of the company. According to the Atrill (2005), accounting is related to the financial information collecting, analyzing and communicating. All these information is very important to an organization, company can use these information for make decision on some business operating like develop new product or service, increasing or cutting the price, arrange distribution in different area.
Accounting is divided into two parts: finance accounting is focus on the companies' capitals, assets, cash flows which people can find in the company's annual report like balance sheet, income statement and cash flows statement. Other one is management accounting which include something relates company's daily management like the numbers of complains received and so on.
This report is relates to the finance accounting and the methods used by company to analysis data to help company make decision. The first part is the forecasting, and then the company's funding. The third part will talk about defining an appropriate investment via using investment appraisal. The last one is using several ratios to analyzing company's operating situations. Finally a conclusion will be written.
Forecasting
Forecasting is a process which was used to estimate the future situations like finance positions and possible result of the organization (answers 2009). It looks quite alike the prophecy, but more easy to be understood by people. There are two methods of forecasting, which are the qualitative forecasting methods and quantitative forecasting methods (answers 2009).
Qualitative forecasting method is the method which demands lots of experts with adequate knowledge and experience; collecting enough data and materials; using expert's experience and knowledge to predict the development of the product or business in future. In this kind of method, those experts always use some techniques like Delphi technique and scenario writing. All these methods require a group of people who has sufficient experience and knowledge and provide their own predict and finally put them all together to conclude a most acceptable forecast.
Quantitative forecasting method is quite different from the qualitative one. Quantitative demands many kinds of data like historical data and analysis them to come out the possible forecast. In this methods always use some figures and graphs like scarttergraph, time series and linear regression.
Scarttergraph is a diagram which is used to split a semi-variable cost into fixed cost and variable ones. This method is quite easy to use and people can understand it without any difficulty (answer 2009).
Time series is another often using technique in quantitative forecasting method. This method need a long time period data which have been already treated with time goes. This method focus on predict future trends via historical data, which means that company can forecast one Saturday's sales based on past several Saturdays. It also can be used to predict the quarter's sale performance via analysis the same quarter's sales performance data in past few years.
The linear regression is the method which used to explain the relationship between the mixed cost and something easily to change. This method is an important statistics analysis method which is often used. The model using linear regression is much easier to meet the figures than the model which not use the linearly related models (Wikipedia 2009).
In qualitative methods, it more focus on forecasting the something internal, and it is more flexible. It also easy to show people's judgments by discuss with several experts. This method is mainly using people's judgments, so there is no need to collect data which mean save lots of time.
By contrast, quantitative put more effort on quantity change analysis, linear regression scarttergraph and time series technique more depend on the historic data to analysis and1 conclude the result. It also means that quantitative methods have received little effect by subjective judgment.
However, it also has its own weakness, the qualitative method was easy to mislead by some judgment elements like limited experience and lack of accurate describe on the quantity of development.
The quantitative is more rely on the past data, so it is difficult to show the reaction on the price movement
The Topps Tiles plc is the biggest company in UK which sales tile and wood floor (Topps Tiles 2009). According to the annual report the revenue from 2005 to 2009 of the company is stable increase. In 2005 Topps got 159,430 thousand pounds, next year is 173,326 thousand and there is a nearly one million pounds increase in year 2008-2009. According to the time series forecasting method, the revenue has increased only 0.08% between year 2008 and year 2009. So the revenue in year 2010 could be 208270 thousand pounds and the company may achieve a 208642 thousand pounds revenue in year 2012.
The cost in this company also has increase in past 5 year. According to the time series forecasting method, company's cost in 2005 is 62282 thousand pounds, and it is has increased every year because of company open new stores and something like that. In 2008, company has spent 77,344 thousand pounds, and 79,537,000 in 2009. According these data the cost of Topps in year 2010 could be 81,730,000 pounds and it will keep increase in year 2012 when the cost is up to nearly 86.1 million pounds.
It could be some movement between the cost and revenue because of the taxations. According to the BBC (2009) government may increase the VAT rate from 15% to 17.5%. It means that the consumer will pay more money to buy the stuffs they want. The revenue of company may slow down their increase. The price go up, customers will calculate their shopping list more carefully. Topps should to do something to cut the cost like find some suppliers can receive a long term paying period, cut the number of staffs instead of recruit part-time staffs and something like that.
Funding
In every kind of businesses, they all need funds to start their business or keep the business operating. It can be divided into two part the internal source (or equity finance) and external source (funding).
The internal source is the source from company's own. Personal saving is one of the internal source, which means the owner or the partners of the company use their own money to start their business. People use their own saving money to finance a small news agent. Retain profit also is one kind of an internal source. When the company got the profit, they do not pay all the profit back to the shareholders and partners instead of use the profit to a next investment, this call the retain profit (Bized 2009a).
The working capital and the sale of assets also can be seen as the internal source of finance (Bized 2009a). Working capital means the capitals and money which company keeps for a short period to pay for daily activities operating by the businesses, like needs of office equipments, staff payments, cost of rent, bills, supplier payments and something like that.
Other internal source of finance is the sale of assets. Sometimes companies got some fixed assets like buildings, lands, warehouses and so on. According to Bized (2009), all these may sell or rent by company and the money from the trading can be used to finance the business.
The external source is the source from outside of company. It can be seen as ownership capitals and non-ownership capital (Bized 2009). Ownership capital means shares of the people or institutions that are the holding shares in a limited liability company. There are two kinds of shares the ordinary shares and preference shares. Ordinary one is a share which has limited liability and has no right to the join in the management of the company. This kind of share can be trading in the stock exchange and little flexible dividend.
The preference share is quite different from ordinary ones. It has a fixed dividend rate which is higher than ordinary share, and the preference shareholder have no right to vote at the general meeting. Bized (2009) also state that a preference share could be changed into an ordinary share in some special situations.
The non-ownership capital means these sources not related to the company's ownership (Bized 2009). Loans, hire purchase, debenture and lease are the some sources of the non-ownership capital. Debenture is a long term with fixed rate of rate and repayment loan which is raise and secure by the company. This loan was rely on the company's credit, if company's credit is good they can get more money, vice versa
Hire purchase and loans are quite similar. These two source have fixed period and which different is the aim of loan is fixed such as the repayment dates and costs, it is also almost issued by a bank; hire purchase is a method which can give company use an assets without a full investment, which means company can buy use of an asset for a period and they can pay the hole investment separately during that time (Bized 2009).
Leasing means company lent its own assets to the customers or other company to gain money from the customers who rent the assets (Bized 2009). It has a fixed time ranges, also the payment.
All these sources are easy to find in the annual report of company: the internal source often can be seen on the income statement and the external one can be shown on the balance sheet called liability.
Because of the internal source could not change very quickly, most internal finance source can be seen as a fixed cost. By contrast, the external source is could be changed easily by finance situation of company or company's plan, so it more like a variable cost.
Topps Tiles plc plans to open a new supermall in Welwyn Garden City; they need the money to start this plan. The company has several ways to raise money. First, company could issue some debenture. Topps Tiles plc is the biggest company which sales tile and wood floor (Topps Tiles 2009), the company's reputation is very good, which means the credit of the company is also very good. Open a new store need a huge amount of money, it means using bank loan also is a way to solve the money problem. Also Topps Tiles could lease parts of this store and attract other company to invest this construction.
According to the situation of the company, the possible solution is to require loan from bank and issue some debentures. It could be a long time for gaining profit, which means this liability could be a long term liability, and the company need a stable and fixed way to deal with these money. It may become a good choice for the company to build their new superstore in Welwyn Garden City.
Investment appraisal
There are three methods which used to appraise company's investment situations: the payback period, average rate of return and discounted cash flow
Payback period is an easy tool which is used to evaluate the investment projects (Bized 2009). It requires the project cost and net cash flows or income streams in a period of time which covers its whole lifetime. Compare the money return and its costs and conclude the time which the investment takes money back equals to the cost. It is quite simple and convenient to find the time period of get profit. It also can find how quick the company can receive the investment cost and quickly define how quick the cash flows on the project can be positive which is helpful to company which has a cash flow problem
But it also has some negative points; it is too simple to provide view only with the time period; it is also lack of qualitative viewpoint; it only can find the time period of get investment cost back without how much cash has been received after reach the cost.
The average rate of return means to appraise the investment via observed the net cash flows, use ratio between cost and average returns which is over the whole lifetime of the project (Bized 2009). Finally, conclude the result from the ratio to evaluate the investment project. The advantage of this method is that it can show the investment profit clearly, consider the change of account interest and it is much easier to compare with other different investment project, to find out different of the rate of return between these project
However, it also has its weakness, it cannot find out whether the project is valuable or not; like the payback period method, and it also has ignored the qualitative aspects.
The discounted cash flows is more complex than other two method, it has combine the previous two methods it has considered the fact of whether the investment worth or not in the future via analyze the data of net cash flows and present value (Bized 2009). The result will show whether the investment have a return or not. This method has take advantage of use the account interest, observe the profitability of the project and also consider the opportunity cost of the money. However, there is still the problem on the qualitative views of decision making.
The Gamma plc the electronic division's payback period is 3 year 6 months. The property division is 3 years, and mining property is 2 year.
Electronics first year is got loss for buying facilities. According to the cash flow electronic begin to gain money from second year, others form first year can gain money, and also there is a second invest on mining division at fourth year for environmental damage rectify.
According to the cash flows between electronics and property division, they all have 4 years life time, the final profit of electronics is 1.2 million pounds and the property is 400 thousand pounds. It means this two division gain 400 thousand pounds profit. There is an800 thousand pounds for fifth year but no profit for property division. Electronics is a good choice.
Compare with property and mining, the investment of mining is more than property. And final profit is mining is 50 thousand pounds and property is 400 thousand pounds. The property is good choice
If the company want to use same criterion for these three divisions it is not wise choice because the life time for these three divisions is not the same and use same criterion cannot meet the maximum profit the company can get.
There are some methods which used to evaluate the company's finance situation; return on capital employed is one of this methods. According to Atrill (2005), the return on capital employed is a basic way to analyze business performance. Bized (2009) also has pointed out that this method has shown the situation of company using its capital to operate business and the returns. It means this method is showing the gaining and losing for company's assets and liabilities
As one of widely used methods, according to companyref (2009) ROCE got three major advantages: first one is using percentage rate to evaluate the project. There is a ratio between company's profit before tax and equity shareholders' funds (bized 2009; Atrill 2005; techtarget 2009). This ratio between these two parts named ROCE ratio. It is easy to use this ratio to evaluate company's project. The other one is this method evaluating the project usually based on company's ability of gaining profit. The third one is that this method does not affect the company operating.
However, there are several disadvantages of ROCE: firstly, the nature of ROCE has been confused by people. According to Google (2009) there are many ways to calculate the capital employed and each method has different result. The second one is this method has ignored the time value of the money.
By contrast, the payback method has considered the money's time value; the discounted payback has been used to calculate the time value.
There are many ratios which used to analysis the company's situation. There are the profitability ratios, efficiency ratios, liquidity ratios, gearing ratios and investment ratios. Atrill (2005) pointed out that it is simple and easy to know whether the operating situation of the company via analyzes these ratios.
The Topps Tiles plc is the biggest company in UK which sales tile and wood floor. According to the company's annual report, there are the ratios for this company.
Profitability ratio
This section shows the profitability viewpoint of Topps Tiles plc. The profitability part shows the company's success in reach the goal of creating more wealth (Atrill 2005). Atill (2005) also point out that this ratio is important; the company has use profit to relate other figures in finance statement .From the chart all the ratios has decreased. The gross profit has decrease 1.02%. But according to the annual report, company's gross profit still increasing nearly one million (Topps Tiles 2009) It means the company has show down its profit growth. This is more obviously in the net profit ratios, there is a nearly 5% decrease between year 2007 and year 2008.
The ROCE decrease shows the company do not well on the operating the company's investment.
Liquidity ratio
This section is about the liquidity aspect of the company. According to Atrill (2008), these two ratios show the company's ability to reach the goal of finance in short period. Topps tiles plc's current ratios has shows a decrease in nearly 10% but still at the higher than 1:1 which means the company can do their payment on time, which could satisfied by company's shareholders and have more opportunity to attract more customers and some who wants to invest this company.
Quick ratio in this company also meets a decrease between these two years. The safety ratio for this company is 1:1 (Dyson 2007), but the company's ratio is below that safety level. It means that the company's cash flow is poor in these two years. It also means the Topps should go into an immediate liquidation
Efficiency ratio
This section shows the how the resource be managed in business.
The inventory turnover periods shows the time period of company sell its stock and make a new order. The ratio shows that the period has decreased. It means the period has been shorted and shows the company's sales may increase.
Age of receivable shows the time of clients to pay for their purchase. The age of receivable ratio of this company has increase between 2007 and 2008. The time has been increased. It means the company has received money later.
The age of payable shows the time of company pay for the supplies. The ratio has been decreased between 2 years which means the company has pay money to suppliers more quickly.
Gearing ratio
This section is the gearing ratio, gearing ratio was used to analysis the risk of the company and it shows (Atrill 2008) .the ratio show some decrease on these ratios.
Gearing ratio of this company is too high. In 2007, the gearing ratio is 223%.this means the borrowing is 2.23pound and hence equity is negative 1.24 pound, it is too high due to the fact that the equity of company is negative. This ratio suggests this company is carrying high financial risk and it will be difficult to the business to increase its finance
The debt ratio shows how the assets of business are financed. This ratio is also too high to this company; the ratio in year 2008 is nearly 159%, which means that every one pound of assets the business has in this year. The borrowing is 1.59 pounds. It also means that company will get negative equity. The company also will meet finance risk.
The last ratio is shows the ability of business to pay interest duty. This ratio shows the company has enough profit before tax and interest which is able to pay the interest without any difficult.
Investment ratio
This section shows if the deservingness of the business to invest
Earning per share has decreased this two year. The reason might be the credit crunch. The share price has been decreased.
Other two ratios also show decreasing in this two year. Credit crunch also might be the reason of decrease.
Conclusions
There are several accounting analysis techniques which used to help managers to make decisions. Managers can use forecasting analysis to conclude the company's or rival's cost and revenue forecasting in future, which can help manager to decide to keep or change their future plans. The investment evaluation can help managers to define they got profit or loss in an investment project, and decide to continue or end it. The ratio analysis can help company to define their problem .
Reference
Book
Atrill P &Mclaney E (2008) accounting and finance for non-specialists 6th edition FT Harlow
Atrill P (2005) Accounting an introduction 3rd edition FT Harlow
Dyson J. (2007) Accounting for Non-Accounting Students 7th edition
Financial Times Prentice Hall
Website
Answer (2009) forecasting [online] available at: http://www.answers.com/topic/forecast [access date: 20 11 2009]
Answer (2009) Return on Capital Employed Ratio [online] available at http://www.answers.com/topic/return-on-capital-employed-1 [access date: 20 11 2009]
Answer (2009) scattgraph-method [online]
Available at http://www.answers.com/topic/scattergraph-method [access date: 20 11 2009]
BBC (2008) Leaders in 'VAT bombshell' clash [online] available at http://news.bbc.co.uk/1/hi/uk_politics/7749195.stm [access date: 20 11 2009]
Bized (2009) finance source [online] available at http://www.bized.co.uk/learn/accounting/financial/sources/index.htm [access date: 20 11 2009]
Bized (2009) investment [online] available at http://www.bized.co.uk/virtual/bank/business/finance/investment/theories.htm [access date: 20 11 2009]
Bized (2009) Return on Capital Employed Ratio [online] available at http://www.bized.co.uk/compfact/ratios/ror3.htm [access date: 20 11 2009]
Companyrdfs (2009) Return on Capital Employed (ROCE) [online] available at http://www.companyrefs.com/Guide/keyROCE.htm [access date: 20 11 2009]
Dteg (2009) time series [online]
Available at http://www.dtreg.com/TimeSeries.htm?gclid=CJjhqs-4lZ4CFU0A4wodgBSCpA[access date: 20 11 2009]
Google(2009) Investment appraisal and financing decisions [online] available at http://books.google.co.uk/books?id=aS8-AAAAIAAJ&pg=PA32&lpg=PA32&dq=advantage+and+disadvantage+of+ROCE&source=bl& ots=7rL8brdowc&sig=24GMywwx97xtBNrlnol_QHjOiiU&hl=zh-CN&ei=bYMIS8HyCOaOjAeVwKX3AQ&sa=X&oi=book_result&ct=result&resnum=5&ve d=0CB4Q6AEwBA#v=onepage&q=&f=false [access date: 20 11 2009]
Techtarget (2009) definitions NPV IRR ROI and payback [online] available at http://searchcrm.techtarget.com/answer/Definitions-NPV-IRR-ROI-and-payback[access date: 20 11 2009]
Topps tiles (2009) homepage [online] available at: http://www.toppstiles.co.uk/ [access date: 20 11 2009]
Wikipedia (2009) liner regression [online]
Available at http://en.wikipedia.org/wiki/Linear_regression [access date: 20 11 2009]
