The company GlaxoSmithKline is among the top pharma companies across the globe. It is a London (UK) based company. It is ranking third in the largest companies group. It has a good line of general health and pharmacy products. GlaxoSmithKline is listed in the London stock exchange. In the last, company is financial stable and growing year by year with the growth of its hundreds of employees all over the globe
The reason for preparing this assignment on financial resource management is to assess, recognize, examine and understand the common financial analysis methods and its financial information needs. This will consists of the financial information concepts and coparative analysis of the given financial data with that of standards. This report also comprises of complete practical cases of the company given as the requirement in the learning outcomes which will cover problems on capital investments, and other budgets.
Learning outcome - I
DIFFERENT SOURCES OF FINANCIAL DATA:
The company's balance sheet and income statements provide the basic financial data, this financial data shows the financial position at the end of its accounting period, income statement, presents the operating result of the company for its reporting period, the cash flow statement, presents the cash flows for the period and reconciles cash flow with the net profit reported in the income statement, a statement showing changes in equity and other explanatory notes of the GlaxoSmithKline.
Financial statements can also be obtained from external financial sources like from the reports of stock exchange. In like manner even the financial data can be obtained from external financial sources like the stock exchange reports, this is a view point of a shareholders financial position, it presents the operating results of the company for the reporting period, which represents the financial position at the shareholders view point, the returns on investments, presents the operating result of the company for its reporting period, bankers statement presents the cash flows --which presents the operating result of the firm for the reporting period, the banker's statement, which presents the cash flows for the period and reconciles cash flow with the bank book reported in the GlaxoSmithKline books, articles and journal in equity and other research notes of the GlaxoSmithKline.--
Factors influencing internal and external source of data:
Content of the data: due attention must be paid to the content of external data.
Credibility: the dependability of the data is also a matter of concern in case of external source of data.
Validity: a data is considered valid only if it is accurate so that it can depended upon, then only is it accepted as valid
Accuracy: as data is collected from various sources some may be trustworthy but not accurate, that why data should be done with care to bring about an accurate data, that can be evaluated for dependency and accurate when comparing it with other similar data that are avalible from other organizations
ROLE OF IFRS AND FASB AND CONTENTS OF FINANCIAL REPORTS:
Mostly Accounting standard bring about accounting principles and methods of recognition, presentation, measurement, and presentation of different sorts of items, but there are even some accounting standards that deal only with disclosure.
External audit report: External audit report is vital as it checks the validity of financial data. It evaluates the quality of truth in the Comments and qualifications in audit report it even provides necessary information and independent views on financial statements. Usually, the board of directors, comment on audit qualifications are recorded in this report.
Board of director's report: since the comments of the board of director's are recorded in reports the reports becomes an informational tool as the past performance and future business prospects can be understood with ease, because an act of the Board of director's attached to the balance sheet and then laid before the GlaxoSmithKline at their general meeting it gives information on the actions of the board of directors that was recorded, making it easy to make decisions.
Management's discussion and analysis: In the USA, and even in other European countries, and adding to the list even many other countries in different parts of the world, this management's analysis of business forms an integral part of the narrative section present in the annual report of the publicly traded companies. This is usually called as Management Discussion and Analysis' (MD&A).
A position paper that was issued by the European Accounting Study group in May 2000 had described the function of management's analysis in the following manner:
"The management's analysis of the business and the financial statements should very well compliment each other in presenting the economic effecting factors on the enterprise of developments in the period and of the state of affairs at the end.
Corporate Governance Report: according to the code of Corporate Government only listed are allowed to include a separate section of 'corporate governance' in their annual reports. A detailed compliance report on the cooperate governance should be included in section.
Voluntary Disclosures: the Voluntary disclosure gives the descriptions of financial and non-financial disclosures that primarily outside the financial statements, which is not explicitly required by the governing statutes. It helps the managers to improve the credibility of their financial reporting. Voluntary disclosure helps in evaluation the usefulness of strategy implementation because it articulates firm's long-term strategy and specification of non-financial leading indicators, and is also used to manage capital market expectations. Furthermore voluntary disclosure is said to reduce the probability of getting sued by investors.
VALIDITY OF FINANCIAL DATA:
. The financial data is important as it is asked for by GlaxoSmithKline's stakeholders. For them it is a very important information as they have they money invested in the company The financial data gives the total financial status. Through this the stakeholders can know the performance of GlaxoSmithKline by taking and comparing the previous financial data. They can also compare GlaxoSmithKline's performance with the companies that produce the same product or providing same services. It is so very important as it provides important information on the performance of the company, the statement should not be modified or manipulated, if it is then it will show a different results rather than the true one, based on such report all the decisions made by the management would go wrong, and furthermore, modifying or manipulating is a crime. --
DIFFERENT TYPES OF ANALYTICAL TOOLS- RATIO ANALYSIS AND VARIANCE ANALYSIS:
Ratio analysis: ration analysis works as an important instrument for financial analysis. Even though, accounting measures has plenty of its own limitations, still they are extensively used by a firms analysts and managers to measure the performance. To make the analysis financial ratios meaningful, it should be used in ratios of conjunction with non-financial or other non-financial measures of performance in different activities within the firm.
Making the analysis of financial statements meaning requires accounting figures to be adjusted to help overcome its limitations; and furthermore adjustments are to be done wisely or else it would make the computations very complex that it would become very difficult to interpret.
Uses of Ratios for internal management:
The amounts of asset, incomes, liabilities, in aggregate and expenses are presented by the financial statement, they are classified in different groups. That's why aggregates cannot be managed. So financial ratios cannot help appropriate managerial actions to maintain or improve the performance of a firm. Financial ratios, is at is best in guiding one to the right questions, that's why financial ratios are only used by managers to understand the economic that they decisions bring about., and furthermore to evaluate the performance of the firm as a whole
Types of ratios:
Liquidity ratios:
Liquidity ratios are useful in indication a firm's ability to meet the short term obligations set up by the firm itself, it may include any current liabilites, including currently maturing long term debt, current assets move through a normal cash cycle of inventories, accounts received, cash, sales. Studying this, the firm can pay off or reduce the current liabilities. The best known liquidity ratio is said to be the current ratio: current assets divided by current liabilities. At present GlaxoSmithKline's current ratio is calculated as follows:
Current ratio = Current Assets
Current Liabilities
Mostly analysts suggest a current ratio 2 to 3. though a large current ratio does not mean that it is a good sign; instead that an organization is not efficient in making use or its assets. Different industries have different ratios, the more the volatile the industry the higher ratios it requires. Acid test ratio:
slow moving or obsolescent inventories can easily overstate a firm's ability in meeting its short-term demands. The acid test ratio sometimes gets the preference to assess a firm's liquidity. Its test ratio is current assets is minus inventories, and is divided by its current liabilities, the acid test ratio of GlaxoSmithKline is calculated in the following way;:
Acid test ratio = Current Assets - Inventories
Current Liabilities
An acid test ratio of approximately 1 would be typical for American industries. even though it has a less variability in the acid test ratio when it is compared to the current ratio, industries that are stable are always able to operate rather safely with a lower ratio.
Leverage ratios:
Leverage ratios are used to identify the source of a firm's capital, its owners or outside creditors. The term leverage points to the fact, that capital being used with a fixed interest then the charge will amplify into, either profits or losses in relation of the quality of the holders of common stock using capital with a fixed interest charge will "amplify" either profits or losses in relation to the. The most commonly ratio that is usually put use is the total debt divided by total assets. The total debt includes current liabilities and long term liabilites.. total debts measurement is us measured by to percentage of the total funds that is provided by debt. A total debt assets ratio that is higher than 0.5 is mostly considered safe only for firms that are in stable industries
Total debt
Total assets
The ratio of long term debt to equity is a measure of the extent to which sources of long term financing are provided by creditors. The result is computed by dividing long term debt by the stockholders' equity.
Long term debt
Equity
Activity Ratios:
Activity ratios is used to see how effectively a firm is putting its resources to use, it compares its revenues with the resources that is used to generate them, it makes the firm to use its resources to its potential limit, making it establish an efficient operation. The asset turnover ratio shows how efficiency of the management in employing total assets. The asset turnover get calculated by dividing the sales to total assets. The GlaxoSmithKline, asset turnover is calculated in the following manner given below.
Assets turnover = Sales
Total assets
The ratio of sales to fixed assets gets its measurement of the turnover on plant and equipment. It is calculation is done by dividing sales by net fixed assets.
Fixed asset turnover = Sales
Net fixed assets
Industry figures for its asset turnover varies with capital intensive industries, and those that need much larger inventories will have ratios that are smaller.
Another activity ratio is the inventory turnover, it is estimated by dividing the sales by average inventory. The U.S. industries usually require a norms or 9, but the fact is that the ratio whether it is higher or lower actually depends only of the sale of product, usually the small inexpensive items turn over at a much higher rate when compared to the larger and expensive items. Inventories are normally carried out at cost, it would be better and even more precise if the cost of the goods that are sold in place of its sales in the numerator of the ratio. Dun and Bradstreet which are established compliers of industry ratios, use these ratio of sales to inventory
Inventory turnover = Sales
Inventory
The accounts receivable turnover is measured by the average collection period on sales. The average number of days should not vary widely and if it does vary widely then it could indicate to poor management. A very low ratio could mean that there a loss of sales probably because of a too restrictive credit policies. And a very high ratio tells that too much of capital is being tied up in accounts receivable, and it may be increasing the chances of bad debts. Because the varying industry policies are the only comparison for a firm over time within an industry is the only available analysis. Because there are no information on credit sales for other firms available, hence the total sales must be used, as you know all firms do not have the same percentage of credit sales only useful analysis. Because information on credit sales for other firms generally is unavailable, total sales must be used. Since not all firms have the same percentages of credit sales, there is only a slight comparability among different firms.
