To What Extent Are a Company's Annual Report and Accounts - Essay Example

? To what extent are a company’s annual report and accounts useful in understanding and analyzing its market, productive and financial performance? Discuss using an extended example. [Name] [Course Title] [University] [Instructor’s Name] [Date] To what extent are a company’s annual report and accounts useful in understanding and analyzing its market, productive and financial performance? Discuss using an extended example. This paper is aimed at focusing the importance of annual reports and accounts with respect to analyzing the overall company’s performance. The basic tool to do this job is value added framework of accounting which does not only helps in determining the performance level of the company under consideration but it also provides the accountants and financial professionals with a benchmark in the form of a calculated Value added for one company operating in the industry which is then used to analyze the performance of the overall industry. The company’s annual report and accounts history are very substantial in terms of understanding and evaluating the market, production and financial perspectives of the company. To effectively do the business analysis value added system is used which is calculated by the market situation and path upon which the organization is working. It is used to develop a relationship between market situations, internal operating architecture and financial outcomes. The internal operating architecture is a combination of ratios relating to sales revenue and operating costs. Accounts receivable from the suppliers are added to the gross sales to gain the value added. Labor costs are subtracted from the value added to take the cash from company activity. Profit gained from the sale of single unit is sum up result of market situations and inner working ratios. This value added system is also used to analyze the company’s performance on the national and international level (Haslam, C et al., 2000). Hence value added is evaluated wealth which is generated by the company. It must not be confused with the sales revenue as it also contains the revenues generated by the suppliers working with the company. The importance of Value Added can be determined by the fact that it is always directing the minds of the chief executives. The decisions made by these executives are made on the basis of the calculations resulting from value added. If the value added ensures an improvement in the value of single unit of supply input then the decision is directed accordingly (Gilchrist, R., 1971). The concept of value added is greatly described by Bernard Cox in his book ‘Value Added: an appreciation for the accountant concerned with industry’. In this book the author has explained various methods through which value added can be made useful in managerial applications, evaluating the annual reports and account of the company. The most applicable way understanding and utilizing value added is to subtract purchases from sales and sum up profits generated by the company, depreciation expense accumulated over the assets, interest expense for the loans made by the company, payroll costs which is the amount paid to the employees and workers, dividends paid to the shareholders and tax paid to the government. The subtracted amount represents that how the value added is created in the first place. All the expenses are summed up with the profits to get an amount which is then the representative of the generated amount by the company or in other words how the company has utilized its wealth (Cox, B., 1979). The value added calculation which is done to analyze a company’s overall performance level is somewhat similar to the calculations done to determine the national accounts with respect to the whole economy. Therefore it would be right to say that the concept of value added is not new for the accountants and financial professionals rather it do existed in the early 20th century as well. The similarly between national accounting and value added is briefly defined by Cox. He demonstrated that gross profit subtracted from purchased services and materials represents gross revenue generated by all the industry operating in the economy. The purchases are subtracted in order to get the value added amount. This corresponds with the calculation of value added for a single firm operating in the industry in which the purchases are subtracted from the sales revenue generated by the organization (Cox, B., 1979). Every year the companies publish their annual reports and accounts which can be further used to calculate the value added. To further explain the calculations of value added let’s consider this example of Ford Motors. Initially all the expenses are subtracted from the total sales which of the year resulting in a value added amount. Value added is basically a cost which is then summed up with all the purchases made within the year. This facilitates in bringing back the products or services rendered to their original saleable position. While on the other hand the labor cost along with the social costs is added to the depreciation and income before taxes. In the Ford’s example the company has utilized around 70% of the revenue generated by the sale of goods in making different purchases including amount paid for acquiring materials and apparatus in addition to the utilization of services. The left over 30% amount is actually the value added produced from the business activities. Therefore it can be concluded that the value added is the ‘value’ of the operations conducted by the Ford motors throughout the year. The percentage of value added acts as a financial alternative for the level of vertical incorporation of a business. If the same calculations are done for other companies dealing in automobile industry then the level to which Ford is more or less perpendicularly incorporated than its opponents. This enhances the usefulness of value added as it can be used for standardization of a company in order to analyze other companies’ performance by making comparison with the standard one. But all the companies to be compared should belong to the same industry as in the case of Ford Motors (Haslam, C et al., 2000). In order to manage value creating issues the executives showed greater concern towards the development of share holder value so that all the processes and tools related to creation of value are fully utilized. The Economic Value added is calculated by subtracting the actual charge i.e. applied by the firm from the net operating profit. The positive result reflect that the firms is making good enough share holder value which the negative value shows that the share holder value is completely shattered. Market value added and the total share holder return is calculated by subtracting the balance sheet equity, retained earnings and loans from the debt and share of capital. The answer is than added to the market value. This is a useful tool for calculating the market capitalization, dividends and market value of equity (Haslam, C et al., 2000). Subtracting sales and taxes from the amount of value added reflects the idea that the government does not have any proportion in the wealth generated by the company. As a result the final amount would have only the corporate income taxes. Considering the taxes as a constituent of the value added put an emphasizes on the viewpoint that government is created as a public sector (S. McLeay, 1983) Value Added Statement has a great substantiality as it is considered equal to the ‘Social Responsibility’ by the business communities. This is also stated in the accounting literature. According to the principles of value added statement it highlights upon the interdependence of shake holders over one another in such a way that it influences their decision making in almost all the possible ways. This reflects the strong link between the management and employees and also explains the employees’ outlook towards the organization (Gray, S., 1980). The Statement of Financial Accounting Concepts ensures the significance and dependability of Value Added Statement. It possesses the same significance level as of other financial statements since it is calculated on the basis of the same accounting procedures (Financial Accounting Standards Board, 1980). Conclusion Value added framework of accounting describes the current position of the company with respect to its productivity; that how much sales it has generated and where the revenues are spent, market share; which explains the growth rate of the company and also suggests the potential areas for further development, lastly, financial performance is analyzed through this substantial accounting tool, the loss/gain earned by the company including all the generated profits. At time value added is confused with the sales revenue despite of the fact that there is a marked difference between the two. The value added should not be misinterpreted with the sales revenue because it is the computation of the net instead of the gross production of any revenue generating institution whether it is a country, company or a factory. The importance of value added and its procedures is also emphasized by the Financial Accounting Standards Board by mentioning that the value added along with its procedures and calculations is as reliable as any other financial statement, for instance, the balance sheet. This infers that value added can be used extensively in order to make evaluations about the company performance and to make generalization about the overall industry. For example, the famous brands Caterpillar and Komatsu can be compared with each other by calculating the valued added amount for one company and then make it a benchmark to compare the other company’s performance. The value added can also be used to identify the strong company when comparing two or more companies together (Haslam, C et al., 2000). References Cox, B., 1979. Value Added: an appreciation for the accountant concerned with industry. Heinemann, London; page 50-66. Financial Accounting Standards Board, 1980. Qualitative characteristics of Accounting Information: Statement of Financial accounting concept no 2. Stamford, FASB. Gray, S. and Maunders, K., 1980. Value Added Reporting: uses and measurement –A Research Study, The Association of Certified Accountants, London. Page 257 Gilchrist, R. 1971. Managing for Profit: The Added Value Concept. George Allen & Unwin, London; page 34-44.  Haslam, C. Neale, A. and Johal, S., 2000. Economics in a Business Context: A competitive Business Analysis. Business Press, London; page 33-46. S. McLeay, 1983. Value added: A comparative study. Accounting, organizations and society; volume 8, page 31-56. Read More