Accounting report.doc

IntroductionSSP plc, a company which is engaged in food processing, is supplying all the main supermarket chains with first class processed meat products. Last several years have some difficult for the food manufacturing industry. Recently, it has rebounded in the market which will gather momentum over the coming year and it is planning to take even greater strides forward by opening a new markets. The management of SSP plc requires me to analysis and evaluates the firms financial condition. This report has three sections. They are Users of financial information、 Sources of finance and Financial information analysis. I have also supplemented the ratios calculation.Section 1Users of Financial Information The main users of financial statements will use financial information to assist decision-making. Users of financial information can be split into 2 categories: internal and external users. To allow management to make effective decisions, all areas of accounting information are of interest to them. Management will use the accounting information to compare performance with previous years and competitors, identify areas improvement, plan future resource allocation, and decide purchasing and pricing policies. Management will use all source of financial information. The companys past performance can be assessed using the financial accounts and ratio analysis. The ratio analysis can then be compared with previous years or with competitors to show areas of possible improvement investigation. Budgets are also an important source to management, there are used to identify possible future problems so that proactive measures can be taken.userPurpose of using informationSpecific information usePotential shareholdersPotential shareholders will use the accounts to help determine whether or not they wish to invest in the company.Potential shareholders will analyze the accounts of some companies and compare with the profitability and future prospects of these companies in order to decide the best investment option. And they usually focus on balance sheet and profit and loss account.Short-term creditorsCreditors will consult accounting information before deciding to lend money to the company.They will be analyzing the liquidity and long-term future of the business to decide the level of finance to be given. Short-term investors use the financial information to evaluate the level of risk and the prospects of the money being repaid. Short-term creditors will also pay attention to cash flow statement and the liquidity ratios.EmployeesEmployees will use the reports to know about their job security, wages and promotion prospects.Employees will be particularly interested in profitability and the companys future prospects, because these factors will affect their job security and future salary negotiations. So, they will pay attention to the profit and loss account and profitability analysis of their company.CompetitorsThrough the financial information which is about its rivals, then, competitors will compare performanceCompetitors will use all sources which are about its rivals to know about the situation of their rivals and make the appropriate project at the same time.Section 2Sources of finance According to the organizations balance sheet, we can use the fund sourced internally and externally, we divided those sources of finance into two groups: short and long term. As follows:Bank overdraft: Within an arranged credit limit with commercial banks, the firm can write cheques to draw more money than that it deposits. This is most commonly-used short-term finances used by all types of entities. It has low cost. Interests charged to the overdraft under credit limit are always 2-5% above the base rate. Meanwhile, it has great flexibility. We can prearrange, no formal contract upon overdrafts, and overdraft level can also be flexible under credit limit. Overdrafts are legally repayable upon demand of banks. Trade creditors: It can be seen as a free short-term finance obtained from suppliers resulting from credit purchases. This is most common and cheapest short-term finance sources. Commonly, the suppliers may provide some discount to encourage early payment before the credit period. The firm should balance the benefit of using the credit until the end of the credit period with the loss of discount if paying earlier to decide whether to utilize this finance in full. We should consider relationship with suppliers. We dont want it effect future cooperation with suppliers. Debentures: The term of debentures can be either fixed or open. These are loans made to companies that carry a fixed rate of interest. The companys fixed assets normally secure debentures. Some debentures can be linked with the issuers ordinary share capital, e.g. convertible bond. Debenture holders are not shareholders they do not participate in the running of the company. This type of finance is therefore referred to as external.Share capital: It made up of a number of shares of a certain denomination. Its a long-term finance. There are two types of shares: ordinary and preference shares. Preference shareholders have a preferential right to a fixed dividend before any ordinary share dividend is paid. Thereafter the amount of ordinary share dividend paid will vary according to the level of profits. This finance is not good for owners equity that will decrease.Retained profit: Its a long-term finance. This is also belong owners equity. There is accumulated un-appropriated profit. The directors propose to restrict the dividend this year in order to retain profit for expansion. Characteristics of each source of finance and categorise of themSources of finance are often categorized according to the period over which the loan I as repaid: the short term, medium-term and long-term.The short term refers to funds that are borrowed for a period of no more than one year. Short-term finance will be appropriate to finance seasonal fluctuations in trading, general working, capital requirements or purchasing minor fixed assets with a short working life.The long-term refers to funds that are borrowed for a period of more than ten years. Long-term finance will be appropriate to finance the acquisition of fixed assets with a long-term life span or finance large-scale expansion.Section 3Financial Information AnalysisThe purpose of the cash flow statement is to show movements of cash (inflows and outflows) over the accounting period. The statement supplements the profit and loss account and balance sheet, which alone do not provide sufficient information on the cash flow position of a business.Cash is the most liquid of all business assets. Cash not only refers to notes and coins held by a company, but also includes any money deposited in the bank. Without sufficient cash flow business will be unable to pay current liabilities or unable to fund investment in new fixed assets. Eventually the business will grind to a halt.The cash flow statement is prepared using the Net cash inflow/outflow from operating the main source of cash is usually from normal trading activities. And this is shown in the first section of the statement. The net profit figure must be adjusted to reflect actual cash flow from operating activities. Some items used in the profit calculation do not represent a movement of cash.Cash flow statement shows the main inflows and outflows of cash and how the business reached its current cash position. In order to analyses the accounts we will use a technique known as ratio analysis.Gross Profit Percentage: This ratio is an indication of the level of profit the business has made from buying and selling its stock. An increase in the gross profit percentage is a good sign. The positive trend can be an indication that stock control had improved, purchasing policies have improved or demand for the product has increased.Net Profit Percentage: This ratio shows how profitable a business is after all expenses have been taken into account. It compares the net profit figure with sales revenue. An increase in the net profit percentage is a good sign as it indicates the company is more Profitable, perhaps because sales have increased, cost of sales has decreased or expenses have decreased.Return on Capital Employed: Ordinary shareholders do not receive a fixed level of return on their investment compared to preference shareholders and debentures holders. This ratio is used as an indication of the level of return on ordinary share capital.Where this ratio has increased, this is a good sign as it indicates that the company is more profitable and ordinary shareholders are likely to receive a higher return on their investments.Current Ratio: This ratio shows the ability of the business to pay its short term debts. Generally speaking, a healthy current ratio is at least 2:1. Where the ratio is less than 2:1 this indicates the company may be over trading and have difficulty in meeting its short-term debts. A ratio of greater than 2:1 indicates that cash is lying idle.The Acid Ratio: This is a more precise (or immediate) measure of a firms liquidity because it does not include closing stock, which takes time to corivert into cash, therefore it cannot be considered to be liquid. This ratio considered a better indication of the companys ability to meet its current liabilities. Generally speaking, a healthy asset test ratio is at least 1:1. Again, a lower acid test ratio indicates liquidity problems for the company whereas ratio of greater than 1:1 indicates that cash is lying idles.AppendixGross Profit Percentage Year 2003(7000/11674)100= 59.96%Year 2004(8037/13382) 100= 60.06%Net Profit Percentage Year 2003(1,182/11,674) 100 = 10.13% Year 2004 (901/13,382) 100 = 6.73%Return on Capital Employed Year 2003 (1182/2885) 100=40.97% Year 2004 (901/3305) 100= 27.26%Current ratioYear 2003:1,195,000:1,560,000 = 0.77:1Year 2004:1,248,000:1,560,000 = 0.80:1Acid test ratioYear 2003:(1,195,000-608,000):1,560,000 = 0.38:1Year 2004:(1,248,000-796,000):1,560,000 = 0.29:1Fix Asset Turnover Year 2003 11,674/4,017 = 2.91 times Year 2004 13,382/4,318 = 3.1 timesStock Turnover Year 2003 4674/608= 7.69 times