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In respect of my chosen company Cable and Wireless PLC, this essay will discuss and thoroughly analyse the functions and importance of their annual report. This will be carried out with the use of three different users of Cable and Wireless' financial statements, their usefulness and why they are useful to the user will be explained. As well as a discussion on the benefits and limitations of the data provided.
An annual report is a requirement for public companies in which they must produce financial documentations regarding the foregoing year and the organisations current plans for the following year. This would typically include financial statements such as the statement of financial position (known in other words as a balance sheet), the income statement, cash flow statement and notes to the financial statements.
As a public company Cable and Wireless PLC's has a responsibility for ensuring that its investors and shareholders are kept up-to-date with all the information they require as to the current status/situation of the company. This is where the annual report comes in. The annual report is important as it ensures that the shareholders are kept up to date with the financial results of the previous year and the plans for the approaching year.
Another important aspect of, and one of the most important functions of, Cable and Wireless PLC's annual report is decision making. Many different types of enterprises and organisations make decisions based upon the information provided by the company about changes in their financial position and the performance. Cable and Wireless' annual reports are important to its decision making as it allows users, such as potential investors and current shareholders to decide on whether to further invest in the company, or to sell their share of the company. This is extremely important in today's economic climate. For instance, with the recession many companies have been forced to close or go into liquidation, making the financial statements of a company even more important to its suppliers, customers and potential investors.
Finally a third function of annual reports is its affect on public relations. The release of the annual report can be an opportunity for an enterprise to publicise its corporate image. It can be used to help market the company
With the use of Cable and Wireless PLC's Annual report we are able to see the following financial statements:
Statement of Financial Position (balance sheet)
Cash flow Statement
Cable and Wireless PLC have a number of different income statements within their annual report, including worldwide income statements and CWI income statement, but the summary consolidated income statement provides full information for the group. Cable and Wireless PLC's Income statements for the year ended 31 March 2009, reports upon the company's revenue and other operating income of £3,648 million. Expenses of (£3,357 million). After other operations and tax the income statement provides us with the profit/ (loss) for the year of £226 million. Which is an increase upon the previous year of £6 million.
The statement of financial position or balance sheet, is used in reporting the level of its assets and liabilities as well as the ownership equity as at 31 March 2009. From the companies statement of financial position it is possible to see changes between the years 2008 and 2009. Total assets increased by over £1 billion, however the level of current assets fell and non-fixed asset increased. Total liabilities also increased by over £800 million with both current and non-current liabilities increase. Producing the negative net current assets of (£314 million) compared to the previous year of £18 million yet a net asset increase by £166 million, which equals the level of total equity increase.
The cash flow statement simply reports on the company's cash flow activities. This is important because a healthy level of cash flow is necessary in the daily running of the company in transactions especially for the paying of suppliers and wages and salaries.
Investors or Shareholders in Cable and Wireless PLC would have an enormous interest in its financial statements, especially in its profit and loss account. This is because shareholders are always in need of knowing whether their investment is in the right place, and whether or not they will receive a dividend from the company's profits and of what size. The main interests are the growth of the business in terms of volumes of sales, the profitability such as Cable and Wireless' £226 million profit year ended 31 March 2009. As well as the value of the business or share price and the levels invested by the business. These are all many reasons for why shareholders have such a key interest in the financial statements of Cable and Wireless.
Customers are a second key user of Cable and Wireless. An example of one of their more recent customers is Tesco, after a £100 million deal tied-up in 2008, The Times (2008), providing Tesco employees with mobile phones. And even more recently Tesco has linked with Cable and Wireless in a five year deal in providing broadband and home phones services.
As Tesco have now signed this deal, it would be within their great interest to monitor Cable and Wireless' levels of existing financial stability. Tesco will have a long term interest in these accounts. They are likely to have an interest in the growth of sales; the company's new product development and the amount of investment in which has been invested into the business. Therefore the annual report of Cable and Wireless is especially important because they would need to have sufficient information regarding where the company will be in the long term as opposed to their current position.
Another user which would be highly interested in Cable and Wireless PLC's financial statements would be the government. The main interest of the annual report for the government would be the income statement. The main purpose being is that Inland Revenue need information on level of profit for the purpose of corporation tax. There are many taxes and many other government agencies in which a corporation such as Cable and Wireless PLC must pay. Examples including sales tax, corporation tax, and value added tax (VAT). National insurance contributions, capital gains tax and other local business rates are all different kinds of tax requiring financial information from Cable and Wireless PLC. It is for this reason exactly that the government would be especially interested in the income statement of Cable and Wireless PLC in order to calculate the correct amount of taxation.
Financial accounts can benefit a number of users in different ways. The main benefit to these users is the ability to use ratio analysis. As quoted from Jim Burton (2008), 'By creating a set of financial metrics, including ratios and other measurements, financial statement analysis can provide invaluable insight about the business.' For example, with the use of a profit and loss account you can then calculate the dividend cover ratio, this is then used by investors to give a basic understanding of how many times the shareholders' dividends could be paid out from the company's profit. Therefore informing the shareholder of how likely they are to receive their dividends. There are other ratios which can be used by investors such as the earnings per share ratio, which investors can use as a good indicator of a firms use of investors' capital, measuring the profit performance overtime. Potential investors and shareholders can use this ratio to compare it to previous year's earnings.
However there are many ways in which a user of financial accounts can be misled by the data in which they are presented, by the use of a range of techniques. Window dressing is a policy of manipulating the accounts within legal boundaries to present a more impressive financial picture. As per Ben Best (2009) 'those who prepare financial statements often have an intention to misinform rather than to inform.' If several firms were to engage in this practice, then comparing their performance through ratio analysis such as 'Return on Capital Employed' is much more difficult.
Finally the government benefit by being able to keep more up-to-date with the company's financial disposition. As mentioned earlier before, the government would need to know of Cable and Wireless' profitability
There are many tactics/ways for this to be carried out; for instance changing the account year. By putting back the year so that a higher period of sales and hence profits is again included in the company accounts.
There is also the recognising of sales earlier than a company should. This involves bringing forward sales into the current time period even though the customer may not have received the goods or service, thus enhancing sales and profits. Even stock could be valued differently yielding different profit figures. Deliberately lowering stock levels in the run up to the end of the year would also improve stock turnover ratio, even if stocks had been high throughout most of the year.
Financial statements only report what has happened based on old data and may not necessarily be relied upon to predict future performance. In reference to Cable and Wireless, this could be due to new advances in communications out dating current systems. Or perhaps more importantly considering both the current and future economic climate, for example the current issue of recession. If Cable and Wireless were to extrapolate past data to create a prediction of the next year's levels of sales, costs and profits, it would be completely irrelevant due to huge changes in consumption by consumers. Therefore extrapolating a trend from past figures may be potentially dangerous as further performance may bear no reflection of that of previous periods.
Another factor in which may make it more difficult to compare firms is if two firms use different accounting techniques. Cable and wireless may innocently have a different accounting year compared to another similar company, so a slump or a boom period may form part of one of the company's accounts and yet not appear in the other firms. In addition, different depreciation approaches by companies could also make fixed asset valuation different and hence have different book values, as well as cause reported profits to be different.
A final limitation to for the financial statements included within the annual report is that, Cable and Wireless may treat research and development completely different to another company, some expressing the whole amount in the year that it is incurred, so depressing profits. While another may spread the cost out over a number of years.
In conclusion there are many ways that Cable and Wireless PLC's annual report can be used by a range of stakeholders. The uses can benefit the users; even though there are a variety of limitations that can have a misleading and negative effect on the user. However in conclusion it is easy to see that the benefits of Cable and Wireless producing an annual report outweighs the limitations to the users of the annual report.