U18655 Financial Reporting Assignment Sample

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Introduction - U18655 Financial Reporting Assignment Sample

Ratio analysis is the quantitative method through which information regarding the liquidity, solvency, profitability, and efficiency position of the business entity could be determined. This analysis plays a crucial role in forming the perception and decision of the investors. Unilever is the British multinational consumer goods firm that was incorporated on 2 Sept by the merger of Dutch margarine and Lever Brothers. Unilever holds a market share of 50% and profits accounted for over 6.1 billion pounds in the year 2023 (Description of Unilever, 2024). This report, serving as a U18655 Financial Reporting Assignment Help Sample, will include the ratio analysis of Unilever’s financial statements to enable the most effective decision-making by investors. It will also depict the influence and significance of ratio analysis in making informed decisions. Further, this report will discuss three international accounting standards. Various recommendations will also be provided that contribute to enhancing the firm’s financial position.

Main Body

Role of ratio analysis in investment decision

All the investment decision are influenced and taken after analysing the financial ratio. The role and significance of the financial ratio in the investment decision could be understood through following points:

Helps in estimating returns: Financial ratio depicts the liquidity and profitability position of the business entity that help investors in estimating the firm’s profits. Effective profitability and liquidity position ensures that the firm is having adequate return that will help in gaining an optimum outcome of their investments.

Support in comparison: Ratio analysis supports in effectively comparing the financial statements of various year that helps investors in identifying the positive and negative changes in the firm’s performance (Thomas and Ward, 2019). This comparison aids in taking informed decision by evaluating the financial health of business entity. Ratio analysis also assists in predicting the firm’s performance over time and supports in determining the organization’s productivity in comparison to other firm within the similar industry.

Depict firm’s long term growth prospect: Ratio analysis helps investors in identifying the long-term growth potential of the business entity based on which decision regarding the investment could be undertaken by the investors (Kaplan, 2021). Solvency position depicts firm capability in paying loans and profitability position denotes the firm’s profit potential that helps in taking the informed decision regarding the investment.

Ratio analysis

The below mentioned table indicate the ratio analysis of the Unilever’s financial statement:

Net profit ratio: It has identified that net profit ratio of Unilever decreased over time which denotes inefficiency of the firm in paying off its liability in the long-term (Financial statement of Unilever, 2023). This also indicates that pricing strategy of Unilever is not accurate and the firm is having inappropriate cost structure. This continuous reduction in net profit indicates that firm will not be able to save high amount of funds in the future that result in less returns for the investors. By comparing with the ideal ratio, it has depicted that firm should have minimum 20% while the Unilever is only having 12%. This in turns indicate the higher risk for the investors in relation to gaining higher returns (BPP, 2021). To overcome the same manager in Unilever should concentrate over reviewing their existing pricing strategies so that product price could be adjusted. Further, firm should incur cost towards marketing activity that will help in increasing the demand for the product and result into improvement in the overall profitability of the organization.

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Operating profit ratio: From the above analysis, it has depicted that operating profit of the Unilever has been reduced as compared to the previous year. This indicates that the firm is unable to manage its operating cost that results into reduction in the profits of the business entity. This is the negative sign for the investors as it ultimately reduces their overall return. Low operating ratio also indicates that Unilever is not able to take advantages of the upcoming opportunity due to the lack of having sufficient profits.

For increasing operating profit ratio, firm needs to boost revenue or reduces their expenses (Francis and Schipper, 1999). Firm should focus on attaining the economies of scale that will help in reducing the cost of production and increases overall operating profits. Further, manager in Unilever needs to lay emphasis on effectively managing their inventory. Consequently, it reduces the scope of over and under stocking which eventually decreases the carrying and holding cost that lead enhancement of overall profitability.

Debt to equity ratio:

It has been identified from the above analysis that firm is not having effective debt to equity ratio and the debt amount in the capital structure is increasing over time. This is the negative sign for the investors as high debt will result in spending high percentage of profit to pay interest. This in turn closely influences the dividend paying ability of the company and thereby shareholder’s confidence as well. Further, high debt increases the financial risk for the business entity and reduces the net cost of equity.

For improving the debt to equity ratio, manager of Unilever should involve in paying down some of the loan that will help in reducing the interest obligations (Mirzaei and Mirzaei, 2021). Firm should also focus on restructuring debt which will assist in decreasing the interest rate and support in improving the debt to equity ratio.

Earnings per share:

The earning per share of the Unilever is 2.82 which have decreased in comparison to the previous year. This indicates that firm is not able to generate effective amount of returns which reduces the overall returns for the stakeholders.

For increasing earnings per share, firm should reduce the number of outstanding shares by buy back it from the market (Mnif and Znazen, 2020). In addition to this, manager should place emphasis on reducing the cost and increasing overall profitability that will help in enhancing earnings per share.

Price to earnings ratio:

Return on equity ratio: After evaluating the return on equity ratio, it has identified that Unilever is effectively utilizing shareholder’s fund for generating income (Saputra, 2022). In comparison to previous year the ROE has been reduced but still the firm is having effective ratio that could attract investors.

For maintaining the ROE, manager in Unilever should concentre on managing an effective capital structure and concentrates on increasing the overall profitability position.

 International accounting standards

International accounting standard refers to the various internationally agreed rules and principle that depict the manner in which company should present their accounts. These standards are provided by the International accounting standard boards (IASB). The three international accounting standards are as follows:

IAS 1: The IAS includes the guidelines regarding the structure of the financial statement; establish requirement of the financial statement and provide the minimum requirement of the content. This standard includes the overriding concept such as accrual basis of accounting, going concern and differentiates between the current & noncurrent (Al Sawalqa and Qtish, 2021). This standard requires the complete set of financial statement that includes balance sheet, income, cash flow and the statement of change in equity.

IAS 2: This international accounting standard is related to the treatment and the determination of the inventory cost. IAS 2 provides the necessary guidance for identifying the inventory cost and provides principle based on which cost are depicted. This standard indicates that inventory should be recorded at the net realisable value or lower cost. In this, only purchase cost should not be recognised as the inventory cost rather the conversion or the direct expenses should also be treated as the inventory cost (Osborne and Costello, 2019). Further, the cost of inventory should be decided either on the weighted average cost method or the first in first out method. Additionally, this standard allows business entity to disclose all the operating cost according to their nature such as raw material, other operating and labour cost.

IAS 7: The IAS 7 describes the manner through which information should be represented in the cash flow statement. This necessitates the requirement of cash flow statement and provides guidelines based on which each transaction is classified on the basis of operating, financing and investing activities (International accounting standard, 2023). This provides information regarding the manner in which the changes in cash and cash equivalent need to be depicted by the company.

Conclusion

By summing up the report, it has determined that ratio analysis plays a crucial role in taking an effective investment decision. This analysis depicts the overall profitability, liquidity and solvency position of the business entity which helps investors in estimating the accurate profits. Along with this, it has been articulated that ratio supports in doing comparing of the firm’s financial performance over the years that leads informed decision. From the ratio analysis, it has been depicted that the firm’s net and operating profit ratio has decreased that create issues in providing effective returns to the investors. The debt-equity ratio showed increasing trend which indicates the high amount of debt financing that raises the risk for the investors and decreases their return on equity. It has also identified that earning per share of the shareholder has reduced which decreases the motivation of the investors. However, Unilever is effectively utilising the shareholder’s funds as the firm is able to generate effective amount of return on equity. The three crucial international accounting standards are IAS1, IAS 2 and IAS7. The IAS 1 indicates the necessity of creating income statement, cash flow statement and balance sheet within the accounting period. IAS 2 helps in identifying the type of cost that needs to be included during inventory costing. IAS 7 denotes the guidelines that need to be covered while creating cash flow statement.

Recommendation

Following are the various measures and strategies that need to be followed by Unilever:

• Unilever should focus on evaluating its pricing strategies and reduces expenses that will help in gaining the adequate amount of profits (Yanto, Christy and Cakranegara, 2021). Firm should place further emphasis on attaining the economies of scale by improving marketing strategies that result in improving the profitability position and attracting the large number of investors.
• In addition to this, firm should also make focus on doing evaluation of all the international standards on timely basis. This will help in undertaking the adequate changes on regular basis and support in avoiding any legal obligations.

References

Books and Journals

• Al Sawalqa, F.A. and Qtish, A., 2021. IAS/IFRS in Jordan: adoption, implementation and determinants. Universal Journal of Accounting and Finance, 9(2), pp.232-244.
• BPP (2021), Financial Reporting, BPP Publishing
• Francis, J., & Schipper, K. (1999). Have financial statements lost their relevance?. Journal of Accounting Research, 37(Supplement), 319-352. 7. Healy, P. M., & Palepu, K. G. (2001). Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of Accounting and Economics, 31(1-3), 405-440.
• Kaplan (2021), Financial Reporting, Kaplan Publishing
• Mirzaei, A., & Mirzaei, H. (2021). The interrelation of financial statement components and the prediction of financial performance: Evidence from Iran. International Journal of Business and Management, 16(4), 88-103.
• Mnif, Y. and Znazen, O., 2020. Corporate governance and compliance with IFRS 7: The case of financial institutions listed in Canada. Managerial Auditing Journal, 35(3), pp.448-474.
• Osborne, J.W. and Costello, A.B., 2019. Sample size and subject to item ratio in principal components analysis. Practical Assessment, Research, and Evaluation, 9(1), p.11.
• Saputra, F., 2022. Analysis Effect Return on Assets (ROA), Return on Equity (ROE) and Price Earning Ratio (PER) on Stock Prices of Coal Companies in the Indonesia Stock Exchange (IDX) Period 2018-2021. Dinasti International Journal of Economics, Finance & Accounting, 3(1), pp.82-94.
• Thomas, A.,& Ward, A. M. (2019): Introduction to Financial Accounting, 9th ed. McGraw Hill.
• Yanto, E., Christy, I. and Cakranegara, P.A., 2021. The influences of return on asset, return on equity, net profit margin, debt equity ratio and current ratio toward stock price. International Journal of Science, Technology & Management, 2(1), pp.300-312.

Online

• Description of Unilever. 2024. Online. Available through: < https://corporatewatch.org/unilever-company-profile/#:~:text=British%2DDutch%20multinational%20Unilever%20is,cleaning%20and%20personal%20care%20brands.>
• Financial statement of Unilever. 2023. Online. Available through: < https://www.unilever.com/files/92ui5egz/production/b09c3510ee7cec58440d5f044f02bdefe85aa186.pdf>
• International accounting standard. 20234. Online. Available through: < https://www.iasplus.com/en/standards/ias/default.html>