Table of contents
Introduction 2
Methodology 2
Company background 3
Accounting system 3
Annual reports 4
Analyses used in Annual Report 5
Key ratios 6
Conclusion 8
Reference list 9
Introduction
"Accounting is the language of business" ... Indeed, like no man withoutability to express his thoughts clearly and understandably can achieve verymuch in life, no firm can succeed without a good accounting system.
Accounting is a necessary tool which not only provides information to theowners about how its money is working, and to the state about how big thetaxes are to be fetched, but, the most important, enables the company tocontrol, to plan and to trace all the actions, processes and projects. Thepurpose of this report is to find out how the accounting is done in asuccessful company, and how the principles and methods used there differfrom the traditional accounting theory. In addition, the analysis of thecompany's performance will be worked out using the standard ratios.
The decision to choose AS Diena for the report has been based onseveral criteria: it is one of the 100 largest companies in Latvia, it hasa leading position in its branch of industry, and it is a good example ofyoung and fast-developing Latvian business.
Methodology
The analyses and findings presented in the paper are based on theinformation received from the interview with the chief accountant of AS
Diena Inese Janikovska and from the Annual Report 1997 of the company. The
Report mirrors the financial data of AS Diena and its subsidiaries:publishing house Diena Bonnier SIA, advertising agency METRO, Bauskas Dzive
SIA, agency Agro Apgads SIA, Kursas laiks SIA, Dzirkstele SIA, Zemgales
Zinas SIA. The information about subsidiaries is included in Annual Reportin limits of financial year starting from the date of acquisition.
Furthermore, the theoretical side was strengthened with the knowledgegained from the lectures by Elvi Sederlin and Gunnar Lindholm, and from thecourse textbooks "Business Accounting" and "The Profitability, Financing,and the Growth of the Firm ".
To make the key ratio analysis sensible, a similar size enterpriseoperating in the same branch of industry was chosen for comparison. Forthis purpose, the figures from the final accounts of AS Preses Nams weretaken from the Lursoft database and used in the analysis.
Company background
The Latvian-Swedish joint-stock company AS Diena was founded in 1992.
In 1996 it was transformed into stock corporation. In fact, it is a groupof companies with parent company and subsidiaries. The share capital of thecompany consists of 6000 fully paid ordinary shares, moreover, each sharehas a nominal value of LVL 10 and its owner possesses one voting right. Theshares of AS Diena do not participate in stock exchange, and no deals amongthe shareholders are allowed. The most important shareholder is a Swedishcompany "Expressen AB", which owns 2940 shares, ie, 49% of share capitaland votes. In addition, it can be pointed out that the sales turnover at
1997 constituted almost LVL 9.5 mil, and the average number of employeeswas 847. The officially registered kinds of activities of AS Diena are asfollows:
. publishing
. printing work and related services
. reproducing of computerized materials
. agents dealing with sales of the wide range of goods
. wholesale
The present strategy of the firm is development as a media and mediainfrastructure company. To conclude, AS Diena now enjoys the benefits ofthe large market share and solid reputation, and it will undoubtedly try tomaintain and to improve the current position.
Accounting system
Accounting system in AS Diena is fully kept on software and all thetransactions are done automatically. The main software accounting programused is Mac Hansa. When the record is made, the account is closedautomatically, and the balance is sent to the next stage, ie, Profit of
Loss Account, Balance Sheet, Cash Flow Statement etc. Printed informationof accounting actions is kept in the company's archive. As AS Diena is avery large company, the chief accountant could not tell exactly how manytransactions were recorded per year, but the approximate number is about
50,000. The most common transactions are those in connection to cash andbank accounts.
Annual reports
The Annual report is prepared according to legislation of Latvia
Republic and the laws "About Accounting" and "About Annual Reports of the
Company ". The main principles used in accounting are the consistencyconcept (methods of valuation of assets and calculation of revenues andexpenses are kept constant from one year to another) and the prudenceconcept (eg, stock is valued taking the lowest from prime cost and marketvalue). Cash flow statement is prepared by using indirect method.
As per legislation of Latvia Republic, all the company's books areclosed at the end of the financial year (in this case at December 31 eachyear), when the Annual Report has to be made. This report is handed over toauditors and to financial inspection. Usually, the inspected Annual Reportis available for users in about three months after the end of the financialyear. In addition, a smaller report for internal use of the company isprepared at the end of each month. This report is handed over to themanagement of the company.
As all the reports are made automatically by means of softwareaccounting program, the problems occur only when transactions are recorded.
The main difficulties outlined by the chief accountant of AS Diena weresettling accounts with debtors and creditors and recording expenditures andrevenues of the company. Difficulties also appear when making records forfinancial and tax accounting.
As per Balance Sheet at December 31, 1997, the highest value of thecompany's assets is taken by debtors which in total amount to 1,780,777,i.e., 35.42% of the total assets. The biggest amount of debts is observedwith regard to bought goods and subscriptions. Each debtor is examinedindividually by the management of the company, and those admitted as badare included in provision for bad debts for 100% of the debited amount.
Quite impressive are also figures observed as creditors. Short-termcreditors amount to 2,619,142 that is 52% of the total passives of thecompany.
As it was pointed out by the chief accountant of AS Diena, cash isregarded as the most important asset of the company because of itsliquidity. If the company runs out of cash, it can easily go bankrupt.
The highest level of revenues is observed from sales of newspapers. Thehighest expenses are salaries, purchase of paper and depreciation of fixedassets.
Analyses used in Annual Report
The annual report of AS Diena includes analysis of the currentsituation and changes during the year 1997.
There was LVL 5.27 million of total assets in the balance sheet at theend of 1997; of those fixed assets were 30.1%. Current assets were LVL 3.51mil; of those debtors comprised of 50.7%. The most important fact is thattrade debtors have increased by 40.5% in 1997. The reason behind it is theincrease in net turnover. Unfortunately, previous trade partnerssystematically ignore terms of repayment.
27.6% of all capital plus liabilities was equity. According to Arvils
A? Eradens, the equity has grown to LVL 1.4 millions, which is 2.3 timesmore than year before (Annual Report, 1997, p. 5). This was only due toprofit for 1997; share capital and reserves were not altered.
Changes in the profit and loss account were analyzed mostly in thepresident's report. The first item mentioned is the increase in netturnover. According to Arvils A? Eradens, the net turnover of the wholeconcern has increased by 29 per cent reaching LVL 9.5 million, and such asituation is conventional for the company during last years. The mainreason for that is staff's excellent accomplishment of their job (Annual
Report, 1997, p. 5).
Consequently, also the profit after taxes has been increased to LVL
813 thousand. It is 16 times more than in 1996 (Annual Report, 1997, p. 5),and there are three crucial factors which determine such a tremendouschange. The first factor is the more efficient use of resources in 1997. Asmentioned above, net income has increased by 29 per cent, but manufacturingcost of goods sold has increased only by 15% in the same time. Thesecalculations were made based on the Profit or Loss statement. (Annual
Report, 1997, p. 7) Next, there was a considerable growth in otheroperating income. Finally, there was a rapid decrease in effective taxratio and reduction in interest payable.
Key ratios
Calculating the key ratios, average values were used because profitwas made during the year. There is also an assumption that profit is thesame each day during the year. All the ratios and necessary data are givenin Table 1.
ROA
This ratio does not depend on the capital structure of the firm (The
Profitability, Financing, and Growth of the Firm, p. 26). Profit beforeinterest and taxation should be used in order to separate ROA from thecompany's financial policy. The ratio is 28.83 per cent (Table 1) which ismore than the same ratio for AS Preses Nams, thus telling about betterbusiness performance.
ROE
The difference from the previous ratio is that ROE shows the returnfrom the owners 'point of view; however, here the minority interest is alsoregarded as equity. Thus the profit after taxes (with minority interestadded back) has to be applied. In AS Diena's case ROE is 69.83% (table 1).
The reason why there is so large difference comparing to AS Preses Nams
(17.91%) is explained under D/E ratio section.
COD
Average cost of debt in 1997 for AS Diena was 2.15 per cent and being
3 times less thanfor AS Preses Nams (Table 1) shows how debt structure affects COD. AS Dienahas higher proportion of non-interest bearing debt, thus, its COD is lower.
D/E
D/E describes the financial policy of firm. It is 2.53 in AS Diena'scase (Table 1) which shows that concern finances its operations two andhalf times more using debt than its own equity. Here an important noticeshould be made: LVL 655.7 th (Annual Report, 1997, p. 23) are subscriptionfees for the next year which calculating D/E and COD are regarded as debt.
The fact that for AS Preses Nams D/E = 0.52 explains why there is muchsharper difference for ROE than ROA. Equity is less important source offinancing for AS Diena, so the difference in ROE occurs.
t
It should be noted that effective tax rate can deviate from thestatutory tax rate during years. (The Profitability, Financing, and Growthof the Firm, p. 60) This difference can be seen in AS Diena's case. Thedenominator in the ratio is profit before tax. In 1997 t was 27.47 percent. (Table 1) However applying the same formula in 1996 this ratio was
60.32 per cent.
Current ratio; Quick ratio
The quick ratio shows the liquidity in very short terms when it isimpossible to sell stock. Both ratios for AS Diena are similar and largerthan 1 (Table 1). Thus, it should not be very hard for AS Diena to get overshort-term problems. Little difference between these ratios indicates thelow proportion of stock in current assets. In contrast, current ratio for
AS Preses Nams is 2 times more than quick ratio because it has large amountof stock.
Equity ratio
Equity ratio for AS Diena is 33.15%, and it is 2 times less than for
AS Preses Nams. The reason for this difference is of similar nature as for
D/E discussed above.
Profit margin; Capital turnover
ROA depends on two factors. The first one is profit margin, and it is
13.15%. (Table 1) The second factor is capital turnover that can indicatethe speed of operations. The decomposition of ROA shows that the differencebetween AS Diena and AS Preses Nams in ROA is due to faster capitalturnover in AS Diena's case.
? E/E0 = ROE0 - Div/E0 + NI/E0
This formula decomposes equity changes. Because there was no new issueof shares in 1997, only profit and dividends affects equity for AS Diena.
ROE = (1 - t) (ROCE + (ROCE - COD) * D/E)
In this formula only interest-bearing debt should be taken intoconsideration. Thus COD was 7.99% (Table 1), and it is similar to COD for
AS Preses Nams, because there COD does not depend on company's debtstructure.
Conclusion
It is fair enough to say that it takes more than just analysing the
Annual Reports to draw serious conclusions about the accounting system andfinance in the firm. However, some important findings can be listed tosummarise the investigation conducted in the report.
First, there is no doubt that the computerised accounting system isthe only one applicable for the company of the similar size because of theimmense number of transactions and complicated structure of the business.
Next, the analysis has revealed some features that characterise thepublishing and printing business:
. operating activities are mainly financed by short-term liabilities, most of them being non interest-bearing
. debtors are the main component of the current assets of the company, due to the need in the high level of stock turnover
To conclude, the AS Diena financial indices show an outstanding, ifcompared to competitors, business performance.
Reference list
Annual Report of AS Diena (1997).
Johansson, S. (1998) The Profitability, Financing, and Growth of the Firm,
Sweden: Studentlitteratur, Lund.
The State Register of Enterprises of Latvia (1999, Feb 18). [on-line],
Available: http://www.lursoft.lv/AppServer1?For...en=50972411&code=000300024
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