Unit 3 – Financial Strategies Key financial statements Learning Objectives • Learners will be able to: • Outline the key elements within published financial statements • Analyse the different stakeholders interested in key financial statements • Evaluate the usefulness of key financial statements The accounts section of an annual report and accounts Types of financial objectives – cash flow targets – cost minimisation – ROCE targets – shareholders’ returns • In small groups discuss these types of financial objectives and provide two examples for each of the four types of financial objective. Purposes of financial statements • To help managers to review progress. • To allow people with an interest in the business (stakeholders) to assess whether the business is performing well. • To assess a firm’s working capital. • To enable people to see if profit is of high quality. • To enable people to see if profit is being utilised in a sensible way. • To compare results with competitors. • To see if the firm is improving its performance over time. • To assess the effectiveness of different divisions or branches. Structure of the income statement (Next PLC) Years ending 30/01/10 (£m) 30/01/09 (£m) Revenue 3,407 3,272 Cost of Sales (2,410) (2,363) Gross Profit 997 909 Expenses (467) (431) Plus (minus) Exceptional Items - - Operating Profit 530 478 Finance Income 1 1 Finance Costs (25) (51) Profit before tax 505 429 Taxation (141) (127) Profit for year 364 302 Earnings per share 189p 156p Tesco Profit and Loss (28/2/09) – Key questions • Which segment of Tesco’s operations contributes the highest level of revenue? • Which segment made an operating loss? • How much did Tesco invest in capital expenditure in Asia throughout the year? • How much did Tesco receive in bank interest and similar during the year? • What was the increase in dividend per share from 2008 to 2009? Profit quality Measure of whether profit is sustainable in the long run •High quality profit – profit that will continue •Low quality profit – arises from extraordinary or exceptional circumstances •Extraordinary items •A non-recurring event that materially affected a company's finances in a reporting period. Must be explained in the annual report or quarterly report. •Exceptional items •Costs which alter a company's earnings during a given reporting period and which are a part of the company's normal activities but are unusually large.
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