1. Financial Statement Analysis Case
Vodafone Group plc. Vodafone is based in the United Kingdom. Selected data from Vodafone’s 2012 annual report follows (pounds in millions).
2012 2011 2010
Revenues £46,417 £45,884 £44,47
Gross profit % 32.04% 32.84% 33.80%
Operating profit £11,187 £5,596 £9,480
Operating cash flow less capital expenditures 8,459 9,173 9,145
Profit (loss) 7,003 7,870 8,618
In its 2012 annual report, Vodafone states, “Our leading performance is based on 3 core strengths ... The successful implementation of our strategy to generate liquidity or free cash flow from non-controlled interests.”
Instructions
(a) Compute the percentage change in sales, operating profit, net cash flow, and net earnings from year to year for the years presented.
Answer :
(b) Evaluate Vodafone’s performance. Which trend seems most favorable ? Which trend seems least favorable? What are the implications of these trends for Vodafone’s strategy ? Explain.
Answer :
Based on the percentage change in sales, the most favorable trend is from 2011 to 2012 because operating profit and revenues increased even though the profit (loss) and OCF decreased but still in the positive result. In addition, the least favorable trend is from 2010 to 2011 because operating profit and profit (loss) decrease even though the OCF and revenue increase but not really significant.
Based on one of the 3 core strengths owned by Vodafone “The successful implementation of our strategy to generate liquidity or free cash flow from non- controlled interests'' it's just that in reality what happened to Vodafone was a decrease in profit from the previous year.
2012 2011 2010 Change (%,yoy) 2012
Change (%,yoy) 2011
Revenues £ 46,417 £ 45,884 £ 44,470 1.16% 3.18%
Gross profit % 32.04% 32.84% 33.80% -2.44% -2.84%
Operating profit £ 11,187 £ 5,596 £ 9,480 99.91% -40.97%
Operating cash flow less capital expenditures£ 8,459 £ 9,173 £ 9,145 -7.78% 0.31%
Profit (loss) £ 7,003 £ 7,870 £ 8,618 -11.02% -8.68%
2. Accounting, Analysis, and Principles
The Amato Theater is nearing the end of the year and is preparing for a meeting with its bankers to discuss the renewal of a loan. The accounts listed appeared in the December 31, 2015, trial balance as follows :
Debit Credit
Prepaid Advertising £ 6,000
Equipment 192,000
Accumulated Depreciation—Equipment £ 60,000
Notes Payable 90,000
Unearned Service Revenue 17,500
Service Revenue 360,000
Advertising Expense 18,680
Salaries and Wages Expense 67,600
Interest Expense 1,400
Additional information is available as follows.
1. The equipment has an estimated useful life of 16 years and a residual value of £40,000 at the end of that time. Amato uses the straight-line method for depreciation.
2. The note payable is a one-year note given to the bank January 31 and bearing interest at 10%. Interest is calculated on a monthly basis.
3. The theater sold 350 coupon ticket books at £50 each. Two hundred ticket books were used in 2015. One hundred fifty of these ticket books can be used only for admission any time after January 1, 2016. The cash received was recorded as Unearned Service Revenue.
4. Advertising paid in advance was £6,000 and was debited to Prepaid Advertising. The company has used £2,500 of the advertising as of December 31, 2015.
5. Salaries and wages accrued but unpaid at December 31, 2015, were £3,500.
Accounting
Prepare any adjusting journal entries necessary for the year ended December 31, 2015.
Answer :
Dr. Cr.
Depreciation Expenses 9,500
Acc. Depre 9,500
Interest Expense 8,250
Interest Payable 8,250
Service Revenue 10,000
Unearned Service Rev 10,000 Advertising Expenses 2,500
Prepaid Advertising 2,500
Salaries and Wages Expenses 3,500
Salaries and Wages Payable 3,500 33,750
33,750
Analysis
Determine Amato’s income before and after recording the adjusting entries. Use your analysis to explain why Amato’s bankers should be willing to wait for Amato to complete its year-end adjustment process before making a decision on the loan renewal.
Answer :
Amato’s bankers should be willing to wait for Amato to complete its year-end adjustment process before making a decision on the loan renewal because there are slight differences in expenses tha affects the results (net income).
Principle
Although Amato’s bankers are willing to wait for the adjustment process to be completed before they receive financial information, they would like to receive financial reports more frequently than annually or even quarterly. What trade-offs, in terms of relevance and faithful representation, are inherent is preparing financial statements for shorter accounting time periods ?
Answer :
Increased Relevance:
Shorter periods provide users with more recent information, allowing for quicker assessment of performance and financial health. Analyzing trends over shorter periods can be easier, highlighting potential issues or opportunities earlier than annual reports might.
Decreased Faithful Representation:
Accruing and estimating revenue, expenses, and other items becomes more critical for shorter periods, as transactions may not be fully completed within the timeframe. This can lead to inaccuracies if estimations are not precise.
Due to the shorter timeframe, some information might not be readily available, leading to incomplete or preliminary statements.
Dr. Cr. Dr. Cr.
Revenue 360,000 370,000
Depreciation Expense 9,500
Interest Expense 1,400 9,650
Advertising Expenses 18,680 21,180 Salaries and Wages Expenses 67,600 71,100
Total Expenses 87,680 101,930
Net Income 272,320 258,570
Before After
