FT Guide to Using and Interpreting Company Accounts, 4th Edition (Financial Times Series)

561 Pages·2010·8.93 MB·English

by  Wendy Mckenzie

FT

ABOUT THE AUTHOR FT Guides
Guides
‘A very thorough and well thought-through guide.’
Wendy McKenzie founded MTA – McKenzie FINANCIAL TIMES Guides USING AND
Training Associates – a fi nancial training Management Today
consultancy, over twenty years ago. Since then CU INTERPRETING
she has acquired an international reputation OS
COMPANY ACCOUNTS
as a fi nancial trainer, working both in the City USING AND
MI
and with a range of other companies and N
organisations, to develop individual business- PG INTERPRETING Understanding company accounts may seem
focused fi nancial training programmes.
A
The Financial Times Guide to Using and Interpreting Company Accounts is the ideal like an intimidating task, but The Financial Times
In addition to the FT Guide, she has also written companion for anyone who has to read company accounts. Whether you’re NA Guide to Using and Interpreting Company Accounts
a number of tuition guides on all aspects of a manager aiming to understand a competitor’s balance sheet, a potential N COMPANY shows that once you have cut through the jargon
Y
fi nance, and a textbook entitled Unlocking investor trying to predict the future value of a business or an entrepreneur trying and understood how the information is presented,
D
Company Accounts, aimed at analysts and to improve your own business’ performance, this book will answer your questions anyone can use published accounts to assess a
A ACCOUNTS business’ performance and profi tability.
the further education sector. clearly and succinctly. I
C
N FOURTH EDITION • Part 1 What information will I fi nd in the accounts?
Using examples and case studies from real accounts, Wendy McKenzie shows
CT • An introduction to the accounts
you what the numbers actually mean. She explains the information that you
WENDY McKENZIE
OE • The income statement
should be looking for in order to assess the health and worth of a company and
• The balance sheet
helps you read between the lines, so that you can identify those things that you UR
• The statements of recognised income and expense,
really do need to know.
NP comprehensive income, and changes in equity
Thoroughly updated throughout, the fourth edition of this bestselling guide TR • The statement of cash fl ows
includes: SE • Other information found in the accounts
• A comparison of IFRS and UK GAAP
• Key accounting and fi nancial terms clearly defi ned and summarised T
• Part 2 How do I analyse the accounts?
throughout the book I
N • Solvency
• Information on IFRS, UK GAAP and their convergence with US GAAP • Profi tability
G
• List of relevant websites and guidance on their use • Cash management
• The investor’s perspective
• Current and proposed changes to accounting rules
FOURTH • IMI
• Information about the effects of derivatives and hedging on reported profi tability EDITION • Part 3 How can I use my analysis?
• Suppliers’ accounts
M • Customers’ accounts
c • Competitors’ accounts
K
E • Identifying a company’s acquisition potential
N
Z • The availability of accounts
I
E
FINANCE

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FT Guide to Using and
Interpreting Company
Accounts

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FT Guide to Using
and Interpreting
Company Accounts
Fourth edition
Wendy McKenzie

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PEARSON EDUCATION LIMITED
Edinburgh Gate
Harlow
Essex CM20 2JE
England
and Associated Companies throughout the world
Visit us on the World Wide Web at:
www.pearson.co.uk
First published in Great Britain in 1994
Fourth edition published 2010
© Wendy McKenzie 1994, 2010
The right of Wendy McKenzie to be identified as author of this work has been asserted
by her in accordance with the Copyright, Designs and Patents Act 1988.
All rights reserved; no part of this publication may be reproduced, stored in a
retrieval system, or transmitted in any form or by any means, electronic, mechanical,
photocopying, recording, or otherwise without either the prior written permission of the
publishers or a licence permitting restricted copying in the United Kingdom issued by the
Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS.
ISBN: 978-0-273-72396-7
British Library Cataloguing in Publication Data
A CIP catalogue record for this book can be obtained from the British Library
10 9 8 7 6 5 4 3 2 1
14 13 12 11 10

Typeset by 9.5/14pt ITC Stone Serif by 30
Printed by Ashford Colour Press Ltd., Gosport
The Publishers’ policy is to use paper manufactured from sustainable forests.
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What’s new in the fourth edition?
Just about everything!
Since the last edition the regulatory framework has changed with the enact-
ment of the Companies Act 2006. Plus all companies in the European
Union listed on a Stock Exchange have to prepare their accounts using the
International Financial Reporting Standards (IFRS), which are now used in
most countries. IFRS has changed the presentation, content and complex-
ity of listed companies’ financial statements. It also means that, in the UK,
organisations use two different sets of accounting rules: IFRS that is largely
used by listed companies, and UK GAAP (the UK’s rules) that is used by most
other organisations.
This edition is fully updated to reflect the changes in the Companies Act, the
different accounting rules, and the presentation and content of the financial
statements prepared using IFRS and UK GAAP. This enables you to under-
stand and interpret the accounts prepared by both listed companies and
other UK organisations. It uses illustrative examples from listed companies’
accounts and a listed company’s accounts as a worked example to illustrate
ratio analysis and interpreting accounts.
Reading this book shows you how to calculate ratios and compare different
businesses’ performance and enables you to understand:
OO The presentation and content of the financial statements using IFRS,
both before and after the implementation of the revised IAS 1 during
2009. (For example the income statement and the statement of
recognised income and expense can be combined in a new financial
statement – the statement of comprehensive income.)
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vi What’s in the fourth edition?
OO How this differs from the presentation used in UK GAAP.
OO The main differences between IFRS and UK GAAP.
OO The effect of financial derivatives and hedging on a business’s reported
profitability and its financial position.
OO The effect of final salary pension schemes on a business’s reported
profitability and its financial position.
Acknowledgement
Thanks to Douglas Hurt, IMI’s Finance Director, for permission to use IMI’s
accounts.

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Contents
Preface / xii
part 1 What information will I find in the accounts?
1 An introduction to the accounts / 3
Introduction / 3
The accounting principles / 6
The accounts / 9
Summary / 20
2 The income statement, or the profit and loss acount / 23
Introduction / 23
Capital costs and revenue costs / 24
What does an income statement look like? / 26
The accounting judgements – defining the costs that relate to the sales / 59
Currency adjustments / 76

Income statement summary / 82
IMI’s income statement / 84
3 The balance sheet / 89
Introduction / 89
What will I find in a balance sheet? / 91
How is this information presented? / 95
The balance sheet in detail / 100
Summary / 174
IMI’s balance sheet / 178
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viii Contents
4 The statements of recognised income and expense,
comprehensive income and changes in equity / 181
Introduction / 181
What’s in a statement of recognised income and expense? / 182
IMI’s statement of recognised income and expense / 186
What’s in a statement of changes in equity? / 187
The statement of total recognised gains and losses / 189
The effects of the revisions to IAS 1 on the financial statements / 192
5 The statement of cash flows / 197
Introduction / 197
What is in a statement of cash flows? / 198
The cash flow statement in detail / 199
IMI’s cash flow statement / 205
6 Other information found in the accounts / 211
Introduction / 211
Segmental analysis / 212
Employee benefits / 222
Contingent liabilities / 235
Commitments for future capital expenditure / 236
Events after the reporting period / 237
Related party transactions / 238
Financial risk management disclosures / 240
The operating and financial reviews / 243

IMI’s financial review / 245
7 A comparison of IFRS and UK GAAP / 255
Introduction / 255
The main differences between the international rules and UK GAAP / 255
The presentation of the financial statements / 259
The income statement/profit and loss account / 264
The balance sheet / 267
The statements of total recognised gains and losses and the recognised
income and expense / 270
The cash flow statement and statement of cash flows / 271
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Contents ix
part 2 How do I analyse the accounts?
8 How do I analyse the accounts? / 277
Introduction / 277
Starting your analysis / 278
And now, a few words about ratios / 288
What’s in this part of the book? / 291
9 Solvency / 295
Introduction / 295
Immediate solvency/liquidity / 296
Short-term solvency / 299
Long- and medium-term solvency / 300
Summary of the solvency ratios and analysis / 311
IMI’s solvency in 2008 / 313
10 Profitability / 327
Introduction / 327
What is the definition of the return on capital employed? / 329
Calculating the return on capital employed / 338
Improving the return on operating capital employed / 342
The hierarchy of ratios / 349
Using EBITDA / 351
Summary of the profitability ratios / 352
IMI’s profitability ratios in 2008 / 354
11 Cash m anagement / 367
Introduction / 367
The operating and financial reviews / 367
The cash flow statement / 368
The loan profile / 373
IMI’s cash management / 374
12 The investors’ perspective / 379
Introduction / 379
The investment ratios / 380
Summary / 405
IMI’s investment ratios in 2008 / 410
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