Financial and Managerial Accounting
Introduction
Good performance of a business is one thing that every player in a given industry works hard to achieve. This is because it helps in making an organization’s name attractive to investors. Investors also look for the details in the reports for the company. Some of the relevant reports for the evaluation of a business are the directors’ and auditors’ reports (Grundy, Johnson & Scholes, 1998). Financial ratio analysis is also very useful in understanding more about a specific company. For example, all these tools are dealt with in the analysis of Vodafone Group Public Limited Company.
The company
Vodafone Group Public Limited Company is one of the greatest companies in the world operating in the telecommunications industry. It has operations in Europe, the Middle East, Africa, Asia Pacific and the United States. It is known for offering powerful business communication tools, branded phones and devices as well as offering roaming services for travelers.
Comments on the directors’ report for Vodafone Group Public Company Limited
The directors’ report is a document prepared by the directors of an organization. Through The directors’ report, the directors give details of the company’s position with regard adherence to the set financial and accounting standards as well as corporate social responsibility requirements (Grundy, Johnson & Scholes, 1998).
The latest directors’ report for Vodafone gives us the required details regarding the company. Firstly, the directors give the company’s policy regarding health and safety. Vodafone Group Public Company Limited is seen to be keen in ensuring that the health and safety of its employees as well as the whole society is taken care of. According to the report, the company is aiming to achieve this through making improvements in the way health and safety matters were previously managed. This would see the company get to a level where almost every aspect of health and safety for those in external or internal environment is handled properly. According to the directors, the company is aiming at making health and safety a priority in the decision making in the company. Additionally, this is going to be incorporated in the culture of the company to ensure that everyone is aware of what is supposed to be done regarding health and safety. There is a proposition to have regular training to the people in the company on matters of health and safety. To achieve the highest level of health and safety, the directors are reporting that the following would be done;
- Putting health and safety into the hands of our decision makers
- Occupational road risk
- Working with electricity
- Working at height
- Managing our contractors
- Legacy infrastructure
- Reducing fatalities and major incidents
- Strengthening health and safety management
The other thing that the directors’ report talks about is the support of the community by the company. The directors are giving details regarding the improvements on the support that the company was offering to the community. This would be achieved by increasing funding of the projects which are ongoing at the same time initiating new ones. The directors are indicating that the management of the projects would be done in a more efficient way to ensure that they have a stronger positive impact to the society.
Additionally, the director’s report indicates the company’s desire to have more cohesion in the company. This would be very essential in ensuring that the company’s operations flow simultaneously in all areas. According to the directors’ report, this would be achieved through ensuring that all the local and regional executives complete 2 year site visits. This would also help in improving the profitability of the company as a result of the improved familiarization with the operations of the business in different areas of the world.
Another important thing that the directors mention in their report is about the relationship of the company with the external auditors. The directors make it clear that their relationship with the external auditors of the company, Deloitte LLP is quite warm on both sides. The directors indicate that the company discloses all the required information to the external auditors. This is a very impressive thing to make interested parties aware of since the confidence in the company’s audited reports would improve.
Comments on the Auditors’ report for Vodafone Group Public Company Limited
The auditor’s report is usually an opinion or disclaimer formally submitted after a legal entity has been audited. This report is usually handed over to the users so that they may consider it in the process of decision making in the organization.
The auditor for Vodafone Group Public Company Limited makes a useful note that the process involved gathering evidence concerning the amounts and disclosures in the financial statements for the purpose of showing that there were no misstatements whether through fraud or errors.
The auditor’s report on Vodafone Group Public Company Limited is positive. According to the auditor, the financial statements of the company give a true and fair view of the company’s affairs as at 31st March 2013, have been prepared in a proper way as per the International Financial Reporting standards (IFRSs) and have also been prepared in adherence of the provisions of the companies’ act.
In the process of testing material misstatement in the company’s financial statements, the auditor’s report indicates that the planning materiality was set at £500 million for the group company. This was meant to make sure that the correct materiality position in the company is known. The auditor’s report indicates that this position was taken so as to avoid the effects of volatility in some items of the financial statements.
Additionally, the auditor’s report explains that the director’s statement on page 84 was reviewed. This was done as per the requirements of the Listing rules. This statement indicated that the company is a going concern. The auditor in the report confirms that indeed the company is a going concern. This is after failing to come up or locate any area with uncertainties that might make the company stop being a going concern. Additionally, the auditor’s report shows that the choice of the going concern concept in accounting is not inappropriate.
The auditor in the report lists some of the risks that were identified in the process of the audit on the company. The risks are said to have had a big impact on the audit strategy and scope. These risks were concerned with the carrying value of goodwill and intangible assets, the accounting for legal claims, revenue recognition and timing, treatment of incentives and discounts among others.
The auditor makes several notes regarding the various items of the financial statements. Firstly, the report points that the revenue of the company fell by 4.2% settling at £44.4 billion. The auditor notes that the fall can be attributed to issues of foreign exchange rate movements. The auditor also gives some insight on the share of the results in associates which increased by 30.5% to £6.5 billion. . The identification of VZW as the associate whose performance was good is sufficient. The auditor’s report identifies impaired loss to have been recorded in Italy and Spain. The auditor points at adverse discount rates movements as the main cause.
From the auditor’s report, it is evident that the other income and expense decreased from a gain of £3.7 billion in the prior year to a gain of £0.5 billion this year. This has been attributed to a gain of £3.7 billion realized after disposal of Group’s 44%interest in SFR and 24.4% interest in Polkomtel recognized in the prior year.
Financial ratio analysis for Vodafone Group Public Company Limited
To understand better the financial performance of Vodafone Group Public Company Limited, it is important to carry out financial ratio analysis. Some of the ratios for the four years up to 31st march 2013 are as follows;
- Gross Profit Ratio ( Margin )= Gross profit/Sales (Annual) x 100
| Gross profit margin | |||
| year | Gross profit | Sales | Ratio |
| 2013 | 21,177,000 | 67,520,000 | 36.82 |
| 2012 | 23,760,000 | 74,163,000 | 32.04 |
| 2011 | 24,156,000 | 73,550,000 | 32.84 |
| 2010 | 14,735,000 | 44472000 | 33.13 |
The gross profit margin is one of the commonly used profitability ratios. It is known to be one of the efficient ratios in understanding the financial health of an organization.
The gross profit margin of Vodafone Group Public Company Limited reduced from 33.13 percent in the year 2010 to 32.84 percent in the year 2011 and 32.o4 percent in the year 2012. This drop in the gross profit margin indicates that the company’s financial health over that time got poor. However, the company makes a good progress in terms of the gross profit margin. In the year ended 31st March 2013, the gross profit margin of the company rose to 36.82. This shows that the financial position of the company improved. Additionally, this is an indicator that the company has been able to improve in the way it uses its materials and labor. It also shows that the company has been able to improve in the way it does the pricing of the products and services, management of cost and improvement in the overall production efficiency. The increasing gross profit margin of Vodafone Group Public Company Limited indicates that the company will not experience any operational difficulties. It also indicates that the administrative as well as operational expenses of the company will be well covered. It is worth noting that an increasing gross profit margin of an organization indicates that the company’s balance sheet amount would also go up.
- Asset turnover= Annual Sales Volume/ Assets Employed (book value, Net book value N.B.V)
| Asset turnover ratio | |||
| year | Annual sales | Assets employed | Ratio |
| 2013 | 21,177,000.00 | 216,784,000.00 | 0.10 |
| 2012 | 23,760,000.00 | 223,008,000.00 | 0.11 |
| 2011 | 24,156,000.00 | 242,398,000.00 | 0.10 |
| 2010 | 44,472,000.00 | 156,985,000.00 | 0.28 |
This ratio seems to decrease over the years. In the year 201, the ratio stood at 0.28 while it stands at 0.10 as at 31st March 2013. This shows that the utilization of the company’s assets for the purpose of generating income for the company has been low. This may be an indicator of poor management in the company. This can be improved by reviewing this situation with the managers and planning on the efficient way to utilize the assets of the company.
- Return on equity = Earnings/ Equity x 100
| Return on Equity | |||
| year | Earnings | Equity | Ratio |
| 2013 | (134,880,000.00) | 108,586,000.00 | -1.24 |
| 2012 | (134,505,000.00) | 122,923,000.00 | -1.09 |
| 2011 | (124,487,000.00) | 140,346,000.00 | -0.89 |
| 2010 | (7,965,500.00) | 90,381,000.00 | -0.09 |
The ratio here seems to worsen from 2010 to 2013. The company’s use of the equity is negative for the four years. This means that there has not been good return to the stakeholder’s equity in the company. This indicates that the company’s stakeholders have not benefited much from their investment in the company. This calls for the management to work towards a positive return from the equity in the company.
- Stock turnover period= stock level/annual cost of sales
| Stock turnover period | |||
| year | Stock | Cost of sales | Ratio |
| 2013 | 684,000.00 | 46,343,000.00 | 0.01 |
| 2012 | 777,000.00 | 50,403,000.00 | 0.02 |
| 2011 | 861,000.00 | 49,393,000.00 | 0.02 |
| 2010 | 433,000.00 | 29,737,000.00 | 0.01 |
The stock turnover ratio measures the number of times the stock of a company is sold in a given year (Grundy, Johnson & Scholes, 1998). From the financial statements of Vodafone Group Public Company Limited, the stock turnover has been reducing since 2010. This may gives the indication that the company have been overstocking. This may also be an indicator that the company has been experiencing more of obsolescence each year or the marketing function of the company has been inefficient.
Conclusion
It is important for all companies to ensure that proper director‘s reports are prepared. The auditors’ reports should also not be ignored. According to Grundy, Johnson & Scholes, (1998), the information contained in the auditor’s report should be handled in a good way to ensure that the recommendations are dealt with in time. The financial ratios are always very useful in determining the level of an organization’s performance ((Grundy, Johnson & Scholes, 1998). This should be done regularly so as to ensure that proper control takes place.
Reference
Grundy, T., Johnson, G. & Scholes, K. (1998). Exploring strategic financial management. London, Prentice Hall.
Appendices
Appendix 1: Vodafone Group Public Limited Company Income statement for the years ending 31st march 2011 to 31st March 2013
Vodafone Group Public Limited Company
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Appendix 2: Vodafone Group Public Limited Company Income Statement for the years ending 31st march 2010
Vodafone Group Public Limited Company
Income Statement for the year ended 31st March 2010
| £m | |||
| Group revenue | 44,472 | ||
| Group EBITDA | 14,735 | ||
| EBITDA margin | 33.1% | ||
| Depreciation and amortization | (8,011) | ||
| Share of result in associates | 4,742 | ||
| Group adjusted operating profit (1) | 11,466 | ||
| Adjusted investment income and financing costs | (902) | ||
| Group profit before taxation | 10,564 | ||
| Adjusted income tax expense | (2,120) | ||
| Non-controlling interests | 27 | ||
| Adjusted profit | 8,471 | ||
| Adjusted basic earnings per share | 16.11p | ||
| Weighted average number of shares – basic | 52,595 | ||
| Closing number of shares outstanding | 52,663 | ||
| Investment income and financing costs | |||
| Adjusted investment income and financing costs | (902) | ||
| Reconciling items (1) | 106 | ||
| Statutory investment income and financing costs | (796) | ||
| Income tax expense | |||
| Adjusted effective tax rate | 24.0% | ||
| Adjusted profit before tax for the purpose of calculating adjusted effective tax rate | 11,216 | ||
| Less: Share of associates’ tax and non-controlling interest | (652) | ||
| Adjusted profit before tax | 10,564 | ||
| Adjustments to derive adjusted profit before tax | (1,890) | ||
| Profit before tax | 8,674 | ||
| Adjusted income tax expense for purposes of calculating adjusted tax rate | 2,692 | ||
| Share of associates’ tax | (572) | ||
| Adjusted income tax expense | 2,120 | ||
| Tax on adjustments to derive adjusted profit before tax | 39 | ||
| Recognition of pre-acquisition deferred tax asset | – | ||
| Tax benefit arising on settlement of German tax loss claim | (2,103) | ||
| Statutory income tax expense | 56 | ||
| Adjusted EPS calculation | |||
| Adjusted profit for EPS calculation | 8,471 | ||
| Adjustments: | |||
| Impairment losses ,net | (2,100) | ||
| Other income and expense | 114 | ||
| Non-operating income and expense(1) | (10) | ||
| Investment income and financing costs(1) | 106 | ||
| (1,890) | |||
| Taxation(1) | 2,064 | ||
| Profit attributable to equity shareholders | 8,645 | ||
Appendix 3: Vodafone Group Public Limited Company Balance sheet as at 31st march 2011 to 31st March 2013
Vodafone Group Public Limited Company (VOD)
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Appendix 4: Vodafone Group Public Limited Company Balance sheet as at 31st march 2010
| Vodafone Group Public Limited Company
Consolidated statement of financial position |
|
| 31 March | |
| 2010 | |
| £m | |
| Non-current assets | |
| Goodwill | 51,838 |
| Other intangible assets | 22,420 |
| Property, plant and equipment | 20,642 |
| Investments in associates | 36,377 |
| Other investments | 7,591 |
| Deferred tax assets | 1,033 |
| Post employment benefits | 34 |
| Trade and other receivables | 2,831 |
| 142,766 | |
| Current assets | |
| Inventory | 433 |
| Taxation recoverable | 191 |
| Trade and other receivables | 8,784 |
| Other investments | 388 |
| Cash and cash equivalents | 4,423 |
| 14,219 | |
| Total assets | 156,985 |
| Equity | |
| Called up share capital | 4,153 |
| Additional paid-in capital | 153,509 |
| Treasury shares | (7,810) |
| Retained losses | (79,655) |
| Accumulated other comprehensive income | 20,184 |
| Total equity shareholders’ funds | 90,381 |
| Non-controlling interests | 3,379 |
| Put options over non-controlling interests | (2,950) |
| Total non-controlling interests | 429 |
| Total equity | 90,810 |
| Non-current liabilities | |
| Long-term borrowings | 28,632 |
| Deferred tax liabilities | 7,377 |
| Post employment benefits | 237 |
| Provisions | 497 |
| Trade and other payables | 816 |
| 37,559 | |
| Current liabilities | |
| Short-term borrowings | 11,163 |
| Current taxation liabilities | 2,874 |
| Provisions | 497 |
| Trade and other payables | 14,082 |
| 28,616 | |
| Total equity and liabilities | 156,985 |
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