Bloomsbury plc

(1) The financial statement information of Bloomsbury plc has been put into some analytical frameworks in order to have a clear point of views about the financial position and past performance. The analytical frameworks from below include horizontal and vertical analysis for income statement and balance sheet respectively, and also some analysis of crucial ratios for the company.

According to the computations of horizontal analysis for income statement and balance sheet of Bloomsbury plc (appendix 1) there are some points need to pay attentions.

The turnover has increased by 5% in 2009, comparing with the figures in 2008, whereas the cost of sales in 2009 is reduced by 2% which might be caused by the strategies of increase sales by new product introductions and cut operating costs at every opportunity. Due to these two factors, the gross profit has an increase of 21% in 2009.

The distribution costs increased by 11% in 2009 and the administrative costs changed in line with turnover from 2008 to 2009. This may be cause of the further expansion of business for the economies of scales. Though the costs has a little increase, the profit before interest and tax increased for 23% due to the rise of turnover and reduce of cost of sales.

The interest paid in 2009 is 10 times of the amount in 2008, this should be cause of the increase of borrowing. Consequently, the profit before tax has a smaller increase than the profit before interest and tax. The tax expense has a significant change in 2009, compare with the increase by 19% of the profit before tax, the tax expense has raise about 28% in 2009. This could be considered that the policy of tax in 2009 has changed. Due to the rise of the income tax expense, the profit after tax increase smaller than the profit before tax.

Because of the excellent financial performance, the dividends paid has an increase of 25% in 2009, while the retained profit for the year has raise about 13%, this figure is almost the same as the increase of the profit after tax from 2008 to 2009.

From the horizontal analysis for the balance sheet of 2008 and 2009 (appendix 2), the 8% debentures in 2009 are ten times than that in 2008. This rate is same as the increase of the interest. However, the shareholders' fund of Bloomsbury plc in 2009 is raise 19%. This growth is mainly due to the increase of the cash and bank. It increases by 807% from 2008 to 2009.

Finally, by consider the income statement together with the balance sheet. It shows that the increase of turnover is much lower than the increase of capital employed of the company. Therefore, Bloomsbury plc needs to improve the activities in the future.

According to the computations of vertical analysis for income statement and balance sheet of Bloomsbury plc (appendix 3&4) there are some points need to pay attentions.

Cost of sales has reduced, and results in increase in the percentage of gross profit. Both distribution costs and administration costs for each year are at the same levels in terms of turnover. However the percentage of interest, tax, and dividends paid in terms of turnover has increased in 2009. Thus, the percentages of retained profit are at similar level in terms of sales for each year.

The debentures, cash and bank and retained earnings have significant increase in 2009. And the increase in retained earnings is larger than the increase of the dividend paid, therefore, the spare money from the retained profit should be reinvested into the business in order to expand the net assets of the company. In 2009, the retained profit has a large percentage of the total capital, and the ordinary shares and share premium have less percentage of the capital employed.

The inventory decreased slightly, however the trade receivables and trade payables increased, these factors means that the working capital might be managed more efficient. Moreover, the provisions are maintained at the similar level in terms of shareholder's funds.

The ratio analysis (appendix 5) shows that the return on capital employed of Bloomsbury plc has a little decrease in 2009. This is due to the stable increase of the profit before interest and tax together with the total capital however the increase of the debentures is quite significantly. This factor reflects that the company is using its net assets quite efficiently.

The net profit margin and gross profit percentage increased steadily from 2008 to 2009. This is mainly cause of the increase in turnover. However, the asset utilisation in 2009 is reduce slightly, this means that the activity of company and turnover have not increase in the same level with the assets of the company.

The current ratio and quick assets ratio are all at a reasonable levels in each year. However, in 2009, cause of the significant increase in cash and bank, the current ratio and quick assets ratio both increased by a little amount. These factors will let the report of company looks like be more safety. The inventory turnover maintained at the similar levels for each year, this shows that the company has a stable inventories holding policy, and the business operation of Bloomsbury plc is quite effectively and efficiently. Also the excellent inventory turnover may cause of the quite short receivables recovery period and the payables prepayment period.

In 2009, the debtors are collected slower than that in 2008. It is a signal shows that the company need to pay attentions to their credit policy. However, the longer receivables recovery period could be the advantage to get more customers, and in order to increase sales.

Also, the payables payment period has increased by a large days from 2008 to 2009, it may be an indicator of the shortage of funds, and it will has some negative effects for the suppliers.

Consequently, the company should to check their credit policy in order to let the debtors collected more efficiently, and manage their assets prudently. Also the company need to pay attentions to the payables repayment period and try to keep a good relationship with the suppliers.

The capital structure for Bloomsbury plc is in a reasonable situation. Gearing ratio increased in 2009 cause of the increase of debentures of the company. Interest cover decreased due to the increase of the interest. However the interest is quite small amount in terms of sales. The debt for both years is in a satisfying level.

The earnings per share have a steady increase, and the dividend cover maintained at a similar level for each year, these are all reasonable figures.

(2)

Generally speaking, the financial performance for 2009 of Bloomsbury plc is quite reasonable. This excellent performance is mainly benefit from the prudent financial management and effective operational management. One of the key strategies for 2009 is to increase sales year on year by new product introductions, which can be seen from the analysis above. The turnover has increased by 5% in 2009, comparing with the figures in 2008.

One of the main important methods to increase profits is to reduce the costs. Therefore the company set the strategy to cut operating costs at every opportunity. Unfortunately, even the cost of sales in 2009 is reduced by 2%, but the distribution costs increased by 11% in 2009 and the administrative costs changed in line with turnover from 2008 to 2009. However, these factors may be cause of the further expansion of business for the economies of scales.

In 2009, due to the influences by the financial crisis, lots of companies were in trouble. The Bloomsbury plc wants to improve their performance by targeting high margin markets. According to the ratios analysis, the net profit margin and gross profit percentage increased steadily from 2008 to 2009. This is mainly cause of the increase in turnover. Also these factors reflect the strategy of target high margin markets is quite useful.

As a significant effect of the financial crisis, the interest rates and property prices are quite low. The Bloomsbury plc hopes to take the advantage to grow their asset base. According to the financial statement, the debentures have increased by 10 times than previous year. This rate is same as the increase of the interest. These factor show the company implement the strategy sufficiently.

The last key strategy for the company is to manage their working capital prudently, from the ratios analysis in question 1, the current ratio, quick ratio and inventories turnover are at a quite safe position. However, the payables payment period has increased by a large days from 2008 to 2009, it may be an indicator of the shortage of funds, and it will has some negative effects for the suppliers. In 2009, the debtors are collected slower than that in 2008. It is a signal shows that the company need to pay attentions to their credit policy and working capital management.

(3)

According to the ratio analysis for the HCA and CCA in 2007(see appendix), it shows that the gross profit percentage is the same, however the net profit margin decrease significantly under CCA. The asset utilisation under CCA is not as satisfying as that under HCA due to the capitalization of holding gains in non-current assets.

Due to the changes of ratios from above, the return on capital employed under CCA is much smaller than that under HCA. Thus the management of Bloomsbury plc should pay attentions to the effects from different accounting systems and then try to diminish the risk of management like the overestimating the performance, and let the operation of the business be more effectively and efficiency.

The current ratio and quick assets ratio are maintained at similar level under HCA and CCA in 2009, however, these two ratios have a slight increase. This could be understand as the company want to use the working capital more sufficiency, in another words, the company do not want to tie resources as stock or put them in bank. However, both of the current ratio and quick assets ratio are all at a reasonable levels in 2009 under HCA and CCA.

The inventories turnover fallen dramatically under CCA, cause of the significant increase of inventories under CCA in 2009. While the receivables recovery and payables repayment periods are stay at the same level under HCA and CCA. The rate of inventories turnover is an indicator of operating activity and the policies of inventories holding. However, the low inventories turnover ratio and high recovery and creditor period is not a good signal for the operation. The company should to pay attentions to these factors, and make policies or change methods of operation, try to increase the inventories turnover ratio and reduce debtor receivable and creditor payment days to a reasonable level. Thus the operation management of the company could become better.

For the capital structure of Bloomsbury plc, because of the further capitalisation of revaluation of certain assets, the gearing ratio fallen under CCA in 2009. As the gearing ratio under HCA is already at a safety level, the decrease under CCA reflects the debt level of the company is at a reasonable position. The interest cover under CCA fallen because of the decrease of PBT in 2009. However, these satisfying ratios prove that the financial management of Bloomsbury plc is quite reasonable, and the company manage the working capital prudently.

The earning s per share has decreased dramatically under CCA. This is an important indicator of the earnings performance for the company. The dividend cover also has a significant fallen. These falls have some negative effect for the report of the company, however, the mainly reason for the falls is the decrease of profit after tax under CCA in 2009.

In conclusion, the return on capital employed, the inventories turnover, interest cover and the earnings per share are the four main accounting ratios which illustrate the key differences between the HCA and CCA financial statements for 2009.

Section B

(1) In recent years, accounting has soared in popularity. But everything has two sides. There are many problems need to solve at the same time with successful development of accounting. Lots of accounting firms have been charged due to demonstrated or admitted professional inadequacy, and the financial markets suffered quite large amount of losses cause of these factors.

The accounting practices like double-entry bookkeeping, it include of many different mathematical processes. The results can be useful only if the information relate to inputs are based on facts, if the inputs are false, or imaginary, the outputs cannot be factual and useful. This has to be widely believed that accounting respects this notion. But things are seldom what they seem. As the limited liability company become popular of commerce. Businessmen, however, have always prized secrecy, especially privacy in financial matters. In order to protect the secrecy of their business, the traders maybe provide valuations that different with the real value to bookkeepers and accountants, and they had no immediate knowledge of the things of prices and value.

Chambers has demonstrated seven fields of disciplined inquiry to present problems existing in the practice of accounting.

Accountants could defend against the criticisms by using the claim of bookkeeping founded on simple mathematical rules of addition and subtraction. But Chambers argue that the rule is not reasonable, as they add or subtract of the values from different items are not normally take out from the same date. They may come from the historical data or hypothetical values. However, practitioners and pedagogues seems do not mind the problems of the rules.

The late eighteenth and the nineteenth centuries, economists were and are concerned with several factors same as accountants like capital, saving and investment. The economic commonsense or literature have defended accounting teaching and practice from ambiguity, vagrant and self-serving ideas and rules of managers. However, Chambers have a different point of view, he argues that accountants do not know the teachings of economics, and do not understand the economic theories. To this day, no standard exposition of the accounting practice has its foundation in the well and systematically developed ideas of economics.

The laws could defend accounting practice from vagueness, prevarication and internal contradiction. The financial statements of companies are required to keep true accounts by the laws. The true accounts require the statements should compounds of past facts, present guesses, managerial opinions, and accounting conventions. However, Chambers claims that accountants have twisted the meaning of ‘true', as not correspondence with facts of real world, but use their traditional habits and disregarding of the facts. Consequently, the statements that are compounds of past facts, present guesses and fallacious arithmetic would be gross misuse of the term, and clear violation of the intent of the law.

Accounting may have been recourse to some factors to defend against the corruption of its ideal processes. However, due to the vagaries of situation from external, the business sets up goals and Chambers claims that the goals must be modified or abandon original intentions and think afresh. By doing this, business should know their current capacity and the progress in time. Consequently, the accounting information is the important factor of making judgments about past and making decisions for the future. But in real world, the information of accounting seems not having such importance as the disregard of changes in prices or money equivalents of goods and other property, misrepresentation of the solvency and risk, and the purchasing power of the company are set aside.

The products of accounting are devised by accountants, and created for all of the people who have more or less interests in the profits and solvencies of business ventures. However, there is no standard for judge the business performances of the companies, thus the assessment use the method of comparing the indicators of different companies and the comparisons have to base on the assumption that different firms use the same rules to do the calculations. By the day to day development of accounting practice, lots of rules for calculations created. Consequently, different companies use different rules to calculate indicators. Therefore, the indicators from the different companies cannot make sense cause of the different calculation rules.

Accountants may have protected from self-serving demands and suggestions of others by regarding their profession as an exercise in measurement. Measurement refines discrimination, reduces the diversity of descriptions of sense impression, enable people to match some things with others. However, Chambers claims that financial accounting is the least disciplined mode of quantification, cause of the highly respected accounting authorities argue that large violate principles exist in measurements. He claims that scarcely any reference in accounting discourse has been made to literatures on measurement, and accounting practices commonly violate principles of measurement.

The distortion of accounting functions and processes could be avoided by referring to the ideas of accountability and responsibility. For practice, the affairs of business, governmental and other organizations are managed by the people who are assigned with different power, and the people have responsibility to exercise power for the interests of others, and have the duty to account for its exercise. However, their personal interests may conflict with their duty. Thus the performance of delegates is expected to be kept under observations such as annual meetings, and audits of annual reports. But Chambers indicates that in reality, the delegates with power determine the qualities of the components of financial reports are without independent evidence of their veracity. Thus the ideas of accountability and responsibility cannot make senses.

In conclusion, Chambers claims that the above seven fields of disciplined inquiry existed in the processes and products of accounting - mathematics, economics, law, judgment and choice, language and communication, metrology, and politics and ethics. In the past, accountants isolated themselves from world affairs by creating ‘generally accepted accounting principles' which covers all irrational and unreasonable practices. The principles has justified diverse accounting practices, however restricted scholarly inquiry into what accounting should be and can be. Due to these factors, accounting needs some revolution to improve the poverty of accounting discourse.

(2) Chambers claims that the reason for some business failures in real world is because of the companies want to keep their business at a quite reasonable position then provide some financial information which are not “true and real”, and also the accounting policies and rules of calculations are not clear, therefore the financial statement cannot make senses.

Chambers' objection on accountants ignoring real world facts can be resolved by Statement of Principles, it shows that transactions which lead to change of financial statements should be based on sufficient evidences and be reliably measured at a monetary amount. Statements of Principles also have the principles to measure assets and liabilities which should be measured by some specific measurement. This can avoid bookkeepers add or subtract of the values from different items are not normally taken out from the same date. The Statement of Principles set the standard rules of calculations for the financial statements and ratios to show the financial performance and position of the company. The different ratios are useful for the people who interest in the financial performance of different companies. They can get the results clearly by the compare. Statement of Principles state that the information of financial statement need to be provided in time, with good faith, and have the ability of influence the economic decisions of users. The Statement of Principles has the concept of ‘true and fair' at its foundation. The true and fair view is a dynamic concept which resolves the problem of Chambers objection of that accountant have twisted the meaning of ‘true', as not correspondence with facts of real world, but use their traditional habits and disregarding of the facts. The Statement of Principles also stated that the information should be comparable, and no deliberate or systematic error should exist. It gives some suggestions to people how to analysis the financial statement for different companies, and in order to make the sensible judgments.

In conclusion, the ASB Statement of Principles for financial reporting can resolve Chamber's objections to measurement in financial reporting theory and practice.

Appendix 1

Horizontal analysis for the Income Statements for the year ended

31 December, on the basis of HCA

2008

2009

Change %

£000

£000

Turnover

88,250

92,500

+5%

Less: Cost of Sales

(63,025)

(62,070)

-2%

Gross profit

25,225

30,430

+21%

Less: Distribution costs

(2,210)

(2,460)

+11%

Less: Administrative Costs

(1,540)

(1,620)

+5%

Profit before interest and tax

(PBIT)

21,475

26,350

+23%

Interest

(80)

(880)

+1000%

Profit before tax (PBT)

21,395

25,470

+19%

Income tax expense

(5,050)

(6,470)

+28%

Profit after tax (PAT)

16,345

19,000

+16%

Dividends paid

(4,000)

(5,000)

+25%

Retained Profit for year

12,345

14,000

+13%

Appendix 2

Horizontal analysis of Balance sheets as at 31 December on the basis of HCA

2008

2009

Change %

£000

£000

Non-current assets:

Cost

Depreciation

85,000

(25,500)

59,500

105,000

(34,000)

71,000

+24%

+33%

+19%

Current assets:

Inventory

Trade receivables

Cash and bank

17,000

23,375

1,875

15,500

34,000

17,000

-9%

+46%

+807%

Current liabilities:

Trade payables

Income tax

Provisions

(17,000)

(4,250)

(4,000)

(25,500)

(6,500)

(5,000)

+50%

+53%

+25%

8% debentures

(1000)

(11000)

+1000%

75,500

89,500

+19%

Share capital and reserves:

Authorised and issued £1 ordinary shares

Share premium

Retained earnings

50,000

1,500

24,000

50,000

1,500

38,000

0%

0%

+58%

75,500

89,500

+19%

Appendix 3

Income statements vertical analysis (all items expressed in terms of turnover)

Income statements

Common size statements

2008

2009

2008

2009

£000

£000

%

%

Turnover

88,250

92,500

100%

100%

Less: Cost of Sales

(63,025)

(62,070)

(71.4%)

(67.1%)

Gross profit

25,225

30,430

28.6%

32.9%

Less: Distribution costs

(2,210)

(2,460)

(2.5%)

(2.7%)

Less: Administrative Costs

(1,540)

(1,620)

(1.7%)

(1.8%)

Profit before interest and tax

21,475

26,350

24.3%

28.5%

Interest

(80)

(880)

(0.009%)

(0.095%)

Profit before tax (PBT)

21,395

25,470

24.2%

27.5%

Income tax expense

(5,050)

(6,470)

(5.7%)

(7%)

Profit after tax

16,345

19,000

18.5%

20.5%

Dividends paid

(4,000)

(5,000)

(4.5%)

(5.4%)

Retained Profit for year

12,345

14,000

14%

15.1.%

Appendix 4

Balance sheet vertical analysis (all items expressed in terms of shareholders' funds)

Balance sheets

Common size statements

2008

2009

2008

2009

£000

£000

%

%

Non-current assets:

Cost

Depreciation

85,000

(25,500)

59,500

105,000

(34,000)

71,000

112.6%

(33.8%)

78.8%

117.3%

(38%)

79.3%

Current assets:

Inventory

Trade receivables

Cash and bank

17,000

23,375

1,875

15,500

34,000

17,000

22.5%

31%

2.5%

17.3%

38%

19%

Current liabilities:

Trade payables

Income tax

Provisions

(17,000)

(4,250)

(4,000)

(25,500)

(6,500)

(5,000)

(22.5%)

(5.6%)

(5.3%)

(28.5%)

(7.3%)

(5.6%)

8% debentures

(1000)

(11000)

(1.3%)

(12.3%)

75,500

89,500

100%

100%

Share capital and reserves:

Authorised and issued £1 ordinary shares

Share premium

Retained earnings

50,000

1,500

24,000

50,000

1,500

38,000

66.2%

2%

31.8%

55.9%

1.7%

42.5%

75,500

89,500

100%

100%

Appendix 5

Ratio analysis:

2008

2009

1.

Profitability:

Return on Capital Employed

(ROCE)

100*21475/76500=28%

100*26350/100500=26%

Net Profit Margin

100*21475/88250=24%

100*26350/92500=28%

Asset Utilisation (Turnover)

88250/76500=1.15x

92500/100500=0.92x

Gross Profit Percentage

100*25225/88250=29%

100*30430/92500=32.9%

2.

Working Capital Management:

Current Ratio

42250/25250=1.67:1

66500/37000=1.80:1

Quick Assets Ratio

25250/25250=1:1

51000/37000=1.38:1

Inventories Turnover

63025/17000=3.71x

62070/15500=4x

Receivables Recovery Period (days)

365*23375/88250=97

365*34000/92500=134

Payables Repayment Period (days)

365*17000/63025=99

365*25500/62070=150

3.

Financial Structure:

Gearing Ratio

100*1000/76500=1.3%

100*11000/100500=10.9%

Interest Cover

21475/80=268.44x

26350/880=29.94x

4.

Market Value and Returns:

Earnings Per Share (EPS)

33p

38p

Dividend Cover

16345/4000=4.09x

19000/5000=3.8x

Appendix 6

Ratio analysis:

2009 HCA

2009 CCA

1.

Profitability:

Return on Capital Employed

(ROCE)

100*26350/100500=26%

100*15512/132729=12%

Net Profit Margin

100*26350/92500=28%

100*15512/92500=17%

Asset Utilisation (Turnover)

92500/100500=0.92x

92500/132729=70%

Gross Profit Percentage

100*30430/92500=32.9%

100*30430/92500=32.9%

2.

Working Capital Management:

Current Ratio

66500/37000=1.80:1

77379/39000=1.98:1

Quick Assets Ratio

51000/37000=1.38:1

51000/39000=1.31:1

Inventories Turnover

62070/15500=4x

62070/26379=2.35x

Receivables Recovery Period (days)

365*34000/92500=134

365*34000/92500=134

Payables Repayment Period (days)

365*25500/62070=150

365*25500/62070=150

3.

Financial Structure:

Gearing Ratio

100*11000/100500=10.9%

100*11000/132729=8.3%

Interest Cover

26350/880=29.94x

15512/880=17.63x

4.

Market Value and Returns:

Earnings Per Share (EPS)

38p

18p

Dividend Cover

19000/5000=3.8x

8846/5000=1.8x

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