Accounting and Finance in AS Diena
Table of contents
Introduction............................................................................................................................................................................ 2
Methodology........................................................................................................................................................................... 2
Company background........................................................................................................................................................ 3
Accounting system............................................................................................................................................................... 3
Annual reports...................................................................................................................................................................... 4
Analyses used in Annual Report................................................................................................................................. 5
Key ratios................................................................................................................................................................................... 6
Conclusion................................................................................................................................................................................ 8
Reference list.......................................................................................................................................................................... 9
“Accounting is the language of
business”…Indeed, like no man without ability to express his thoughts clearly
and understandably can achieve very much in life, no firm can succeed without a
good accounting system. Accounting is a necessary tool which not only provides
information to the owners about how its money is working, and to the state
about how big the taxes are to be fetched, but, the most important, enables the
company to control, to plan and to trace all the actions, processes and
projects. The purpose of this report is to find out how the accounting is done
in a successful company, and how the principles and methods used there differ
from the traditional accounting theory. In addition, the analysis of the
company’s performance will be worked out using the standard ratios.
The decision to choose AS Diena
for the report has been based on several criteria: it is one of the 100 largest
companies in Latvia, it has a leading position in its branch of industry, and
it is a good example of young and fast-developing Latvian business.
The analyses and findings
presented in the paper are based on the information received from the interview
with the chief accountant of AS Diena Inese Janikovska and from the Annual
Report 1997 of the company. The Report mirrors the financial data of AS Diena
and its subsidiaries: publishing house Diena Bonnier SIA, advertising agency
METRO, Bauskas Dzive SIA, agency Agro Apgads SIA, Kursas laiks SIA, Dzirkstele
SIA, Zemgales Zinas SIA. The information about subsidiaries is included in
Annual Report in limits of financial year starting from the date of
acquisition.
Furthermore, the theoretical side
was strengthened with the knowledge gained from the lectures by Elvi Sederlin
and Gunnar Lindholm, and from the course textbooks “Business Accounting” and
“The Profitability, Financing, and the Growth of the Firm”.
To make the key ratio analysis
sensible, a similar size enterprise operating in the same branch of industry
was chosen for comparison. For this purpose, the figures from the final
accounts of AS Preses Nams were taken from the Lursoft database and used in the
analysis.
The Latvian-Swedish joint-stock
company AS Diena was founded in 1992. In 1996 it was transformed into stock
corporation. In fact, it is a group of companies with parent company and
subsidiaries. The share capital of the company consists of 6000 fully paid
ordinary shares, moreover, each share has a nominal value of LVL 10 and its
owner possesses one voting right. The shares of AS Diena do not participate in
stock exchange, and no deals among the shareholders are allowed. The most
important shareholder is a Swedish company “Expressen AB”, which owns 2940
shares, i.e., 49%
of share capital and votes. In addition, it can be pointed out that the sales
turnover at 1997 constituted almost LVL 9.5 mil, and the average number of
employees was 847. The officially registered kinds of activities of AS Diena
are as follows:
·
publishing
·
printing work and related services
·
reproducing of computerized materials
·
agents dealing with sales of the wide range of
goods
The present strategy of the firm
is development as a media and media infrastructure company. To conclude, AS
Diena now enjoys the benefits of the large market share and solid reputation,
and it will undoubtedly try to maintain and to improve the current position.
Accounting system in AS Diena is
fully kept on software and all the transactions are done automatically. The
main software accounting program used is Mac Hansa. When the record is made,
the account is closed automatically, and the balance is sent to the next stage,
i.e., Profit of Loss Account, Balance Sheet, Cash Flow Statement etc. Printed
information of accounting actions is kept in the company’s archive. As AS Diena
is a very large company, the chief accountant could not tell exactly how many
transactions were recorded per year, but the approximate number is about
50,000. The most common transactions are those in connection to cash and bank
accounts.
The Annual report is prepared according to legislation of Latvia Republic
and the laws “About Accounting” and “About Annual Reports of the Company”. The
main principles used in accounting are the consistency concept (methods of
valuation of assets and calculation of revenues and expenses are kept constant
from one year to another) and the prudence concept (e.g., stock is valued
taking the lowest from prime cost and market value). Cash flow statement is
prepared by using indirect method.
As per legislation of Latvia Republic, all the company’s books are closed
at the end of the financial year (in this case at December 31 each year), when
the Annual Report has to be made. This report is handed over to auditors and to
financial inspection. Usually, the inspected Annual Report is available for
users in about three months after the end of the financial year. In addition, a
smaller report for internal use of the company is prepared at the end of each month.
This report is handed over to the management of the company.
As all the reports are made automatically by means of software accounting
program, the problems occur only when transactions are recorded. The main
difficulties outlined by the chief accountant of AS Diena were settling
accounts with debtors and creditors and recording expenditures and revenues of
the company. Difficulties also appear when making records for financial and tax
accounting.
As per Balance Sheet at December
31, 1997, the highest value of the company’s assets is taken by debtors which
in total amount to 1,780,777, i.e., 35.42 % of the total assets. The biggest
amount of debts is observed with regard to bought goods and subscriptions. Each
debtor is examined individually by the management of the company, and those
admitted as bad are included in provision for bad debts for 100% of the debited
amount. Quite impressive are also figures observed as creditors. Short-term
creditors amount to 2,619,142 that is 52% of the total passives of the company.
As it was pointed out by the chief
accountant of AS Diena, cash is regarded as the most important asset of the
company because of its liquidity. If the company runs out of cash, it can
easily go bankrupt.
The
highest level of revenues is observed from sales of newspapers. The highest
expenses are salaries, purchase of paper and depreciation of fixed assets.
The annual report of AS Diena
includes analysis of the current situation and changes during the year 1997.
There was LVL 5.27 million of
total assets in the balance sheet at the end of 1997; of those fixed assets
were 30.1%. Current assets were LVL 3.51 mil; of those debtors comprised of
50.7 %. The most important fact is that trade debtors have increased by 40.5 %
in 1997. The reason behind it is the increase in net turnover. Unfortunately,
previous trade partners systematically ignore terms of repayment.
27.6 % of all capital plus
liabilities was equity. According to Arvils Ašeradens, the equity has
grown to LVL 1.4 millions, which is 2.3 times more than year before (Annual
Report, 1997, p. 5). This was only due to profit for 1997; share capital and
reserves were not altered.
Changes in the profit and loss
account were analyzed mostly in the president’s report. The first item
mentioned is the increase in net turnover. According to Arvils Ašeradens,
the net turnover of the whole concern has increased by 29 per cent reaching LVL
9.5 million, and such a situation is conventional for the company during last
years. The main reason for that is staff’s excellent accomplishment of their
job (Annual Report, 1997, p. 5).
Consequently, also the profit
after taxes has been increased to LVL 813 thousand. It is 16 times more than in
1996 (Annual Report, 1997, p. 5), and there are three crucial factors which
determine such a tremendous change. The first factor is the more efficient use
of resources in 1997. As mentioned above, net income has increased by 29 per
cent, but manufacturing cost of goods sold has increased only by 15% in the
same time. These calculations were made based on the Profit or Loss statement.
(Annual Report, 1997, p. 7) Next, there was a considerable growth in other
operating income. Finally, there was a rapid decrease in effective tax ratio
and reduction in interest payable.
Calculating the key ratios, average values were used because
profit was made during the year. There is also an assumption that profit is the
same each day during the year. All the ratios and necessary data are given in
Table 1.
This ratio does not depend on the
capital structure of the firm (The Profitability, Financing, and Growth of the
Firm, p. 26). Profit before interest and taxation should be used in order to
separate ROA from the company’s financial policy. The ratio is 28.83 per cent
(Table 1) which is more than the same ratio for AS Preses Nams, thus telling
about better business performance.
The difference from the previous
ratio is that ROE shows the return from the owners’ point of view; however, here
the minority interest is also regarded as equity. Thus the profit after taxes
(with minority interest added back) has to be applied. In AS Diena’s case ROE
is 69.83 % (table 1). The reason why there is so large difference comparing to
AS Preses Nams (17.91%) is explained under D / E ratio section.
Average cost of debt in 1997 for AS Diena was 2.15 per cent and
being 3 times less than
for AS Preses Nams
(Table 1) shows how debt structure affects COD. AS Diena has higher proportion
of non-interest bearing debt, thus, its COD is lower.
D / E describes the financial
policy of firm. It is 2.53 in AS Diena’s case (Table 1) which shows that
concern finances its operations two and half times more using debt than its own
equity. Here an important notice should be made: LVL 655.7 th (Annual Report,
1997, p. 23) are subscription fees for the next year which calculating D/E and
COD are regarded as debt. The fact that for AS Preses Nams D / E = 0.52
explains why there is much sharper difference for ROE than ROA. Equity is less
important source of financing for AS Diena, so the difference in ROE occurs.
It should be noted that effective
tax rate can deviate from the statutory tax rate during years. (The
Profitability, Financing, and Growth of the Firm, p. 60) This difference can be
seen in AS Diena’s case. The denominator in the ratio is profit before tax. In
1997 t was 27.47 per cent. (Table 1) However applying the same formula in 1996
this ratio was 60.32 per cent.
Equity ratio for AS Diena is 33.15
%, and it is 2 times less than for AS Preses Nams. The reason for this
difference is of similar nature as for D / E discussed above.
ROA depends on two factors. The
first one is profit margin, and it is 13.15 %. (Table 1) The second factor is
capital turnover that can indicate the speed of operations. The decomposition
of ROA shows that the difference between AS Diena and AS Preses Nams in ROA is
due to faster capital turnover in AS Diena’s case.
DE / E0
= ROE0 – Div / E0 + NI / E0
This formula decomposes equity
changes. Because there was no new issue of shares in 1997, only profit and
dividends affects equity for AS Diena.
In this formula only interest-bearing
debt should be taken into consideration. Thus COD was 7.99% (Table 1), and it is similar to COD for AS Preses Nams,
because there COD does not depend on company’s debt structure.
It is fair enough to say that it
takes more than just analysing the Annual Reports to draw serious conclusions
about the accounting system and finance in the firm. However, some important
findings can be listed to summarise the investigation conducted in the report.
First,
there is no doubt that the computerised accounting system is the only one
applicable for the company of the similar size because of the immense number of
transactions and complicated structure of the business.
Next, the analysis has revealed some features that
characterise the publishing and printing business:
·
operating activities are mainly financed by
short-term liabilities, most of them being non interest -bearing
·
debtors are the main component of the current
assets of the company, due to the need in the high level of stock turnover
To conclude, the AS Diena financial indices show an outstanding, if
compared to competitors, business performance.
Annual
Report of AS Diena (1997).
Johansson, S. (1998) The Profitability, Financing, and
Growth of the Firm,
Sweden: Studentlitteratur, Lund.
The State Register of Enterprises of Latvia (1999, Feb 18). [on-line],
Available:
http://www.lursoft.lv/AppServer1?For...en=50972411&code=000300024