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Financial Accounting & Reporting - Report

   

Added on  2020-06-05

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Financial Accounting and Reporting1

TABLE OF CONTENTSINTRODUCTION......................................................................................................................1a. Discussing reserves by using a simple classification method............................................1b. Preparing an internal memorandum for the Board of Directors........................................2c. Commenting on the limitations of financial ratio analysis.................................................7d. Comparing non-financial aspects of the selected business units.......................................8CONCLUSION..........................................................................................................................9REFERENCES.........................................................................................................................102

INTRODUCTIONFinancial accounting is highly concerned with the summarization, analysis andreporting of monetary transactions associated with the business. Now, it becomes vital for thecompanies to prepare and publish financial reports at the end of accounting year. This in turnrenders suitable information to the stakeholders and helps in making appropriate decisions.This project report is based on low cost airline companies listed on LSE namely Easy Jet andRyanair. Both the companies lay focus on offering air services to the customers at lowerprices. In this, the present report will shed light on the extent to which financial position andperformance of such business units are good via ratio analysis. Further, it also depicts theaspects that limit the significance of ratio analysis technique in the context of financialevaluation. a. Discussing reserves by using a simple classification method To Board of Directors Date: 18th March 2018Subject: Financial performance evaluationTrend of Easy Jet Plc’s and Ryanair’s reserves during the period of 3 years from 2015 to2017 is as follows:Particulars Easy Jet Ryanair201520162017201520162017Retained earnings (in £ million)1,7201,9201,9962,706.23,166.13,456.8Other reserves (in £ million)(238)2539600.3(298.7)236.8Easy Jet Ryanair201520162017201520162017Dividend per share.44.58.531.951.55Interpretation: The above depicted table shows that retained earnings and others areserve of Easy Jet Plc has inclined over the years. In 2015, retained earnings of Easy Jet Plcaccounted for £1720 GBP, whereas at the end of 2017 it reached on £ 1996 million. Further,other reserves had also inclined and implied for £ 39million in 2017. Along with this,position of Ryanair’s reserves had also increased to the significant level. By doingassessment, it has found that growth which takes place in the company’s reserves hasnegative influence on dividend payment. Moreover, when company adopts strategy inrelation to maintaining more funds with itself from profit after tax them it becomes unable to1

offer high returns to the shareholders in the form of dividend. Likewise, due to inclination inthe reserves, dividend offered by Ryanair to the investors at decreasing rate. In addition tothis, Easy Jet Plc had also offered fewer dividends to the shareholders in 2017 because highreserves were maintained by the company during this time. Evidently, it can be said thatnegative relationship exists between company’s reserve policies and dividend payment. b. Preparing an internal memorandum for the Board of Directors Profitability ratios Particulars FormulaEasy Jet RyanairProfitabilityratios201520162017201520162017operating profit 6884984041,042.901,460.101,534.00Net profit 548427305866.71,559.101,315.90Sales revenue 4,6864,6695,0475,654.006,535.806,647.80OP ratio OP / Net sales *10014.7%10.7%8.0%18.4%22.3%23.1%NP ratio NP / Net sales *10011.7%9.1%6.0%15.3%23.9%19.8%0.00%5.00%10.00%15.00%20.00%25.00%Profitability RatiosOP ratio NP ratio Referring ratio analysis outcome, it can be stated that operating profit margin of EasyJet decreased from 14.7% to 10.7% irrespective of rising sales pattern. On the other side,inclining trend has assessed in the OP margin of Ryanair. This aspect clearly shows Ryanair’sability in relation to exerting control on indirect expenses. Further, through evaluation it hasidentified that due to low revenue and high indirect expenditures, in comparison to Ryanair,NP margin of Easy Jet declined and accounted for 6% at the end of 2017 (Annual report ofEasy Jet Plc 2017, n.d.). During the period of 3 years, NP margin of Ryanair was highly goodin the period of 2016 such as 23.9% significantly. In contrast to this, net profitability ofRyanair decreased in FY 2017 due to decline in the level of income generated from othersources. Thus, it is reported to the management team that profitability position of Ryanair isgood as compared to Easy Jet. Liquidity ratio2

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