MOD003459 Financial Reporting for Businesses

Running head: FINANCIAL REPORTING OF BUSINESS
Financial reporting of business
Name of the student
Name of the university
Author note

1FINANCIAL REPORTING OF BUSINESS
Table of Contents
Part (a)........................................................................................................................................2
Ratio calculation.........................................................................................................................2
Part (b)........................................................................................................................................5
Analysis of ratio.........................................................................................................................5
Part (c)......................................................................................................................................10
Reporting on plant, property and equipment............................................................................10
Reference..................................................................................................................................13

2FINANCIAL REPORTING OF BUSINESS
Mitchells and Butlers Plc is the operator of managed pubs and restaurants. The
portfolio of the company and the formats involves Toby Carvey, Harvester, Miller & Carter,
All Bar One, Sizzling Pubs, Crown Carveries, Browns, Stone house and Ember Inns. Their
vision is that the guest must love to drink and eat with them. They operate in UK drinking
and eating out and the market is fragmented and large. Food is the primary ling term route for
the sustainable growth in the industry to which the company belongs (Mbplc.com 2017).
Part (a)
Ratio calculation
Ratio Formula 2015 2014
Profitability ratio
Return on capital
employed
Profit before interest and tax/(Equity+long
term debt)
0.065 0.064
Return on equity Profit after interest before tax/equity 0.099 0.104
Gross profit margin Gross profit/Sales 0.531 0.725
Operating profit margin Operating profit/sales 0.129 0.134
Asset turnover Sales/(equity+long term debt) 0.507 0.476
Liquidity ratio
Current ratio Current assets/current liabilities 0.556 0.553
Acid test ratio (Current assets - Inventory)/Current liabilities 0.518 0.510
Efficiency ratio
Inventory ratio Average inventory/Cost of sales*365 9.440 17.173
Debtor days Average trade receivables/credit sales*365 0.521 0.463
Creditor days Average trade payables/Credit purchases*365 35.908 61.956
Gearing ratio
Gearing ratio Long term debt/equity 0.442 0.401
Interest cover Profit before interest and tax/interest expenses 2.077 2.000
Earnings per share Profit after tax and preference dividend/no. of
equity shares 0.250 0.226
Price to earnings ratio Share price /EPS 10.266 11.761

3FINANCIAL REPORTING OF BUSINESS
Ratio calculation with figures
Ratio Formula 2015 2014
Profitability
ratio
Return on
capital
employed
Profit before interest and
tax/(Equity+long term
debt)
=270/(1271+2876) =264/(1185+2952)
Return on equity Profit after interest before
tax/equity
=126/1271 =123/1185
Gross profit
margin
Gross profit/Sales =1115/2101 =1428/1970
Operating profit
margin
Operating profit/sales =270/2101 =264/1970
Asset turnover Sales/(equity+long term
debt)
=2101/(1271+2876) =1970/(1185+2952)
Liquidity ratio
Current ratio Current assets/current
liabilities
=353/635 =342/618
Acid test ratio (Current assets -
Inventory)/Current
liabilities
=(353-24)/635 =(342-27)/618
Efficiency ratio
Inventory ratio Average inventory/Cost =((27+24)/2)/ =((24+27)/2)/

4FINANCIAL REPORTING OF BUSINESS
of sales*365 986*365 542*365
Debtor days Average trade
receivables/credit
sales*365
=((3+3)/2)/2101*365 =((2+3)/2)/1970*365
Creditor days Average trade
payables/Credit
purchases*365
=((100+94)/2)/
986*365
=((84+100)/2)/
542*365
Gearing ratio
Gearing ratio Long term debt/equity =1271/2876 =1185/2952
Interest cover Profit before interest and
tax/interest expenses
=270/130 =264/132
Earnings per
share
Profit after tax and
preference dividend/no. of
equity shares
=103000000/4125206
26
=93000000/4116378
85
Price to earnings
ratio
Share price /EPS =366.5/35.7 =417.5/35.5

5FINANCIAL REPORTING OF BUSINESS
Part (b)
Analysis of ratio
Profitability ratio – the profitability ratio of the company are used for assessing the ability of
the business for generating the earnings as compared to the expenses and other related costs
expended during the particular period of time (Bodie, Kane and Marcus 2014). Under the
profitability ratio, having higher value as compared to the competitors and as compared to the
previous year’s indicates that the company is progressing.
 Return on capital employed – it is the operating profit of the company as compared to
the capital employed. It calculates the company’s profitability through expressing the
operating profit as the percentage of the capital employed. From the above table it can
be identified that the return on capital employed of Mitchells and Butlers Plc is 6.5%
in 2015 as compared to 6.4% in 2014. Therefore, the company is stable in earning the
return on their capital (Heikal, Khaddafi and Ummah 2014).
 Return on equity – this is the profitability ratio that calculates the company’s ability to
generate the profit from the investment of the shareholders in company. To be more
specific, the return on the equity indicates the amount of profit that the company earns
on each dollar of the shareholder’s equity. From the above table, it is recognized that
the return on equity of the company was 0.099 in 2015 as compared to 0.104 in 2014.
It indicated that the earning ability of the company is reduced in 2015 as compared to
the previous year (Atrill and McLaney 2016).
 Gross profit margin – this ratio measures the financial health and the business model
of the company through revealing the percentage of money that is left from the
revenues after meeting the cost for selling the goods. The gross profit margin of the

6FINANCIAL REPORTING OF BUSINESS
company for the year 2014 was 72.5% whereas the same reduced to 53.1% in 2015.
Therefore, the profitability margin of the company is reduced as compared to the
previous year (Robinson et al. 2015).
 Operating profit margin – operating profit margin measures the operating efficiency
and pricing strategy of the company. It indicates the proportion of revenue that is left
after meeting the variable costs like raw materials, wages and salaries. The operating
profit margin of the company has been reduced to 12.9% from 13.4%. The reason
behind this is that the depreciation and amortisation cost is increased by £28 million
that led to reduction of operating profit of the company.
 Asset turnover – it measures the efficiency of the company to generate earning from
sales using the assets. Asset turnover measures the net sales in percentage form for
revealing how the sales are created from each dollar of the assets of the company
(Melville 2015). It is identified that the company earned 50.7 cents in 2015 as
compared to 47.6 cents in 2014. The reason behind the increase in earnings is owing
to the increase in the revenue by £ 131 million.
Liquidity ratio – it analyzes the company’s ability to pay off the current liabilities on
becoming due. To be more specific, it reveals the company’s cash level and the ability to
transform other assets in cash for paying off the obligations and other liabilities (Delen,
Kuzey and Uyar 2013).
 Current ratio – it is the efficiency ratio that indicated the efficiency of the company to
pay off the short-term obligation of the company with the available current assets.
From the table presented above it can be identified that for both the year the current
ratio of the company is 0.55 that means to say the company has enough asset to pay
off 55% of the liabilities. The reason behind this shortage is that a large portion of the
money is owed by the company towards trade payables and tax liabilities. Therefore,

7FINANCIAL REPORTING OF BUSINESS
the company shall pay off these liabilities to improve the current ratio (Elliott and
Elliot 2015).
 Acid test ratio – this is the ability of the company to pay off the current obligation of
the company. The acid test ratio reveals the efficiency of the company to convert the
assets quickly into cash for paying off the current obligation. It can be seen from the
calculation that the acid test ratio for both the years is 0.51. It means to say the
company has enough assets to pay off 51% of the liabilities with the available quick
assets. The reason behind this is that the quick assets and liabilities of the company
are stable (Collier 2015).
Efficiency ratio – this is used for analyzing the ability of the company to use the liabilities
and assets internally. The efficiency ratio measures the receivable turnover, usage and
quantity of liability, liabilities repayments and the general usages of the machinery and
inventories.
 Inventory turnover ratio – the inventory turnover ratio is the efficiency ratio that
reveals the efficiency of the company with regard to management of its inventory as
compared to the cost of the sales associated with the average inventory for specific
period. It can be seen from the calculation that the inventory turnover for 2014 was
17.17 times whereas the inventory turnover for 2015 was 9.44 times. Therefore, it can
be identified that the efficiency of the company with regard to inventory is reduced
(Brigham and Ehrhardt 2013). The reason behind that is the company is taking more
time to sell their inventories due to market demand fluctuation and competition in the
market for the substitute products.
 Debtor days – it measures how quickly the cash is collected by the company from the
debtors. Longer times it takes to collect the cash more will be days for collecting the
receivables. It is also known as the debtor collection period. It can be identified from

8FINANCIAL REPORTING OF BUSINESS
the calculation that the debtor day of the company is increased in 2015 as compared to
2014. The reason may be that the company is allowing more credit to the debtors or
the debtors are not paying on time (Helfert 2011).
 Creditor days - it measures how quickly the dues are paid by the company to the
creditors. Longer times it takes to pay the dues more will be days for paying the dues.
It is also known as the creditor payment period. It can be identified from the
calculation that the creditor days of the company are reduced in 2015 as compared to
2014. The reason may be that the company was able to pay off the dues on time or the
credit period allowed by the creditors has been reduced (Arnold 2013).
Gearing ratio – it measures the company’s borrowed funds proportion as compared to the
equity. High ratio indicates that the company has high debt proportion and low ratio indicated
low proportion of the debt to the equity. For both the year the gearing ratio of the company is
more or less same which indicates that the company is managing the same debt and equity
portion for both the years.
 Interest coverage ratio – it measures the ability of the company to pay off the
interests on borrowings from the available operating profit of the company. The
interest coverage ratio of more than 1.5 indicates that the company is efficient paying
off its interest expenses. As per the calculation for both the years the interest
coverage ratio of the company is more than 2. That is to say the company has
sufficient operating income to cover up its interest expenses (Petty et al. 2015).
 Earnings per share - as the earning per share of the company has increased from
0.226 in 2014 to 0.250 in 2015, it can be stated that the company is improving with
respect to create the return for the shareholders and attracting the potential investors
to invest in the company.

9FINANCIAL REPORTING OF BUSINESS
 Price to earnings ratio – it indicates the price that an investor is ready to pay for the
profit or earning of the company. The P/E ratio of the company is reduced from 11.76
to 10.27 over the year 2014 and 2015. A lower ratio indicates that the investor’s
interest in investing the company will be reduced (Bekaert and Hodrick 2017).

10FINANCIAL REPORTING OF BUSINESS
Part (c)
Reporting on plant, property and equipment
The main objective of IAS 16 on plant property and equipment is prescribing the
accounting treatment for plant, property and equipment. The major issues here are the
recognition of the assets, determination of the carrying amount of the assets and the charges
of depreciation as well as the impairment losses that is to be recognized in association with
them (Picker et al. 2016). The items for plant, property and equipment shall be recognized
under assets while it is probable that the asset’s cost can be reliably measured and it is
probable that the future economic benefit in relation to the asset will flow to the company.
The principle of recognition is applicable to all the costs related to the plant, property and
equipment at the point of time while it is incurred (Svoboda and Bohušová 2017). The
associated costs includes the costs that are incurred for constructing and acquiring the assets
and subsequent costs incurred for replacing, adding or servicing the assets. It also identifies
that part of the assets which requires to be replaced regularly. IAS 16 allows 2 models for
accounting the cost of the assets –
 Cost model – under this, the asset is valued at cost reduced by impairment and
accumulated depreciation
 Revaluation model – under this the asset is carried on at revalued amount which is the
fair value of the asset reduced by the subsequent impairment and depreciation,
provided that the fair value of the asset can be reliably measured (Lapointe-Antunes
and Moore 2013).
On the other hand, the IAS 36 on impairment of assets ensures that the assets of the
company are not carried out at the values which are more than the recoverable amount of the

11FINANCIAL REPORTING OF BUSINESS
assets. The recoverable amount is the higher value among the value in use and the fair value
reduced by disposal costs (Tsalavoutas, André and Dionysiou 2014). The company must
carry out the impairment test for the entire asset where there is the indication for impairment
with the exception to some intangible assets and goodwill. Further, the impairment test can be
carried out for the cash generating unit where the asset is not able to generate the cash
inflows, which is largely independent from the other assets. At the closing of each reporting
period the company is required to analyse whether any indication is there that an asset have a
chance to impair (Mazzi, Liberatore and Tsalavoutas 2016). Under IAS 36 there is a list of
internal and external indication list for impairment. If there, is any indication the recoverable
amount of the asset shall be calculated. The below mentioned asset’s recoverable amount are
annually measured to identify whether any indication is there that the asset may be impaired.
These assets are –
 The intangible asset with the indefinite useful life
 The intangible asset which is not yet available for the purpose of use
 The goodwill that is acquired under the business combination.
External indication for impairment is the decline in the market value, increase in the
market rate of interest, negative changes in the economy, markets, laws or technology and the
net asset of the company is higher as compared to the market capitalisation. On the other
hand the internal sources for impairment are the physical damage or obsolescence, the asset is
idle or part of restructuring or held for the purpose of disposal or the worsening of the
economic performance as compared to expectation (Avallone and Quagli 2015).
Mitchell and Butlers Plc follow the IAS 16 for recognition of plant, property and
equipment. For example, the items for plant, property and equipment are recognized under
assets while it is probable that the asset’s cost can be reliably measured and it is probable that

12FINANCIAL REPORTING OF BUSINESS
the future economic benefit in relation to the asset will flow to the company. Further, they
adopted IAS 36 for measuring the impairment of the assets. For example, the company
recognizes the impairment loss when the carrying amount of the asset is more than its
recoverable amount. The recoverable amount is considered as higher among the value in use
and fair value of the asset reduced by selling cost which is as per the requirement of IAS 36.
Further, in accordance with the IAS 16, the assets are valued as per the revaluation model that
is revalued amount reduced by subsequent depreciation and impairment.

13FINANCIAL REPORTING OF BUSINESS
Reference
Arnold, G., 2013. Corporate financial management. Pearson Higher Ed.
Atrill, P and McLaney, E., 2016. Accounting and Finance for Non-Accounting Specialists
(10th edition), Pearson,
Avallone, F. and Quagli, A., 2015. Insight into the variables used to manage the goodwill
impairment test under IAS 36. Advances in Accounting, 31(1), pp.107-114.
Bekaert, G. and Hodrick, R., 2017. International financial management. Cambridge
University Press.
Bodie, Z., Kane, A. and Marcus, A.J., 2014. Investments, 10e. McGraw-Hill Education.
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice.
Cengage Learning.
Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for
decision making. John Wiley & Sons.
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Elliott, B and Elliot J., 2015. Financial Accounting and Reporting, Pearson
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exchange. International Journal of Academic Research in Business and Social
Sciences, 4(12), p.101.

14FINANCIAL REPORTING OF BUSINESS
Helfert, E., 2011. Financial Analysis tools and techniques: a guide for managers, McGraw-
Hill
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Andrew Peller Limited. Accounting Education, 22(3), pp.268-281.
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impairment testing under IAS 36. Accounting in Europe, 13(3), pp.353-379.
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