Overview and Analysis of Financial Reporting

This presentation provides an overview and analysis of financial reporting in business. It covers the context and purpose of financial reporting, its uses for meeting business objectives and growth, and the analysis of regulatory frameworks and governance. It also includes an interpretation of profit and loss, cash flow, and balance statements.

Overview and Analysis of
the financial reporting

ASOS: Introduction
UK based online fashion retailer founded in 2000.
Global Business:
 Online business in approximately 200 countries worldwide.
 Country-specific websites in different languages for Australia, Spain, Germany, Italy,
France, Russia and the United States (Asosplc, n.d.).
Target customers: Young population “20-something consumers” in the
fashion industry.
Product’s range:
 Women's wear, men’s wear, fashion accessories, footwear and skin & beauty
products.
 Offers near 80,000 products including both, the third-party brands and its exclusive
in-house brands.

ASOS: Introduction (continued)
Different Platforms: Its available on mobile and web platforms.
Significant growth since its inception in 2000:
 Focus on Innovation and technology: the use of social media and the use of
advanced features like picture-led search to attract young customers.
 Provides a value proposition for its customers: offers competitive prices and
efficient worldwide delivery options including free shipping and free returns.
In recent times, things were little gloomy for the whole online
retail market including ASOS:
 Increased competition.
 Increased discounting and promotional activities across the sector.
Increased costs have affected the company’s net profit and its
cash flows are expected to remain negative for the current year.

ASOS: Introduction (continued)
The company has excellent growth prospects:
 Trend-leading reputation.
 Technology focus.
 Global expansion strategy.
ASOS prepares its financial statements
according to:
 The International Financial Reporting Standards as
adopted for use in the European Union.
 The applicable parts of the Companies Act 2006.

The context and purpose of financial reporting
The process of financial accounting includes the design
and the recording of the entity’s:
 Assets and liabilities.
 Receipts and payments.
 Cash and bank balances.
Financial reports are prepared for a particular time period:
 Calendar year.
 Nation’s financial year.
 Firm’s trading year.
Financial reporting provides relevant and important
accounting information to all the stakeholders of the firms.

The context and purpose of financial reporting (continued)
Investors provide resources to the firm and to
know the financial health of the firm they need
annual statements describing:
 The financial performance and cash flows of the firm over a
particular period (Income statement and cash flow
statement).
 The financial position of the company at a current point of
time (Balance Sheet).
 The companies need to follow accounting
standards for financial reporting:
 To provide fair representation about their exact economic
reality to investors to help them make and assess their
investment decisions.

The context and purpose of financial reporting (continued)
Management needs to provide the
interpretation of this complex accounting
data to make it easy for the users to
understand via:
 Annual reports.
 Management discussion & analysis and footnotes
portion of the financial statements.

The context and purpose of financial reporting (continued)
There is a particular purpose of different financial
statements:
 Income statement-
Provides information regarding the performance of a company: revenues
and expenses in an accounting period.
Tells about the firm’s ability to generate profits from its business.
 Balance Sheet-
Provides information regarding the current financial position of the
company.
Tells about the company’s: assets valuation; liquidity status; debt and
funding position.
 Statement of cash flows-
Provides the category wise information regarding the company’s receipts and
payments.
Different parts of the cash flow statement are- cash flow from operations,
investing cash flows and financing cash flows.

Financial reporting for meeting business objectives,
development and growth
Financial reports provide a firm’s
management with information about the
overall business performance and financial
problems.
By analysing income statement:
 The management can get information about the
business profitability by using margin ratios.
 It can check whether it has achieved the business
objectives in terms of revenue/profit numbers.

Financial reporting for meeting business objectives,
development and growth (Continued)
By analysing balance sheets:
 The management can assess its capital structure and
financial leverage.
 It can get insight about the overall health of its
business that is how much it owns and how much it
owes. This information can be used to plan future
decisions for raising capital.

Financial reporting for meeting business objectives,
development and growth (Continued)
Efficient debt management:
 Tracking of different balance sheet accounts allows
firms to asses-
 Liquidity condition.
 Solvency condition.
 Examples-
 To check the progress towards a long term objectives of
firm like reducing its financial leverage.
 If the firm needs funds for business expansion objectives,
then the financial reporting helps to determine any need
to reduce existing liabilities before applying the loan
application.

Financial reporting for meeting business objectives,
development and growth (Continued)
For raising capital:
 Financial reporting helps firms raise funds in equity
markets.
 Example:
 Firms can issue IPO for capital investments and business
expansion.
 The financial statements help firms decide the price of
this IPO.

Financial reporting for meeting business objectives,
development and growth (Continued)
Identification and analysis of business trends:
 Trend analysis of the financial statements helps the firm
track its business development and growth.
 It helps the company to identify past and current trends.
 Management can use this trend information:
 To address potential weaknesses.
 To make improvements that will boost company’s financial
health.
 Example:
 Horizontal analysis of the income statement provides
information about-
 Growth in Profits.
 Effects of new business decisions on the revenues.

Financial reporting for meeting business objectives,
development and growth (Continued)
Tracking and analysis of business
operations:
 Financial reporting can provides real-time insights to
avoid potential issues.
 The income statement and balance statement can be
used to analyse the efficiency of operations.
 Example:
 Firm can analyse its inventory management by
comparing growth in cogs with growth in inventory.
 Firm can use this information to improve its inventory
management to avoid any future write-downs.

Financial reporting for meeting business objectives,
development and growth (Continued)
Analysing financial performance and the
profitability:
 Financial statements tells management how much
profit the business is generating.
 Firms need to make profit for its shareholders.
 Profit and loss statement helps firms analyse how
much income it is generating per share (EPS).

Financial reporting for meeting business objectives,
development and growth (Continued)
Compliance with the regulation and
business growth:
 Financial reports are prepared according to the
applicable accounting standards.
 This type of reporting helps the firm to meet the
national regulations.
 It will also improve the firm’s financial efficiency. This
will help the firm remain successful in long run.

Uses of financial statements to the various stakeholders
Company Managers-
 To efficiently manage the business by analysing financial data.
 To assess the firm’s financial performance.
 To plan future business decisions.
Shareholders and prospective investors-
 To make investment decisions: whether to invest in the firm.
 To assess the management performance.
 To analyse the risk and return of their investment.
 To predict the future profits by using financial modelling.
Trade contacts (Suppliers/Customers) -
 Suppliers: To decide whether to provide goods on credit to the firm by assessing its
creditworthiness.
 Customers: To assess the firm’s ability: to provide a steady future supply of goods
& services and to fulfil its future obligations (services/guarantees/updates).

Uses of financial statements to the various stakeholders
(continued)
Finance Providers -
 To take lending decisions: whether to provide a loan to the
firm, whether to extend credit or restrict already extended
credit.
 To assess the asset base, liquidity and solvency position of
the firm to know its exact financial health.
The Government -
 To take taxation decisions: Government entities need to
assess the assets or income of the firm to calculate its tax
obligations.
 To assess the overall economic progress by using the
financial data from different businesses.

Uses of financial statements to the various stakeholders
(continued)
Trade Unions and Employees –
 Unions: To negotiate pay and conditions of their
members by analysing information regarding the
firm’s operations and financial position.
 Employees: To assess the firm’s profitability and its
effect on their salary and job security.
Competitors-
 To analyse the rival’s performance to learn and to
develop business strategies for the future.

Analysis of regulatory frameworks and governance of
financial reporting
It is critical for the financial accounting
process to be regulated to ensure that the
financial reports are:
 Reliable.
 Accurate.
 Up to date.
 According to the applicable accounting standards.
 In compliance with the national legislations.

Analysis of regulatory frameworks and governance of
financial reporting (continued)
Auditing of financial reporting-
Financial information has to go through a strict
auditing process.
Role of auditing is becoming more critical and
complex due to:
 Increasing division of ownership and control because of
growing capital markets.
 Increasing size and global expansion of the organisations.
 Evolving and more demanding legislations.
 Increasing pressures regarding social and ethical
responsibility.

Analysis of regulatory frameworks and governance of
financial reporting (continued)
Auditing is done from both internal and external
perspective:
 Internal- To ensure that the accounting systems are in line
with company internal processes.
 External- To verify that the financial statements are
prepared according to the applicable accounting standards.
In the UK:
 Consultative Committee of Accounting Bodies (CCAB)- Set
the definitions of auditing standards.
 Financial Reporting Council (FRC)- Implements the
standards.

Analysis of regulatory frameworks and governance of
financial reporting (continued)
According to the Financial Reporting Council
(2016), to give the honest opinion on the
financial statements the auditors need to:
 Be truly independent.
 Take full responsibility.
 Exercise professional judgment.
 Maintain professional scepticism throughout the
auditing process.

Analysis of regulatory frameworks and governance of
financial reporting (continued)
The auditors express their opinion on
the financial statements whether they fairly
present the economic reality of the reporting
firm.
Auditors can issue following opinions:
 Unmodified opinion-
This means auditor is convinced that the financial
statements represents a true & fair view and the
statements comply with the applicable accounting
standards and financial reporting framework.

Analysis of regulatory frameworks and governance of
financial reporting (continued)
 Modified opinion-
The auditor modifies the opinion when they think that the
financial statements are materially misstated.
 Qualified opinion-
The auditor expresses qualified opinions when there are some
misstatements in the financial statement that are material but
not pervasive.
 Adverse opinion-
This means the auditor has sufficient evidence to conclude
that financial statements have misstatements that are both
material and pervasive.

Analysis of regulatory frameworks and governance of
financial reporting (continued)
Legal and regulatory influences on financial statements-
The national regulations and legislation can influence the
financial accounts of the listed companies via:
 Company laws.
 Accounting standards.
 Stock exchange listing requirements.
 In the context of the UK, the limited companies need to prepare
their statements in compliance with the Companies Act 2006:
 This act does not provide any detailed guidance, but it requires that the
financial accounts should present a ‘true and fair view’.
 The detailed guidance is provided by the applicable accounting standards.
 These standards tell firms how to record a particular transaction to ensure
there are no manipulations.

Analysis of regulatory frameworks and governance of
financial reporting (continued)
Accounting standards are available at both
the national and the international level.
In the UK, private limited companies
generally follow the national standards, but
the listed companies are required to follow
the IFRS since 2005.

Interpretation of financial statements: profit
& loss, cash flow and balance statements
(continued)
Income statement: As per the full year
results by Asosplc (2018):
 The Company’s revenue (£m 2,417.30) has gone up by
25.67% as compared to previous year due to-
 Increased sales.
 Firm’s global expansion.
 Increase in online shopping trend.

Interpretation of financial statements: profit and loss, cash
flow and balance statements
 Gross profit (£m 1,237.1) and operating profit (£m
101.9) of the company has increased by 29.09% and
28.02% respectively as compared to previous year due
to-
 Cost benefits from economies of scales.
 Operational efficiencies.
 Profit after tax (£m 82.4) has increased by 28.55% as
compared to the previous year-
 The company’s profitability has overall increased
showing that its business is moving forward in the right
direction.

Interpretation of financial statements: profit
& loss, cash flow and balance statements
(continued)
 Basic (98.9p) and diluted (98.0p) earnings per share increased
by 28.11% and 27.94% respectively-
 Due to increase in net profits.
 It shows that the company has generated more earnings for each
share the investor holds.
 ASOS has a growth objective to become a leader in online
fashion retail.
 The analysis of Income statement can be used to check
progress towards that objective:
 Growth in revenues and operating profits shows that ASOS is on
right track

Interpretation of financial statements: profit
& loss, cash flow and balance statements
(continued)
Balance Sheet: As per the full year results
by Asosplc (2018):
 The company’s cash balance (£m 43) decreased by
73.13% as compared to the previous year due to-
 Company’s increased capital investments.
 Net assets (£m 439) increased by 52.96% as
compared to the previous year due to-
 Higher capital expenditure.
 Increase in inventory.

Interpretation of financial statements: profit
& loss, cash flow and balance statements
(continued)
 The total liabilities (£m 568) increased by 2.71% as
compared to the previous year due to-
 Due to the firm’s increased investments to improve its
operations and to expand globally.
 Debt structure of the firm should be analysed to predict
future solvency.
 The common size balance sheet shows that the total
liabilities as a percentage of the total assets have
decreased from 65.83% in 2017 to 56.41% in 2018-
 It implies that lesser proportion of its assets is financed by
the debt.

Interpretation of financial statements: profit
& loss, cash flow and balance statements
(continued)
 Owner’s equity increased in 2018-
 The company did not issue any new shares in 2018.
 Increase of £m 95 and £m 57 in the retained earnings
and other comprehensive income respectively seems to
be the main reason for this increase in owner’s equity.
 ASOS has objective of expanding its business globally-
 Above analysis of balance sheet can be used to see firm’s
progress.
 Increase in the assets and capital investments tells that
ASOS business is expanding appropriately.

Interpretation of financial statements: profit
& loss, cash flow and balance statements
(continued)
Cash flow statement: As per the full year
results by Asosplc (2018):
 The company’s cash balance (£m 43) decreased by
73% as compared to the previous year due to:
 Massive capital expenditure cash outflow of £m 213.0
 Increased investment in warehousing and technology
infrastructure for global growth.
 Movement in working capital of £m 62.4
 Growth in inventory in line with sales growth to meet
increased demand.

Interpretation of financial statements: profit
& loss, cash flow and balance statements
(continued)
 ASOS is expanding its operations to become a leading
fashion website.
 The cash-flow statements can help management check
its progress towards this objective:
 The growth in the working capital in line with the
increased sales shows its business is progressing.
 The massive growth in capital investments ASOS’s
business is expanding.

Ratio Analysis and its importance to various users of
financial statements
Financial ratios help in analysing different aspects of a
firm’s business (Sherman, 2015):
Profitability/Return on investment Ratios-
Gross profitability or Gross margin = Gross Profit /
Revenue
 The gross profit margin of ASOS is in the ballpark of 50% for the
last five years.
ASOS 2014 2015 2016 2017 2018
Gros
s
Marg
in %
49.72 49.95 49.98 49.82 51.18
Booho
o
201
4 2015 2016 2017 2018
Gross
Margin
%
59.1
2 60.81 57.79 54.59 52.84

Ratio Analysis and its importance to various users of
financial statements (continued)
 The time series analysis shows that this ratio is
consistently raising, which means that company’s
profitability is improving due to:
 Increased sales.
 Cost efficiencies.
 The company’s gross profit ratio is less than its
competitor Boohoo:
 It can be because of the low pricing strategy of ASOS.
 Cross-sectional analysis shows that its competitors are
selling their products more profitably.

Ratio Analysis and its importance to various users of
financial statements (continued)
Net profitability or Net margin= Net Profit /
Revenue-
 The last five years data shows that the net profit margin
of ASOS has not been moving in any particular
direction.
ASOS 2014 2015 2016 2017 2018
Net
Marg
in %
3.79 3.2 1.69 3.33 3.41
Booho
o
201
4 2015 2016 2017 2018
Net
Margin
%
7.68 6.01 6.37 8.3 5.46

Ratio Analysis and its importance to various users of
financial statements (continued)
 It started moving up from 2016 onwards, representing
the increased profitability.
 ASOS net margins were lower than its competitor
Boohoo:
 Because ASOS offers its customers value proposition by
offering competitive prices.

Ratio Analysis and its importance to various users of
financial statements (continued)
Return on assets= Net Profit / Total Assets-
 Return on the assets of ASOS has declined from 10.68
in 2014 to 8.92 in 2018 as:
 The company has been investing heavily in its assets for
the global expansion.
ASOS 2014 2015 2016 2017 2018
ROA 10.68 8.59 4.33 8.6 8.92
Booho
o 2014 2015 2016 2017 2018
ROA 36.25 14.74 12.7 16.34 12.27

Ratio Analysis and its importance to various users of
financial statements (continued)
 The company’s ROA was lower than its competitor
Boohoo because of ASOS low pricing strategy and
high capital spending.

Ratio Analysis and its importance to various users of
financial statements (continued)
Implication:
 Most of ASOS’s profitability ratios have been
consistently moving upwards:
 It’s a positive sign for the investors as it shows that
company business is improving and it has nice growth
prospects.
 The company’s ratios are lower than its competitor
Boohoo but it can be due to ASOS’s different pricing
and capital spending strategy.

Ratio Analysis and its importance to various users of
financial statements (continued)
Liquidity Ratios and Leverage Ratios-
Current Ratio= Current Assets/Current
Liabilities-
 Measures the firm’s ability to meet its short term
obligation.
 Low ratio means that the company may face
difficulties while paying its current bills.
 Very high ratio means the company is not using its
short term assets effectively.
Current Ratio 2017 2018
ASOS 94% 90%
Boohoo 158% 207%

Ratio Analysis and its importance to various users of
financial statements (continued)
 Current ratio of ASOS has remained lower as
compared to that of its competitor Boohoo:
 It might be because of its particular business strategy.
 If that is not the reason, then the company may face
difficulty while meeting its short term obligation in
future.

Ratio Analysis and its importance to various users of
financial statements (continued)
Debt to Equity Ratio= Debt / Equity-
 Tells about the capital structure of the firm that is the debt as a
proportion of the equity.
 Debt to equity ratio of ASOS has remained higher compared to
Boohoo:
 As the company has been borrowing money for its capital
investment.
 This can increase the financial risk in the future because of the
high financial leverage.
Debt to equity Ratio 2017 2018
ASOS 193% 129%
Boohoo 96% 60%

Ratio Analysis and its importance to various users of
financial statements (continued)
Implication:
 The lenders might not gain much confidence from
these numbers as the high financial leverage can
hamper the company’s future profitability because of
the higher interest costs.
 The company should carefully analyse its capital
structure

Ratio Analysis and its importance to various users of
financial statements (continued)
ASOS 2014 2015 2016 2017 2018
ITR 3.22 3.24 3.2 3.32 3.23
Booho
o
201
4 2015 2016 2017 2018
ITR 5.4 5.22 5.53 5.06 6.64
Operational/Turnover Ratios-
Tell about the efficiency of the firm’s
operations.
Inventory Turnover Ratio (ITR) = Cost of
Goods Sold / Average Inventory-

Ratio Analysis and its importance to various users of
financial statements (continued)
 ITR ratio of ASOS has been around 3.2 for last five
years:
 The company has been increasing its inventory in line
with the increasing sales so as to avoid any stock outs.
 It’s competitor Boohoo’s ITR has remained higher:
 Because of different business strategy or more efficient
inventory management.

Ratio Analysis and its importance to various users of
financial statements (continued)
Total Asset Turnover (TAT) = Revenues/
Average total assets –
 Measures the efficiency with which firm is using its
assets to generate revenues.
ASOS 2014 2015 2016 2017 2018
TAT 2.82 2.68 2.56 2.58 2.62
Booho
o
201
4 2015 2016 2017 2018
TAT 4.72 2.45 2 1.97 2.25

Ratio Analysis and its importance to various users of
financial statements (continued)
 Total asset turnover of ASOS has been declining from
2.82 in 2014 to 2.62 in 2018:
 This decline can mean that the firm is inefficiently using
its resources, but it can also be due to firm’s particular
business decisions.
 It does not look that there are any issues with the
ASOS operations:
 As its revenues are consistently increasing.
 This declining TAT can be because the company has
been investing in its assets heavily.
 ASOS ratio has been higher for most of the periods as
compared to Boohoo.

Ratio Analysis and its importance to various users of
financial statements (continued)
Valuation Ratios-
Price to Earnings ratio = Price of the firm’s
share/Earnings per share-
 ASOS P/E multiple has declined a lot from 87.7 in 2017 to 23.3 in
2018:
 Concerns about the firm’s future sales and its negative net cash flows
affected its stock price.
 Its competitor’s Boohoo P/E was higher at 67.59 at the end of its
2018 financial year because of its perceived prospects.
ASOS 2017 2018
P/E 87.7 23.3
Boohoo 2017 2018
P/E 75.66 67.59

Ratio Analysis and its importance to various users of
financial statements (continued)
Price to Book ratio = Price of the firm’s
share/Earnings per share-
 ASOS P/B multiple has declined significantly from 19.6 in
2017 to 4.4 in 2018:
 Due to a fall in its share price and its increased capital
spending.
 Boohoo’s P/B was higher at 10.62 at the end of its 2018
financial year because of its better stock performance.
ASOS 2017 2018
P/B 19.6 4.4
Boohoo 2017 2018
P/B 12.42 10.62

Ratio Analysis and its importance to various users of
financial statements (continued)
Implication:
 This much decrease in the firm’s P/E and P/B ratio can
be seen negatively by the investors.
 Some value investors might see this as an opportunity
to buy ASOS shares at a discount if they feel that its
business is still strong.

References:
Asosplc. (2019). The ASOS Story. Available 10 April 2019:
https://www.asosplc.com/asos-story
Asosplc. (2019). Final Results for the year to 31 August 2018.
Available 10 April 2019:
https://www.asosplc.com/~/media/Files/A/Asos-V2/results-
archive/statement/full-year-results-2018.pdf
Financial Reporting Council. (2016). Description of the
auditor’s responsibilities for the audit of the financial
statements. Available 10 April 2019:
https://www.frc.org.uk/auditors/audit-assurance/auditor-s-
responsibilities-for-the-audit-of-the-fi/description-of-the-
auditor%E2%80%99s-responsibilities-for

References (continued)
Morningstar. (2019). ASOS PLC- Income Statement.
Available 10 April 2019:
https://financials.morningstar.com/income-statement/i
s.html?t=0P00007NYL&culture=en&ops=clear
Morningstar. (2019). ASOS PLC- Balance Sheet.
Available 10 April 2019:
http://financials.morningstar.com/balance-sheet/bs.ht
ml?t=ASC&region=gbr&culture=en-US
Morningstar. (2019). ASOS PLC- Cash Flow. Available
10 April 2019: http://financials.morningstar.com/cash-
flow/cf.html?t=ASC&region=gbr&culture=en-US

References (continued)
Morningstar. (2019). ASOS PLC- Financials.
Available 10 April 2019:
https://www.morningstar.com/stocks/XLON/A
SC/quote.html
Morningstar. (2019). Boohoo Group PLC -
Financials. Available 10 April 2019:
https://www.morningstar.com/stocks/grey/bhh
of/quote.html
Sherman, E. H. (2015). A Manager's Guide to
Financial Analysis. New York: AMA Self-
Study.

Appendix
1. Excel file showing calculations and data
used for the financial analysis ( horizontal
analysis of the financial statements, margin
calculations and ratio analysis).
Microsoft Excel
Worksheet
Microsoft Excel
Worksheet