Financial Report: Analysis of Ding Dong Plc for Investment Purposes

This report provides a comprehensive analysis of financial statements and ratios to evaluate investment opportunities, focusing on Ding Dong Plc and comparing Lockup Ltd and Secure Ltd. The analysis includes profitability, liquidity, solvency, and efficiency ratios, offering insights into each company's financial health. The report recommends investment strategies based on the ratio analysis, highlighting the importance of factors like dividend yield and capital structure. Furthermore, the report delves into International Accounting Standard (IAS) 38, discussing its significance in accounting for intangible assets, particularly in the context of Research and Development (R&D) expenditures. The report provides a detailed understanding of the application of IAS 38 and its implications for financial reporting and decision-making, providing a financial analyst's perspective on the investment potential of Ding Dong Plc.

INTERNATIONAL FINANCIAL
REPORTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Question 1 Recommending suitable firm top Ding Dong Plc for the investment purpose
through using ratio analysis.........................................................................................................1
Question 2 Critically evaluating the main contents of International Accounting Standards
which covers R&D......................................................................................................................5
Question 3....................................................................................................................................7
a. Income statement.....................................................................................................................7
b. Notes to income statement.......................................................................................................8
c. Statement of financial position................................................................................................9
d. Notes for Statement of Financial Position.............................................................................10
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
International financial reporting may be defined as framework which lays focus on drafting
financial statements which contains characteristics of consistency, transparency and
comparability. In the current times, business units make focus on presenting highly reliable
information to the stakeholders with the motive to influence their decision making. The present
report is based on different case scenario which will provide deeper insight about firm which
prove to beneficial from investment purpose. It will depict how ratio analysis tool can be used
for assessing the extent to which one organization is better than other referring ratio analysis
tool. Further, it will also develop understanding about IAS 38 and its importance in relation to
recording transactions pertaining to R&D.
Question 1 Recommending suitable firm top Ding Dong Plc for the investment purpose through
using ratio analysis
On the basis of cited case scenario, Ding Dong Plc is planning to expand business
operations. In this regard, business unit have two options for investment such as Lockup and
Secure Ltd. Hence, for assessing the attractiveness of investment opportunities ratio analysis tool
has been applied. Ratio analysis may be presented as a quantitative tool which enables investor
to evaluate business performance from several perspectives such as profitability, liquidity,
solvency and efficiency (Hamilton and et.al., 2021).
Ratio Lockup Ltd Secure Ltd
Current ratio 1.0 5.0
Acid-test ratio 0.75 1.0
Accounts receivable days 40 30
Inventory turnover (times) 6.0 12.80
Accounts payable days 70 30
Percent of total debt to total assets 40% 80%
Gross profit percentage 24.6% 12.5%
Operating profit percentage 12% 5%
Return on capital employed 16% 4%
Return on equity 11% 11%
Gearing 20% 90%
Interest cover (times) 2 5
Dividends in pence 7.20 1.20
Profitability ratio analysis
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By evaluating ratios it has identified that Lockup Ltd exerted effectual control on both
direct and indirect expenses in the period of 2020. Moreover, in the accounting period gross and
operating profit margin of Lockup implies for 24.6% & 12% significantly. Nevertheless, during
the same period such ratios of Secure Ltd was 12.5% & 5% respectively. In business, attainment
of high sales and profitability is the main motive of management which helps in gaining
competitive edge. Hence, from profitability perspective, Lockup Ltd will prove to be more
beneficial for Ding Dong Plc. In addition to this, efficiency of management’s strategies can be
evaluated from its efforts pertaining to using capital and equities while performing business
operations as well as functions. Comparatively, with regards to the usage of capital employed for
profit generation performance of Lockup Ltd can said to be good. Thus, from the investment
perspective Lock Ltd is good. The rationale behind this, by investing money in the profitable
firm Ding Dong Plc can explore business prominently.
Liquidity ratio analysis
In the context of current ratio, business unit must have 2 assets for meeting 1 current
obligation. Outcome of ratio analysis clearly shows that current ratio of both the concerned
organization was not good in the period of 2020. On the basis of results derived through ratio
analysis it can be said that Lockup failed to maintain enough liquidity in comparison to
benchmark. Moreover, current ratio of Lockup Ltd was 1 at the end of 2020 which in turn entails
that company has no enough current assets for fulfilling obligations. On the other side, Secure
Ltd maintained high liquidity which directly impacts profitability. Moreover, instead of
maintaining more assets company should focus on investing additional liquid funds in profitable
opportunities. Hence, referring overall assessment it can be presented that liquidity position of
Secure Ltd was good in 2020 as compared to Lockup.
Solvency ratio analysis
The above depicted table shows that solvency position of Secure and Lockup Ltd was
not in line with the ideal ratio at the end of 2020. The rationale behind this, for developing
optimal capital structure company should issue 1 debt in against to 2 equities while raising funds
(Hicks and et.al., 2020). However, from evaluation, it has assessed that Lockup Ltd raised more
funds from equities rather than debt instruments. On the other side, Secure Ltd places equal
emphasis on both the sources of funds while generating capital. In the context of business
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organization, inclusion of more debt within capital structure places direct impact on profitability
aspect. Moreover, in debt, firm has accountability to make interest payment irrespective of aspect
whether profit generated during the concerned period or not. Further, high level of equities also
impose issue in relation to shareholders interruption in decision making. By keeping in mind all
such aspects it can be entailed that solvency Lockup maintained suitable capital structure over
others.
Efficiency ratio analysis
In this, with regards to accounts receivable ratio, Lockup Ltd getting funds from debtors
within 40 days. On the contrary to this, debtor’s turnover ratio of Secure Ltd was 30 days at the
end of 2020. It shows that Lockup Ltd is receiving payments from debtors later in comparison to
Secure. This in turn places direct impact on working capital aspects and thereby day to day
operations as well. However, in order to deal with and maintain effectual working capital Lockup
emphasized on getting credit extension from suppliers. As per accounts payable period, Lockup
Ltd made payment to creditors in 70 days. Whereas, Secure Ltd failed to get more credit period
from supplier’s side. In the case of having high payable days company have opportunity to invest
funds in other opportunities and thereby attain profit. On the basis of overall evaluation, it can be
said that working capital management of Lockup Ltd was prominent.
Inventory turnover ratio exhibits company’s ability in relation to selling and replacing its
inventory level. In 2020, stock turnover ratio of Lockup Ltd was 6 times, whereas 12.80 times of
Secure Ltd. Hence, outcome presents that Secure Ltd managed its inventory more efficiently
within the concerned year. Nevertheless, Lockup Ltd failed to sell its stock within the pre-
determined time period. In other words, during 2020, Lockup Ltd hold its stock for longer period
which in turn directly affects cash aspect. Lower inventory turnover ratio shows company’s
inability in relation to converting finished goods into cash. However, by taking into account
competent measures and strategic framework Lockup Ltd can improve its stock management,
sales & profitability as well.
Along with this, interest coverage ratio reflects that, in accounting period 2020, Secure
Ltd was highly capable for meeting current interest payments from available earnings. In
comparison to Secure ltd, Lockup can meet its interest payment only 2 times from the profit
generated during 2020. However, as per the standards, company’s position can said to be good
when it has minimum 2times interest coverage ratio. Accordingly, both the companies are in
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good position to fulfil their obligations.
Investment ratios
Dividend is recognized as one of the main factors which helps in attracting and
maintaining the faith of shareholders in business operations. Nevertheless, dividend decision is
highly affected from the profit generated by the firm within financial year. In 2020, dividend
offered by Lockup and Secure accounts for 7.20 & 1.20 pence significantly. Thus, from
shareholders perspective, financial performance of Lockup was good.
To,
Ding Dong Plc
Date: 28th March 2020
From analysis it is reported to the higher management team that financial position and
performance of Lockup Ltd recognized as good. Through assessment, it has found that Lockup
Ltd generated higher profit margin, in 2020, over expenses incurred. Along with this, ability of
Lockup in relation to meeting current obligations from assets is good. As, company is able to
covert its assets into cash for fulfilling liabilities. Further, in comparison to Secure Ltd, capital
structure made by Lockup was good. Along with this, efficiency of Lockup Ltd in relation to
making use of both current and non-current assets can said to be better over Secure Ltd.
Considering overall assessment management of Ding Dong Plc is advised to invest in Lockup
Ltd. Moreover, financial performance of Lockup Ltd was sound in the category of profitability,
liquidity, solvency etc. As per the current performance, Ding Dong Plc can raise funds through
equity in the near future by investing in Lockup Ltd. Moreover, current company is offering high
and suitable dividend to the shareholders. Thus, this aspect will help investors in attracting more
investors. From overall perspective, investment in Lockup Ltd will contribute in the attainment
of Ding Dong Plc’s goals and objectives. Hence, higher management team of Ding Dong Plc is
advised to make focus on employing social media marketing tool. By this, firm can enhance its
reach at global level and entice decision making of customers. Meanwhile, it results into the
maximization of both sales and profitability. In addition to this, after investment, management
team of Ding Dong Plc should make focus on maintaining enough current assets so that liquidity
position can be improved. Besides this, before investment, Ding Dong Plc should also lay focus
on evaluating company’s culture, employee base and other external factors that impacts
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operations. Hence, by developing sound strategic and policy framework Ding Dong Plc can get
success through making investment in Lockup Ltd.
Sincerely
Financial analyst
Question 2 Critically evaluating the main contents of International Accounting Standards which
covers R&D
The pandemic has impacted businesses adversely in many ways. There are various
organization that has been shut down due to these crises. With respect to this, firms has requested
government to innovate such vaccines and equipment that can save them from not being wind up
and gain sustainability for longer duration.
IAS-38 highlights the accounting requirements for intangible assets. The Research and
development is an essential part of IAS which plays critical part in obtaining success regarding
its operations related to R & D (Agyei-Mensah, 2019). Its main objective is to identify
requirements that are measuring carrying amount of intangible assets of organizations. The
standard also aims to identify the characteristics of non-physical assets. In this crisis R&D
worked would be identified that can be sold, leased, etc. for utilization of world.
It is applied to all types of Intangible assets (IA) but excludes some special cases. It
excludes financial & insurance company non-physical assets, development, extraction &
evaluation of minerals, tools held for rent, sales, etc. The type of transactions that company can
acquire for receiving assets are exchange of assets, government grand, distinct purchase and
many more. In prior time it was difficult for business to distinct cost and other elements related
with IA (IAS 38 Intangible Assets, 2017). With respect to this, international accounting standard
has formulated the concept of intangible assets for acquiring clarity and understanding regarding
recording norms and conditions related with it. In business combination quality is improved &
international coverage can be given on this aspect.
IAS-38 has mentioned 6 conditions for this particular intangible assets. It comprises
technical feasibility for use, intention to complete, ability to sell, availability of resources for
completion, optimization of future benefits related to economy and reliable measurement of
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expenditures. In addition to this, reporting entry should be recognizable from the view point of
this 6 factors (Elsten and Hill, 2017). Expenditures that are related with development are not
coordinated expensed off. It does not allow to capitalize those items that are not matched with
conditions. It as well has two approaches such as revaluation model & the cost method. It has
stated that revaluation approach can be used only in case of licence that are non-passively
transacted. In addition to this, the basic objective of it is to recognise & measure non-physical
assets and getting information regarding disclosure.
Earlier, emphasis was placed on recognizing R&D as asset which separated from
goodwill. However, treatment pertaining to R&D as per IAS 38 was unclear and lacks
standardization in process. Hence, in order to improve reporting aspects and for making the
treatment of R&D more responsive several new aspects were introduced. Accordingly, R&D
must be recognized as expense when it is a kind of expenses (IAS 38 Intangible Assets, 2021).
Unlike this, cost incurred pertaining to development is recorded as an assets as per IAS 38. In
aspect to this, IAS-38 has expected organization to disclose all expenditures that are connected
with research and development which was expensed off priorly neglected. It has also been
mentioned in act to render valuable data disconnected balance sheet assets. Further, it supports
the non-disclosure for gaining competitive advantages.
It has been revised for due to some lacking area. One of the biggest modifications require
for the improvement is related with its ability of working. With respect to this, it was prior used
to recognize the IA but identified aspects were not mentioned. The fair value of IA is assessed
through sufficient reliability to be recognized separately from goodwill. This standard uses the
judgements for determining that which element is more significant for considering tangible and
intangible assets under sections. For example- IAS- 38 mainly includes computer software,
patents, customer & supplier relations, market share with rights, mortgage servicing rights,
franchises, fishing licence, import quotas, etc. There are several future economic benefits which
allows business combination to attain in order to comply with rules and regulations formulated.
It provides legal rights that give advantages while dealing with IA. It encourages firm to derive
this benefits by adhering norms and conditioned mentioned under the act.
The current rules are inappropriate for better accounting of cost. It is not clear and
specific of what to include and which elements that can be excluded. This makes balance sheet
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improper from international standards covering research and development (Dinh, Schultze, List
and Zbiegly, 2020). It requires three approaches that involves expensing research and
development values, selective capitalization, etc. in addition to this, it does not focuses on
important factor of institutions in turn they get risk of losing part of their net worth because of
not getting rid of assets from financial statements (Ertuğrul, 2020). The most advisable
recommendation can be allowing organization to utilize their usable approach from the
beginning. Tendencies to make balance in appropriate by involving intangible assets that
company is performing good so that shareholders can be attracted for investing. Defining these
assets differently under methods so hybrid system is suggested for effective functioning. Another
advice is permitting organization to achieve competitive advantage of uniqueness internally that
is distinct from external that is currently got mixtures with other organization (de Aguiar and
Bebbington, 2021). The proper valuation of cost of particular assets before it can be included in
present balance sheet. Further, making clear for companies that what constitute an non-physical
asset.
Question 3
Cited case situation entails that Sunderland Plc, European distributor, deals with the
artificial intelligence (AI) of motor industry. Hence, for assessing profitability and condition of
both assets as well as liabilities company tends to make focus on preparing financial statements.
a. Income statement
This statement shows profit generated by business entity over expenses including both
direct and indirect during the accounting period.
Statement of income for the year ended 30th April 2021
Particulars Amount Amount
Revenue from operations 13000
Less Cost of goods sold
Opening inventory 300
Add Purchases 9500
Less Closing inventory 1000 8800
Gross profit 4200
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Operating Expenses
Salesman salaries 200
Administration wages and salaries 400
Distribution costs 200
Administration expenses 700
Director's remuneration 600
Audit fees 100
Depreciation of fixtures 110
Depreciation of motor vehicle 480
Operating Income
Re-valuation of land 800
Non- operating expenses
Amortization 400
Debenture interest 200
Income Tax 100
Net profit 1490
b. Notes to income statement
 The upward revaluation of land is considered as income and is adjusted in the operating
income slot of the company's profit and loss statement.
 The amortization of the goodwill is considered as the non-operating expense of the
company and so is debited to find out the actual profits of Sunderland Plc.
 The cost of goods sold is calculated by adding purchases in the opening inventory and
reducing the closing stock.
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c. Statement of financial position
It represents both company’s assets, liabilities and shareholders at specific point of time.
By preparing statement of financial position management can do evaluating liquidity, rate of
return and capita structure to the significant level.
Balance sheet of Sunderland Plc for the year ended 30th April, 2021
Particulars Amount Amount
ASSETS
Non-current assets
Land 5000
Fixtures 1100
Motor Vehicle 1200
Goodwill 1000 8300
Current assets
Inventory 1000
Cash 2200
Rent receivables 500
Trade receivables 800 4500
Total assets 12800
LIABILITIES
Non- current liabilities
Debentures 2200
Provision for depreciation 1090 3290
Current liabilities
Trade payables 200
Share capital
Equity capital 300
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Preference capital 50
Share premium 20
Retained earning 6030
Profit 1490 7890
Total liabilities 12800
d. Notes for Statement of Financial Position
 The provision of depreciation account is placed at the liability side of the balance sheet
under the non-current liabilities of the company.
 The share capital shows the liability of the business towards the owner of the company
and in that the retrained earnings, the premium that is provided and the profit of the
current period are all included in its computation.
 The capital structure of the company includes both debt and the equity capital. The
debentures form part of the borrowed funds and share capital forms the part of the owned
capital. But proportionately the debt capital is way too high as compared to the equity
capital of the company.
CONCLUSION
By doing assessment, it can be concluded that Lockup Ltd prove to be more beneficial for
Ding Dong Plc from investment purpose. It can be seen in the report that profitability position of
Lockup ltd is good over rival firm. Thus, by investing funds in Lockup Ltd, management team of
Ding Dong Plc can get desired level of outcome or success. Further, it can be summarized from
the evaluation that IAS 38 provides competent measures in relation to dealing with the
transaction of R&D. Along with this, it has been articulated that profitability and balance sheet
helps Sunderland Plc in doing evaluation of monetary position as well as performance.
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REFERENCES
Books and Journals
Agyei-Mensah, 2019. IAS-38 disclosure compliance and corporate governance: evidence from
an emerging market. Corporate Governance: The International Journal of Business in
Society.
de Aguiar, T. R. S. and Bebbington, J., 2021. Financial Accounting and the Natural
Environment. Routledge Handbook of Environmental Accounting.
Dinh, T., Schultze, W., List, T. and Zbiegly, N., 2020. R&D Disclosures and Capitalization
under IAS 38—Evidence on the Interplay between National Institutional Regulations
and IFRS Adoption. Journal of International Accounting Research. 19(1). pp.29-55.
Elsten, C. and Hill, N., 2017. Intangible Asset Market Value Study?. les Nouvelles-Journal of
the Licensing Executives Society. 52(4).
Ertuğrul, M., 2020. Direct and indirect value relevance of r&d capitalization. İstanbul Ticaret
Üniversitesi Sosyal Bilimler Dergisi. 19(37). pp.781-802.
Hamilton, F. and et.al., 2021. Aspirin reduces cardiovascular events in patients with pneumonia:
a prior event rate ratio analysis in a large primary care database. European Respiratory
Journal. 57(2).
Hicks, B. B. and et.al., 2020. Augmented Bowen Ratio Analysis–I: Site Adequacy, Fetch and
Heat Storage (ABRA). Agricultural and Forest Meteorology. 290. p.108035.
Online
IAS 38 Intangible Assets. 2021. Online. Available through: <
https://library.croneri.co.uk/cch_uk/iast/ias38-200403>.
IAS 38 Intangible Assets. 2017. Online. Available through: <https://www.ifrs.org/issued-
standards/list-of-standards/ias-38-intangible-assets/>
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