Financial Statement Analysis: Overview

This report shows the analysis of the financial performance of Centrica Plc, one of the top energy business providers in UK. Based on my analysis from this report I can conclusively state that: Centrica Plc has an upper hand in the energy and gas market than its competitor; Scottish Power. Centrica Plc’s turnover was very high in 2008 which shows that it made better sales than its competitor.

Although Centrica’s sales turnover was high in 2008 but the profit margin dropped drastically. In the overall financial performance Centrica Plc made a loss of 645million in 2008 compared to the previous year 2007 when the company had a retained profit of 1088million. This was considered to be an impact of the global financial crises that hit the UK and US economy causing increase in oil prices and a drastic fall again as the level of global oil demand rises and at the same time causing a tight supply position.

Centrica Plc’s Total shareholders return has an upper hand when compared with other 99 members of the FTSE 100 in 2008.

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INTRODUCTION

evaluate the impact of financial accounting concepts on corporate reporting of Centrica Plc. evaluate the limitations of ratio analysis discuss the role of management accounting in the evaluation of Centrica’s business performance. I have been motivated to choose Centrica Plc because of the type of product they deal in, which is energy. It is a product that is essential for all, not just households. And it will be good to know if this company is actually doing well in terms of profitability and customer’s satisfaction.

LITERATURE REVIEW

According to Barry Elliot and Jamie Elliot, ratios show different items in the financial statements. A ratio is not useful in isolation and its usefulness depends on what aspects of the firm’s business affairs are being investigated. Ratios, according to them are a powerful tool in interpreting and understanding a company’s account. Therefore, the graphs above show the performance of the Centrica plc and its competitor; Scottish Power over a period of 5years and will be analyzed below.

DEBTORS TURNOVER

This ratio shows how long it takes debtors of a company to pay back credit purchases.

In as mush as credit facilities enhances sale turnover in a competitive market, it is very important to take adequate control of it because it is an essential part of working capital management. (Buz/ed, 2009) It is calculated as: Debtors' Turnover*= Average Debtors * 365days Centrica Plc has been able to achieve a positive stock turnover ratio over the years with a 55% less time between 2004 and 2008 compared to its competitor that has a longer time of 18% to sell off its products.

This shows that Centrica Plc has more sales turnover than Scottish Power. The trend on the graph show that Centrica Plc has been more liquid than Scottish power because the higher the ratio, the more liquid the business is said to be. It is obvious from the graph that Centrica Plc is more liquid than Scottish Power. That is Centrica Plc has a better capacity to pay it short term debt than Scottish Power, with reference to their current ratio of 1. 12 to 0. 59 respectively in 2008.

DISCUSSION

IMPACT OF FINANCIAL ACCOUNTING CONCEPT UPON CORPORATE REPORTING OF CENTRICA PLC

• Going Concern: The Board of directors of Centrica Plc continues to adopt the going concern basis in preparing the financial statement because they have a reasonable expectation that the company has adequate resources needed to continue operational existence for the foreseeable future
• Business Entity: Centrica Plc operates as a separate business entity from its investors.
• Cost: Centrica Plc reports the market value of its assets.
• Sincerity: The financial Statement of Centrica Plc is prepared and audited by auditors from the Pricewaterhouse coopers
• Monetary Unit: The financial statement of Centrica Plc shows a single monetary unit dominated in GBP because the parent company is in the UK.
• Dual concept: Centrica presents it total assets as liabilities (debt finance) plus equity (shares).
• Accrual: The revenue or income of Centrica Plc are recorded when they are actually earned.

ROLES OF MANAGEMENT ACCOUNTING ON THE BUSI*NESS PERFORMANCE OF CENTRICA PLC

According to Institute of Management Accountants, Management accounting can be defined as “the internal business building role of accounting and finance professionals who work inside the organizations” They are concerned about the growth of the business in terms of evaluating the business prospects, budgeting and forecasting, implementing and monitoring internal controls for the purpose of achieving economic value.

The Board of Directors of Centrica Plc believes that there must be high standards of corporate governance which are relevant to the overall integrity and performance of the business. The Company adopted a new set of Articles of Association which states the power of the Board of directors at the 2008 Annual General Meeting and stated below are few of the responsibilities of the Directors with respect to the managerial accounting of the company. the Group’s corporate governance and system of internal control development of strategy and major policies nterim dividend payments and recommendation of final dividends the appointment and removal of Directors and the Company Secretary the Group’s corporate responsibility arrangements including health, safety and environmental matters reviewing management performance approval of the annual operating plan, the financial statements and major acquisitions and disposals The Board gives thorough monitoring to the development of the company’s strategies and also during the year 2008, the Board had a full review of the company’s overall strategy with the assistance of an independent external consultant.

The Board also place value on their investors and promote communication program in order to hear their views of their shareholders as regards the key matters affecting the company. The Chief Executive and Group Finance Director held regular meetings with the Company’s major shareholders during the year and the Company’s Rights Issue which was the main topic of discussion was successfully completed during December 2008 after which an approval was given at the Company’s General Meeting held on 21 November 2008.

The company’s Executive Committees also established a control infrastructure to ensure proper monitoring and management where major risks have been identified.

THE NON-FINANCIAL PERFORMANCE OF CENTRICA PLC

The fluctuation in demand and prices of oil worldwide as well as the global financial crises in 2008 made Centrica Plc face series of challenges and the Chairman of the company (Roger Carr) tagged the year “a difficult year”.

But despite the difficulty, the company still performed well because it is a company that aims at delivering stability and growth for the benefit of their customers, employees and shareholders. Centrica Plc’s non-financial performance can be outlined in terms of the following:

BUSINESS PERFORMANCE OF CENTRICA PLC LIMITATIONS OF RATIO ANALYSIS

Ratios are useful methods of analyzing the performance and financial position of a business but they have their flaws which are seen as limitations and will be analyzed below.

THE IMPACT OF THE CHANGE FROM UK GAAP TO IFRS ON THE CORPORATE REPORTING OF CENTRICA PLC

That IFRS has improved the company’s 2004 operating profit and statutory Earnings Per Share (EPS) reduction in shareholder’s fund as a result of pensions deficit Adjustment the company’s policy to link dividend to earnings thereby increasing pay out ratios. Some assets and liabilities will be treated differently which will affect timing of profit.

CONCLUSION

With reference to the ratios analyzed above, Centrica Plc has an upper hand in the energy and gas market than it s competitor; Scottish Power. Centrica Plc’s turnover was very high in 2008 which shows that they made better sales than its competitor. Although Centrica’s sales turnover was high was high in 2008 but the profit margin dropped drastically. In the overall financial performance Centrica Plc made a loss of 645million in 2008 compared to the previous year 2007 when the company had a retained profit of  88 millions. This was considered to be an impact of the global financial crises that hit the UK and US economy causing increase in oil prices and a drastic fall again as the level of global oil demand rises and at the same time causing a tight supply position. Finally, we can say that from the record of 2007, the financial performance in 2008 was good despite the economic instability. Centrica Plc made strong progress against the strategic priorities set out at the end of year 2006.

The global financial crises which remain very challenging in the UK till date could pose as a problem for many of the company’s customers. But Centrica Plc promises to continue to place their customers’ needs at the forefront of their agenda, alongside the determination to deliver increasing long-term value for our shareholders

FUTURE OF CENTRICA PLC

According to the Chief Executive’s Review, some priorities have been set for the future growth of Centrica which would help measure performance in year 2009.

Some of which are:

• To build on the company’s growth platform: Increasing the value of their customer base by expanding the overlap between the energy and services business. Also establishing a centralized service platform and the acquisition and construction of gas and power assets which will enable the company to compete efficiently in the energy market.
• To reduce risk through integration: There will be more focus on UK in the coming year 2009, due to the high demand. Therefore more production has to be made by integrating/building closer relationship with the National Oil Companies.
• To transform British Gas: In order for Centrica Plc to succeed, British Gas Residential which seems to be the core backbone of Centrica’s business has to deliver high level of profitability. Therefore, there will have to be an integration of the British Gas Residential, British Gas Business and British Gas Services into a single customer-focused organization.

Amidst all these future plans briefly mentioned above, I can now conclusively say that the future performance of Centrica Plc is not 100% certain of profitability as they are not exempted in the effect of the global financial crises which is still hitting the UK economy. Although demand for product might rise causing increase turnover but consumers might not be able to meet up with financial obligations of paying cash. So, Centrica must be prepared for more credit sales which might decrease its debtor turnover.

Also, prices of product must be put into consideration despite the goal of maximizing profit not forgetting its competitors. And finally, the leadership of Centrica Plc will be playing major role in delivering stability and growth for the benefit of customers, employees and shareholders.

REFERENCES

1. Asmii Vernekar, 2009. Available at: http://www. buzzle. com/articles/basic-accounting –concepts-and –principles. html. Assessed on 15th December, 2009 Buz/ed, 2009. Available at: http://www. bized. co. uk/compfact/ratios/sdc5. htm Assessed on 13th December, 2009. Centrica Plc, 2005.
2. International Financial Reporting Standards. Available at: http://www. centrica. co. uk/files/results/2004_ifrs_transcript. pdf. Assessed on 15th December, 2009
3. FAME (Financial Analysis Made Easy), 2009. Available at: http://www. fame. bvdep. com/version-20091130. Assessed on 11th December, 2009
4. Peter Atrill, and Eddie McLaney (2008), Accounting and Finance for Non-Specialists, 6th ed. Prentice Hall, financial times. D
5. avid Alexander and Christopher Nobes. (2007), Financial Accounting, An International Introduction, 3rd ed. Prentice Hall, financial times.

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