Accounting and Finance in AS Diena

Table of contents

Introduction 2

Methodology 2

Company background 3

Accounting system 3

Annual reports 4

Analyses used in Annual Report 5

Key ratios 6

Conclusion 8

Reference list 9

Introduction

“Accounting is the language of business”…Indeed, like no man without

ability to express his thoughts clearly and understandably can achieve very

much in life, no firm can succeed without a good accounting system.

Accounting is a necessary tool which not only provides information to the

owners about how its money is working, and to the state about how big the

taxes are to be fetched, but, the most important, enables the company to

control, to plan and to trace all the actions, processes and projects. The

purpose of this report is to find out how the accounting is done in a

successful company, and how the principles and methods used there differ

from the traditional accounting theory. In addition, the analysis of the

company’s performance will be worked out using the standard ratios.

The decision to choose AS Diena for the report has been based on

several criteria: it is one of the 100 largest companies in Latvia, it has

a leading position in its branch of industry, and it is a good example of

young and fast-developing Latvian business.

Methodology

The analyses and findings presented in the paper are based on the

information received from the interview with the chief accountant of AS

Diena Inese Janikovska and from the Annual Report 1997 of the company. The

Report mirrors the financial data of AS Diena and its subsidiaries:

publishing house Diena Bonnier SIA, advertising agency METRO, Bauskas Dzive

SIA, agency Agro Apgads SIA, Kursas laiks SIA, Dzirkstele SIA, Zemgales

Zinas SIA. The information about subsidiaries is included in Annual Report

in limits of financial year starting from the date of acquisition.

Furthermore, the theoretical side was strengthened with the knowledge

gained from the lectures by Elvi Sederlin and Gunnar Lindholm, and from the

course textbooks “Business Accounting” and “The Profitability, Financing,

and the Growth of the Firm”.

To make the key ratio analysis sensible, a similar size enterprise

operating in the same branch of industry was chosen for comparison. For

this purpose, the figures from the final accounts of AS Preses Nams were

taken from the Lursoft database and used in the analysis.

Company background

The Latvian-Swedish joint-stock company AS Diena was founded in 1992.

In 1996 it was transformed into stock corporation. In fact, it is a group

of companies with parent company and subsidiaries. The share capital of the

company consists of 6000 fully paid ordinary shares, moreover, each share

has a nominal value of LVL 10 and its owner possesses one voting right. The

shares of AS Diena do not participate in stock exchange, and no deals among

the shareholders are allowed. The most important shareholder is a Swedish

company “Expressen AB”, which owns 2940 shares, i.e., 49% of share capital

and votes. In addition, it can be pointed out that the sales turnover at

1997 constituted almost LVL 9.5 mil, and the average number of employees

was 847. The officially registered kinds of activities of AS Diena are as

follows:

. publishing

. printing work and related services

. reproducing of computerized materials

. agents dealing with sales of the wide range of goods

. wholesale

The present strategy of the firm is development as a media and media

infrastructure company. To conclude, AS Diena now enjoys the benefits of

the large market share and solid reputation, and it will undoubtedly try to

maintain and to improve the current position.

Accounting system

Accounting system in AS Diena is fully kept on software and all the

transactions are done automatically. The main software accounting program

used is Mac Hansa. When the record is made, the account is closed

automatically, and the balance is sent to the next stage, i.e., Profit of

Loss Account, Balance Sheet, Cash Flow Statement etc. Printed information

of accounting actions is kept in the company’s archive. As AS Diena is a

very large company, the chief accountant could not tell exactly how many

transactions were recorded per year, but the approximate number is about

50,000. The most common transactions are those in connection to cash and

bank accounts.

Annual reports

The Annual report is prepared according to legislation of Latvia

Republic and the laws “About Accounting” and “About Annual Reports of the

Company”. The main principles used in accounting are the consistency

concept (methods of valuation of assets and calculation of revenues and

expenses are kept constant from one year to another) and the prudence

concept (e.g., stock is valued taking the lowest from prime cost and market

value). Cash flow statement is prepared by using indirect method.

As per legislation of Latvia Republic, all the company’s books are

closed at the end of the financial year (in this case at December 31 each

year), when the Annual Report has to be made. This report is handed over to

auditors and to financial inspection. Usually, the inspected Annual Report

is available for users in about three months after the end of the financial

year. In addition, a smaller report for internal use of the company is

prepared at the end of each month. This report is handed over to the

management of the company.

As all the reports are made automatically by means of software

accounting program, the problems occur only when transactions are recorded.

The main difficulties outlined by the chief accountant of AS Diena were

settling accounts with debtors and creditors and recording expenditures and

revenues of the company. Difficulties also appear when making records for

financial and tax accounting.

As per Balance Sheet at December 31, 1997, the highest value of the

company’s assets is taken by debtors which in total amount to 1,780,777,

i.e., 35.42 % of the total assets. The biggest amount of debts is observed

with regard to bought goods and subscriptions. Each debtor is examined

individually by the management of the company, and those admitted as bad

are included in provision for bad debts for 100% of the debited amount.

Quite impressive are also figures observed as creditors. Short-term

creditors amount to 2,619,142 that is 52% of the total passives of the

company.

As it was pointed out by the chief accountant of AS Diena, cash is

regarded as the most important asset of the company because of its

liquidity. If the company runs out of cash, it can easily go bankrupt.

The highest level of revenues is observed from sales of newspapers. The

highest expenses are salaries, purchase of paper and depreciation of fixed

assets.

Analyses used in Annual Report

The annual report of AS Diena includes analysis of the current

situation and changes during the year 1997.

There was LVL 5.27 million of total assets in the balance sheet at the

end of 1997; of those fixed assets were 30.1%. Current assets were LVL 3.51

mil; of those debtors comprised of 50.7 %. The most important fact is that

trade debtors have increased by 40.5 % in 1997. The reason behind it is the

increase in net turnover. Unfortunately, previous trade partners

systematically ignore terms of repayment.

27.6 % of all capital plus liabilities was equity. According to Arvils

A?eradens, the equity has grown to LVL 1.4 millions, which is 2.3 times

more than year before (Annual Report, 1997, p. 5). This was only due to

profit for 1997; share capital and reserves were not altered.

Changes in the profit and loss account were analyzed mostly in the

president’s report. The first item mentioned is the increase in net

turnover. According to Arvils A?eradens, the net turnover of the whole

concern has increased by 29 per cent reaching LVL 9.5 million, and such a

situation is conventional for the company during last years. The main

reason for that is staff’s excellent accomplishment of their job (Annual

Report, 1997, p. 5).

Consequently, also the profit after taxes has been increased to LVL

813 thousand. It is 16 times more than in 1996 (Annual Report, 1997, p. 5),

and there are three crucial factors which determine such a tremendous

change. The first factor is the more efficient use of resources in 1997. As

mentioned above, net income has increased by 29 per cent, but manufacturing

cost of goods sold has increased only by 15% in the same time. These

calculations were made based on the Profit or Loss statement. (Annual

Report, 1997, p. 7) Next, there was a considerable growth in other

operating income. Finally, there was a rapid decrease in effective tax

ratio and reduction in interest payable.

Key ratios

Calculating the key ratios, average values were used because profit

was made during the year. There is also an assumption that profit is the

same each day during the year. All the ratios and necessary data are given

in Table 1.

ROA

This ratio does not depend on the capital structure of the firm (The

Profitability, Financing, and Growth of the Firm, p. 26). Profit before

interest and taxation should be used in order to separate ROA from the

company’s financial policy. The ratio is 28.83 per cent (Table 1) which is

more than the same ratio for AS Preses Nams, thus telling about better

business performance.

ROE

The difference from the previous ratio is that ROE shows the return

from the owners’ point of view; however, here the minority interest is also

regarded as equity. Thus the profit after taxes (with minority interest

added back) has to be applied. In AS Diena’s case ROE is 69.83 % (table 1).

The reason why there is so large difference comparing to AS Preses Nams

(17.91%) is explained under D / E ratio section.

COD

Average cost of debt in 1997 for AS Diena was 2.15 per cent and being

3 times less than

for AS Preses Nams (Table 1) shows how debt structure affects COD. AS Diena

has higher proportion of non-interest bearing debt, thus, its COD is lower.

D / E

D / E describes the financial policy of firm. It is 2.53 in AS Diena’s

case (Table 1) which shows that concern finances its operations two and

half times more using debt than its own equity. Here an important notice

should be made: LVL 655.7 th (Annual Report, 1997, p. 23) are subscription

fees for the next year which calculating D/E and COD are regarded as debt.

The fact that for AS Preses Nams D / E = 0.52 explains why there is much

sharper difference for ROE than ROA. Equity is less important source of

financing for AS Diena, so the difference in ROE occurs.

It should be noted that effective tax rate can deviate from the

statutory tax rate during years. (The Profitability, Financing, and Growth

of the Firm, p. 60) This difference can be seen in AS Diena’s case. The

denominator in the ratio is profit before tax. In 1997 t was 27.47 per

cent. (Table 1) However applying the same formula in 1996 this ratio was

60.32 per cent.

Current ratio; Quick ratio

The quick ratio shows the liquidity in very short terms when it is

impossible to sell stock. Both ratios for AS Diena are similar and larger

than 1 (Table 1). Thus, it should not be very hard for AS Diena to get over

short-term problems. Little difference between these ratios indicates the

low proportion of stock in current assets. In contrast, current ratio for

AS Preses Nams is 2 times more than quick ratio because it has large amount

of stock.

Equity ratio

Equity ratio for AS Diena is 33.15 %, and it is 2 times less than for

AS Preses Nams. The reason for this difference is of similar nature as for

D / E discussed above.

Profit margin; Capital turnover

ROA depends on two factors. The first one is profit margin, and it is

13.15 %. (Table 1) The second factor is capital turnover that can indicate

the speed of operations. The decomposition of ROA shows that the difference

between AS Diena and AS Preses Nams in ROA is due to faster capital

turnover in AS Diena’s case.

?E / E0 = ROE0 – Div / E0 + NI / E0

This formula decomposes equity changes. Because there was no new issue

of shares in 1997, only profit and dividends affects equity for AS Diena.

ROE = (1 – t)(ROCE + (ROCE – COD) * D / E)

In this formula only interest-bearing debt should be taken into

consideration. Thus COD was 7.99% (Table 1), and it is similar to COD for

AS Preses Nams, because there COD does not depend on company’s debt

structure.

Conclusion

It is fair enough to say that it takes more than just analysing the

Annual Reports to draw serious conclusions about the accounting system and

finance in the firm. However, some important findings can be listed to

summarise the investigation conducted in the report.

First, there is no doubt that the computerised accounting system is

the only one applicable for the company of the similar size because of the

immense number of transactions and complicated structure of the business.

Next, the analysis has revealed some features that characterise the

publishing and printing business:

. operating activities are mainly financed by short-term liabilities, most

of them being non interest -bearing

. debtors are the main component of the current assets of the company, due

to the need in the high level of stock turnover

To conclude, the AS Diena financial indices show an outstanding, if

compared to competitors, business performance.

Reference list

Annual Report of AS Diena (1997).

Johansson, S. (1998) The Profitability, Financing, and Growth of the Firm,

Sweden: Studentlitteratur, Lund.

The State Register of Enterprises of Latvia (1999, Feb 18). [on-line],

Available:

http://www.lursoft.lv/AppServer1?For...en=50972411&code=000300024

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