This assignment to be based around the financial statements of a Barratt Development (Household goods and home construction). You should use the financial statements of the company to help explain and illustrate the points raised in your essay.
Choose an International Accounting Standard or International Financial Reporting Standard from the list attached to your original lecture programme handout. Choose an item from a current set of financial accounts to which your chosen standard relates.
Explain how the accounting standard you have chosen helps preparers of accounts to ensure that the figure gives a ‘fair representation’ of the current state of the business.
Financial Accounting and Reporting for Barratt Development PLC
The financial accounting and reporting mechanism chosen for this paper is compliant with IAS (International Accounting Standard). In any profit organisation in the world, financial statements are essential to provide an apparent financial performance or competence, for the sake of stakeholders (Gordon et al. 2017, 839). The preferred item under the IAS category is the statement of cash flows. This paper will analyse the essence of cash flow statements of Barratt Development Plc.
Statement of Cash Flows
Cash flow statements are essential for the survival of any company today because of the benefits they are associated with. They enhance the ability of a setting to the positive flow of cash in the future (Ball et al. 2016, 30). These statements are also crucial in the evaluation of a company’s capacity to satisfy its loan-related objectives and the payment of dividends.
In addition, such statements help shareholders to note the variation between reported and related cash flows (Campbell 2015, 245). The company will also be well-positioned to evaluate how major transactions impact on its financial position in a given year through cash flow statements.
In the just concluded financial year (2018), Barratt Development received a net cash inflow/outflow from operating activities accumulating to 514 million pounds as a group and 124.2 million pounds as a company. While the group earnings oversaw a significant increase from 388.6 million pounds, the company net cash flow decreased from 360.1 million pounds to 124.2 million pounds.
On the other hand, the net cash outflow/inflow from investing activities under the group was 9.7 million pounds under group category, which is a significant reduction from the 2017 figure of 65.9 million pounds while the company category was responsible for 559.8 million pounds, which represented a significant rise from 20.6 million in 2017 (Barrattdevelopments.co.uk. 2019, 129).
From financial activities, Barratt Development had a net cash outflow of 306.6 million pounds as a group and 272 million pounds as a company; the group net cash outflow indicated a decrease from 2017. Based on the net inflows/outflows from investing and financing activities, Barratt Development had cash and cash equivalents of 982.4 million pounds as a group, representing an increase from the 2017 financial year where it had 784.4 million pounds.
Under the company dimension, Barratt Development had 867.4 million pounds in cash and cash equivalents at the end of the 2018 financial year, which indicated an increased from 2017 in which it had 703.8 million pounds. From operating activities, the net cash inflow/outflow for Barratt Development in the 2018 financial year was 514.3 million pounds as a group, revealing an increase from 388.6 million pounds in the 2017 financial year; under the company dimension, Barratt net cash inflow/outflow from operating activities for 2018 was 124.2 million pounds, indicating a decrease from 360.1 million pounds in 2017 (Barrattdevelopments.co.uk. 2019, 129).
How Cash Flow Statements Help Preparers of Accounts to Ensure that the Figure Gives a “Fair Representation” of the Current State of Business
From the statements of cash flow, it is easier to depict the performance or competence of the company. The cash flow statements involve three dimensions, including investing activities, financing activities, and operating activities. Investing activities indicate how a company utilised the financial at its disposal to undertake the purchase of property, plant, and equipment, increasing invested quantities based on the equity method, repaying amounts invested in aspects accounted for in compliance with equity method, dividends acquired from subsidiaries, and interests received (Weber 2018, 490).
Under financing activities, the account preparers give accurate information regarding the dividends received by Barratt’s shareholders, distribution channelled towards non-controlling partners, the buying of own shares, proceeds accrued from disposing of own shares, proceeds from share capital issuance, the repayment of loans, swap cancellations, and loans drawdown.
Meanwhile, operating activities provide details regarding profits/losses from operations, the total amount of non-cash items, and total movements in working capital. Core aspects of profit/loss from operations include depreciation, inventories’ impairment, profit on available for sale financial assets’ redemption, the share-inclined charge of payments, facility fees’ amortisation, financial gains from employee incentives, and imputed interests on deferred term payables (Chen et al. 2018, 166).
Total non-cash items are inclusive of inventories’ increase, the increment in trade and additional receivables, as well as a decrease in the present for sale financial assets. Meanwhile, parameters of total non-cash items include interest paid and tax paid.
From the analysis above, it is apparent that cash flow statements are indispensable in a company as they show the financial sustainability of the company. Alongside other modes of financial accounting and reporting such as balance sheets, they help stakeholders to formulate sound policies to steer the organisation forward. These strategies are likely to determine the amount of investment in the company.
Potential shareholders, for instance, will be keen on the probable dividends they will get from the company. Barratt Development is likely to attract more investors because its basic earnings per share increased in the just concluded year, from 61.3 pence in 2017 to 66.5 pence in 2018.
The company’s diluted earnings per share also increased from 60.7 pence in 2017 to 65.9 pence in 2018 (Barrattdevelopments.co.uk. 2019, 135). As a result, equity shareholders of Barratt Development received total dividends of 434.9 million pounds in 2018 as compared to 321.7 million pounds in 2017.
The paper has discussed financial accounting and reporting for Barratt Development in relation to the setting’s cash flow statements. Through the financial statements, stakeholders receive clear information on investing activities, operating activities, and financing activities, which help to evaluate the financial sustainability of the company.
Because Barratt utilises its finances effectively, it is likely to attract more shareholders considering that its earnings per share have increased significantly from the previous financial year; this situation accounts for an increase in dividends. In this respect, it is factual that cash flow statements help preparers of accounts to get figures that give a “fair representation” to a company.
- Ball, R., Gerakos, J., Linnainmaa, J.T. and Nikolaev, V., 2016. Accruals, cash flows, and operating profitability in the cross section of stock returns. Journal of Financial Economics, 121(1), pp.28-45.
- Barrattdevelopments.co.uk. (2019). Annual Reports and Accounts 2018. [online] Available at: http://www.barrattdevelopments.co.uk/~/media/Files/B/Barratt-Developments/reports-presentation/2018/barratt-ar18.pdf [Accessed 19 Jan. 2019].
- Campbell, J.L., 2015. The fair value of cash flow hedges, future profitability, and stock returns. Contemporary Accounting Research, 32(1), pp.243-279.
- Chen, C.W., Collins, D.W., Kravet, T.D. and Mergenthaler, R.D., 2018. Financial statement comparability and the efficiency of acquisition decisions. Contemporary Accounting Research, 35(1), pp.164-202.
- Gordon, E.A., Henry, E., Jorgensen, B.N. and Linthicum, C.L., 2017. Flexibility in cash-flow classification under IFRS: determinants and consequences. Review of Accounting Studies, 22(2), pp.839-872.
- Weber, M., 2018. Cash flow duration and the term structure of equity returns. Journal of Financial Economics, 128(3), pp.486-503.