CASE STUDY: FINANCIAL STATEMENTS

May 2
nd
2007(AI/IE II)
Source: http://www.tt100.biz
1 Financial stat!nts and "#$"tin%: Int"$d&cti$n
For questions 1'(1, read the text below and think of t) *$"d which best fits each space.
Use onl $n word in each space. !here is an exa"ple at the be#innin# $1%.
+%+ 1,t)$s
&'i"ited co"panies $((1(( owned b ((2 ((% are required ((((( law to produce
Financial State"ents. !hese state"ents "ust be ((- (( and "ade a)ailable to
shareholders as part of a ((. (( report. *adbur Schweppes ai"s to produce ((/((
financial state"ents that #i)e a )aluable insi#ht ((7(( the co"pan+s strate# and
perfor"ance.
&*adbur Schweppes is a "a,or ((0 (( co"pan that "anufactures, "arkets and ((1 ((
confectioner and non-alcoholic ((10 ((. .ith ori#ins stretchin# ((11 (( o)er /00 ears,
*adbur Schweppes+ brands are en,oed toda in al"ost e)er ((12 (( in the world. !he
((1(2( re#ional and local fa)ourites such as *adbur 0air 1ilk, !rident, 2alls,
0entne, 3ubblicious, 3assett+s and !rebor in confectioner and 0r 4epper, Schweppes,
Snapple and 5Up in be)era#es. !he co"pan ((1- (( around 60,000 people.
*adbur Schweppes+ 2ead 7ffice ((1.(( tea" collects the infor"ation required to ((1/
(( these state"ents fro" the co"pan+s ((17 (( and financial tea"s around the world.
!he le#al ((10 (( for producin# financial state"ents that presents an ((11 (( picture of
the co"pan+s perfor"ance o)er the period ((20 ( with the co"pan+s directors. !hese
state"ents "ust be ((21 (( b an external ((22 ((, where the co"pan hires a fir" of
accountants to ((2( ( that it pro)ides a true and fair record and ((2- (( with le#al
require"ents. !he exact statutor require"ents for li"ited co"panies to prepare and
publish accounts are ((2.(( down for li"ited co"panies throu#h the *o"panies 8ct
19:6, re#ulated b *o"panies 2ouse, and for publicl listed co"panies ((2/ ((
;uropean law, the 'istin#s <ules, ((27 (( b Financial Ser)ices 8uthorit $FS8%.
&So"e leadin# public co"panies, like *adbur Schweppes, include reports to
shareholders ((20 (( their success in "eetin# self-((21 (( financial #oals (((0 (( their
financial state"ents.
!he three (((1 (( Financial State"ents are:
1+ 3"$4it and L$ss Acc$&nt
2+ 5alanc S)t
(+ Cas) Fl$* Stat!nt+
2 Financial Stat!nts and 6#$"tin%: Financial 789cti:s
1
<ead the article below about establishing financial goals. =n "ost of the lines (2'-1,
t)" is $n ;t"a *$"d. =t is either #ra""aticall incorrect or does not fit in with the
sense of the text. So"e lines, howe)er, are correct. =f a line is correct, write C766ECT.
=f there is an extra word in the line, write t) ;t"a *$"d in capital letters. !he exercise
be#ins with an exa"ple ((1).
Cadbury Schweppes Case Study page 2
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( Cadbury Shweppes' Profit and Loss Account
&8 4rofit and 'oss 8ccount is a table co"piled at the end of an accountin# period, to
show #ross and net profit or loss. =t is )er useful for helpin# readers to understand the
financial perfor"ance of a co"pan.
8 re)iew of the 4rofit and 'oss 8ccount will help shareholders and other users to see
how the co"pan is perfor"in#.
!he table below shows t)" <y 4i%&"s 4$" 200-:
Case Study page 3
/
>13usinesses need to ha)e s&c) a clear direction to work towards, so that their
>/e"ploees "ust know what the are seekin# to achie)e and what the need to do.
>>!he directors of a co"pan $with the Finance 0irector or *hief Financial 7fficer
>?plain# a pro"inent role% establish recentl financial #oals which are used b
>6in)estors, financial analsts and other external outer parties to "onitor the
perfor"ance of a co"pan.
>@3ecause these financial #oals ne)er can be set out in nu"bers, it is relati)el eas >5to
co"pare their actual perfor"ance a#ainst the set tar#ets. For exa"ple, b settin# >:sales
#rowth #oals, it is possible to check pro#ress in ha)in# "eetin# sales tar#ets. >9*adbur
Schweppes has established three perfor"ance #oal ran#es for the period /00?-/005.
T)s a":
?0A. Aet Sales Balue $ASB% #rowth of between >C and 6C. ASB #rowth refers to the
?1#rowth in sales of the co"pan D for exa"ple e)en b sellin# "ore soft drinks,
?/chocolate or chewin# #u" to super"arkets, which in turn sell to so"e consu"ers.
?> 5. 7peratin# "ar#in #rowth of between 60 and 56 basis points per ear. 7peratin# ??
"ar#in #rowth refers to "akin# "ore profit for each E1 of sales "ade - for ?6exa"ple b
buin# less in#redients and packa#in# "aterials as efficientl as possible.
?@ C. Free cash flow of E1.6 billion o)er the four-ear period. Free cash flow does
?5reflects how "uch cash is #enerated within the business, for an exa"ple b
?:increasin# profits. Free cash flow is reall i"portant to enable the co"pan to ha)e
?9those "one a)ailable to "eet its financial co""it"ents.
Downloaded from 100
&8 si"plified )ersion of *adbur Schweppes+ 4rofit and 'oss 8ccount for /00? is set
out below. .hen readin# a 4rofit and 'oss 8ccount, it is easier to understand a
co"pan+s financial perfor"ance b co"parin# the latest fi#ures with the pre)ious ears.

&!he 4rofit and 'oss 8ccount s)$*s a s&!!a"y $4 t) t"ansacti$ns $4 t) 8&sinss
4$" a #"i$d $4 $n ya"+
>
1. !he top line shows that the ((.0(( re)enue fro" products such as 0r 4epper, 2alls,
Schweppes, !rident and *adbur 0air 1ilk, ca"e ((.1(( E@,5>: "illion. !his can be
called either +re)enue+ or +sales+$historicall called ((.2((%.
2. *osts were in)ol)ed in "akin# these products - the cost of ((.((( "aterials such as
cocoa, packa#in#, transport, staff ((.-((, ad)ertisin#, etc. !he production costs ((..(( up
to E6,@@: "illion. !hese are deducted fro" re)enue because the are paid out. =t is
co""on to show ((./(( )alues in brackets in financial state"ents.
(. *adbur Schweppes ((.7(( a share of so"e other co"panies - raisin# additional
inco"e.
-. *adbur Schweppes has borrowed "one, for exa"ple, to bu new co"panies. =t "ust
pa interest pa"ents ((.0(( these loans.
.. *adbur Schweppes "ust pa *orporation !ax to the #o)ern"ent $E1:6 "illion,
which #oes towards helpin# to pa for ite"s such as education and health spendin#%. !his
is a tax on profits. 7nce tax has been deducted the profit for the ear is E6?5 "illion.
/. !he profit for the ear is the ((.1(( of profit after all external costs are deducted. !he
profit for the ear is then used to either pa a ((/0(( to shareholders or is retained b the
co"pan in its reser)es, for future use.
7. Finall, a calculation is set ((/1(( of ;arnin#s per Share - the profit di)ided b the
nu"ber of shares in the co"pan. !his is /6.9p. =n)estors will want to see this fi#ure
risin# o)er ti"e, as it indicates the ((/2(( on their in)est"ent into the co"pan, and the
will "easure percenta#e increases and co"pare the #rowth rates of different co"panies.
Cadbury Schweppes Case Study page 3
Downloaded from The Times
&<ead the explanations abo)e a#ain. *hoose the best word to fill each #ap fro" A=5=C
$" D .For each question .0'/2, "ark one letter$8,3,* or 0%.!here is an exa"ple at the
be#innin#$0%.
60.A slls 5 sals C sllin%s D sllin%
61+A t$ 5 t$*a"ds C at D na"
6/.A %"$ss 5 t&"n$:" C a"nin%s D inc$!
6>+A #"i!a"y 5 "a* C 8asic D a"t)ly
6?+A #ays 5 sala"is C incnti:s D "!&n"ati$n
66+A addd 5 a!$&ntd C dc"asd D "isd
6@+A #$$" 5 insatis4act$"y C 8ad D n%ati:
65+A ac>&i"s 5 8&ys C $*ns D %ts
6:+A 4$" 5 at C &#$n D $n
69.A >&antity 5 s&! C l:l D a!$&nt
@0+A di:idnt 5 l$an C di:idnd D %&a"ant
@1+A &# 5 $&t C $n D d$*n
@/+A #"$4it 5 :al& C "t&"n D #ay8ac<
- The Balance Sheet
?T$ &nd"stand t) 4inancial #$siti$n $4 Cad8&"y Sc)*##s at a !$!nt in ti!=
it is ncssa"y t$ @4"A@ t) :al&s $4 :a"i$&s 4inancial c$!#$nnts. T)s :al&s=
$" 8alancs= a" &sd t$ st $&t t) 5alanc S)t+
8 3alance Sheet shows the relationship between the assets of the business $what the
business owns or is owed%, and the liabilities of the business $what the business owes%.
?
.hen liabilities are taken awa fro" assets this #i)es a fi#ure for net assets, which
pro)ides an indication of the health of the business at a point in ti"e.
&!he followin# is a su""arised *adbur Schweppes 3alance Sheet for /00?. =t sets out
the o)erall structure of the 3alance Sheet, but si"plifies so"e of the indi)idual balances:
& 2ere is a si"ple explanation of the 3alance Sheet:
1. Fi;d assts consist of two "ain ele"ents.
F=ntan#ible 8ssets are ones that help to #enerate wealth for the business o)er ti"e but
don+t ha)e a phsical presence. For exa"ple, a "a,or intan#ible for *adbur Schweppes
is the ((/((( associated with brands that it has acquired, such as 2alls. !he fact that 2alls
is an existin# ((/- (( that consu"ers reco#nise and connect with #i)es *adbur
Schweppes a )aluable asset that will #enerate sales and profits o)er a lon# period.
=nternall #enerated brands, like *adbur 0air 1ilk, are not on the balance sheet as the
ha)e not been purchased at a known cost.
F!an#ible assets are those that exist phsicallG these include the costs of factories and
"achiner used to "ake the products and the offices that the staff works in around the
world.
2. C&""nt assts consist of stock $=n)entories%, trade and other ((/. (( $0ebtors, i.e.
a"ounts of "one custo"ers owe for #oods that the ha)e not et paid for%, and cash.
8fter production, supplies of chocolate and sweets are stored for a short period of ti"e
until a custo"er "akes an order when the are deli)ered to wholesalers and super"arket
chains such as !esco. Stocks are counted as current assets because the are quickl
turned into cash. !esco and others tpicall bu fro" *adbur Schweppes on credit - the
"one owed is counted as a current asset, and the co"pan owin# it is a debtor.
6
.e then deduct the liabilities $see point >% fro" the assets.
(. *urrent liabilities consist of an pa"ents that *adbur Schweppes "ust pa out in
the short-ter" $tpicall under a ear% such as pa"ents to suppliers for cocoa and su#ar.
=n addition, it would include short-ter" borrowin#s and ((//((.
-. Aon-current liabilities consist pri"aril of bank loans, "one owed to e"ploees to
pa their pensions, etc.
.. !he net assets/liabilities fi#ure is then calculated b deductin# the two "ain tpes of
liabilities fro" the two "ain cate#ories of assets.
/. !he final section of the 3alance Sheet shows the a"ount of ((/7 ((. !his is the price
paid b the shareholders for their initial share capital and the ((/0 (( "ade b the
co"pan.
8t the end of /00? the net assets of *adbur Schweppes and thus the ((/1((
$shareholders+ capital% was E/,>00".
&Use t)s *$"ds/#)"ass 4"$! /('/1 to fill the blanks fro" A'I
8 Short-ter" borrowin#s
3 Hoodwill
* ;quit/shareholdersI capital
0 <etained profits
; 7)erdrafts
F <ecei)ables
H ShareholdersI funds
28 hi#h profile brand
= 0ebtors
J B$$d*ill in financial state"ents arises when a co"pan is purchased for "ore than the
book )alue of the co"pan. !he difference between the purchase price and the su" of the
fair )alue of the net assets is b definition the )alue of the K#oodwillK of the purchased
co"pan.
. <ead the text below $n Cas) Fl$* Stat!nts. For 71'00 use the word #i)en in
capitals at the end of so"e of the lines to for" a word that fits in the space in the sa"e
line. !here is an exa"ple at the be#innin# $71%.
51 e.#. stat!nt
=n addition to the 3alance Sheet and =nco"e ((71 ((, *adbur Schweppes
)alues the infor"ation ((72 (( in its Cas) Fl$* Stat!nt. T)is stat!nt
si!#ly sts $&t t) ((7( (( and $&t%$in%s $4 cas) in a 8&sinss d&"in% a
#a"tic&la" #"i$d $4 ti! +%+ $n ya"+ =t shows how the "ain cate#ories of
cash flow ha)e chan#ed the cash balance in particular periods.
=n /00?, *adbur Schweppes achie)ed free cash flow ((7- (( of E/@6 "illion.
*ash flow is )er i"portant to the co"pan because cash ((7. (( the business
to pa its bills, pa di)idends to its shareholders and, in addition, to "ake ((7/
STATE
367CISI7N
C7ME
BENE6ATE
A5LE
DICIDE
@
((. =n recent ti"es *adbur Schweppes has focused on acquirin# new
businesses, increasin# ((77 (( and inno)ation, cuttin# costs, and inte#ratin#
existin# businesses to achie)e its ai"s of hi#her sales ((70 ((, i"pro)ed
operatin# profit "ar#ins and hi#her le)els of free cash flow.
!hrou#h ((71 (( financial "ana#e"ent *adbur Schweppes is able to ((00((
in)est in "akin# sure that custo"ers are supplied with the brands that the
en,o.
ACDUI6E
SELL
B67E
EFFICIENCY
C7NTINUE
JJJJ
C$ncl&si$n $4 s!ina" acti:ity:
&*adbur Schweppes prepares financial state"ents because:
L8s a listed co"pan, it is le#all required to do so.
L*adbur Schweppes wants to co""unicate a true and fair picture of the financial state
of the co"pan to its shareowners and external analsts.
F !he co"pan )alues transparenc and honest and ai"s to reflect this in all its
co""unications, both internall and externall.
F *adbur Schweppes won the *o""unication of *orporate Strate# 8ward at the
4ricewaterhouse*oopers +3uildin# 4ublic !rust+ awards in /006. !his publicl reco#nised
the hi#h standards of the co"pan+s reportin#: +a hi#hl accessible o)er)iew of its short-
ter" strate#, "a,or "arkets and "easurable tar#ets.+
Cadbury Schweppes Case Study page 6
?F$&" 6as$ns
!he reasons wh businesses keep accounts for these users can therefore be su""arised
as:
1. !o co"pl with le#al and other require"ents e.#. Stock ;xchan#e listin# rules.
/. !o pro)ide infor"ation for stakeholders about financial perfor"ance and )iabilit.
>. !o pro)ide "ana#ers with infor"ation for decision "akin#.
?. !o pro)ide a structure to business acti)it based on the careful processin# of nu"erical
data.
4ublic li"ited co"panies like *adbur-Schweppes and 4olestar produce an annual report
includin# a set of financial state"ents. !hese state"ents are produced in line with a
nu"ber of UM and international accountin# standards, and pro)ide users with a clear
picture of business perfor"ance o)er the pre)ious ear $throu#h the 4rofit and 'oss
8ccount% as well as a clear picture of the financial position of the business at the end of
the financial ear $in the 3alance Sheet%.
Financial state"ents "ust pro)ide a true and fair description of the financial position of a
co"pan in line with accountin# standards.

****
5
A WOR O! W"SO#$
&N= ne)er #et the accountants in before = start up a business. =t+s done on #ut feelin#,
especiall if = can see that the are takin# the "icke out of the consu"erN.
<ichard 3ranson
&N=t has been " experience that co"petenc in "athe"atics, both in nu"erical
"anipulations and in understandin# its conceptual foundations, enhances a person+s
abilit to handle the "ore a"bi#uous and qualitati)e relationships that do"inate our da-
to-da financial decision-"akin#.N
8lan Hreenspan
&N!here+s no business like show business, but there are se)eral businesses like
accountin#N.
0a)id 'etter"an
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