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Accounting analysis

Quality Disclosure of Freedom Foods Group Limited

After conducting a careful study of the financial statements of Freedom Foods Group Limited it was observed that the account managers and the internal auditors have adhered to the accounting rules and standards stated under the international accounting financial standards. The accounting reports have covered every aspect of the company’s business and the figures have represented the organization’s financial position and performance appropriately. The consolidated statement of financial position (balance sheet) and the consolidated statement of income are easy to understand and interpret. This is because the terminologies used to depict the financial figures are appropriate and they adhere to the standards set by the international accounting standards board. The company has reported the tangibles and the intangibles appropriately which in turn makes it easy for analysts to make a proper assessment of the company’s financial performance.

Freedom Goods Group Limited’s financial reports provide a robust foundation for analysts to incorporate data into other frameworks so that the company’s financial position can be appropriately adjudged. This paves way for an elaborate financial analysis whereby financial ratios can be calculated which in turn will indicate the company’s financial performance over the last few years. This illustrates that the managers of Freedom Foods Group Limited believe in conducting transparent business by providing quality disclosure of their financial figures to the stakeholders. This will help investors and other equivalent players in the market to assess the company’s financial performance and make an informed judgment regarding whether or not to invest in the company. However, the researcher has identified certain areas within the financial reports of Freedom Foods Group Limited that lacks transparency. The managers need to pay close attention to these areas as this information is a critical indicator of a company’s financial performance.

First of all, the income statement of the Freedom Food Groups limited was not categorized properly. The operating expenses and interest expenses were not delineated appropriately which made it very difficult for the researcher to find segregate the interest expenses from the operating expenses. The operating expenses were broken down into several expenses without any proper heading which also made it considerably difficult for the researcher to comprehend the total operating expense of the company. In addition to that, the minority interest of the company was not reported within the balance sheet regardless of the fact that the company had minority interests. Moreover, the interest income of the company was also not revealed within the financial statement of the company. Therefore, it can be said that, despite a strong compliance showed by the accounting managers of Freedom Foods group plc as far as preparing financial statements is concerned, some areas of the financial reports lacked transparency. Nevertheless the accounting managers of the company have given their best effort to give a transparent representation of the company’s financial performance.

Red Flags

The researcher was able to identify two red flags corresponding to Freedom Foods Group Limited’s financial position after conducting a careful study of the company’s financial statements. Firstly, it was seen that the accounts receivable of the company increased drastically over the last three years starting from 2011. This has been considered as a red flag because the growth rate of this accounting factor is considerably superior to the company’s sales growth rate. This gives an indication of the fact that the managers are making bad sales to customers or companies who are not creditworthy or are unable to pay their debts. This might have contributed to the unprecedented augmentation in the company’s accounts receivable over the past three years.  This also indicates that that the accounting managers of Freedom Foods Group Limited may have been booking the revenues within their accounts ahead of time (Weetman, 2008). This is one of the major signs of accounting manipulation and therefore has been considered as a red flag.

The reported reserves can also be considered as another red flag because this figure affects a company’s yearly income significantly. Companies normally keep a reserve in order to compensate for losses incurred due to merger and acquisition failures, bad account receivables and so on and so forth. Therefore, having a large credit balance reserve in the company accounts will affect the net income severely. Accounting managers have often been found to have converted a massive proportion or all of its reserve balances into net income with the underlying aim of making the company look more prospective in front of the investors so that the latter can be influenced to make more investments (Vandyck, 2006). This might happen in case of Freedom Food Groups Limited and that is why it has been considered as a red flag.

Financial Analysis

Operating management

Year

2014

2013

2012

Margin (Sales-COGS)

35,203,000

28,400,000

17,588,000

EBIT margin

15.12%

23.48%

8.71%

Operating efficiency

38.30%

73.52%

28.79%

Production efficiency

39.48%

31.94%

30.25%

As is evident from the operating management ratios of Freedom Foods Group Limited, the company’s gross margin increased gradually from $17.58 million in 2012 to $28.40 million in 2013 (Freedom Food Group Limited, 2012; 2013). Thereafter the value increased steadily to $35.20 million in year 2014 (Freedom Food Group Limited, 2014). This indicates that the managers were able successfully execute their sales strategies which in turn boosted the company’s sales. In addition to that the managers were able to reduce the company’s cost of goods sold as a result of which the margin increased substantially (Weetman, 2008).

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