1.

Financial Statement Analysis Case

Vodafone Group plc. Vodafone is based in the United Kingdom. Selected data from
Vodafone’s 2012 annual report follows (pounds in millions).

2012 2011 2010

Revenues £46,417 £45,884 £44,47
Gross profit % 32.04% 32.84% 33.80%
Operating profit £11,187 £5,596 £9,480
Operating cash flow less capital expenditures 8,459 9,173 9,145
Profit (loss) 7,003 7,870 8,618

In its 2012 annual report, Vodafone states, “Our leading performance is based on 3 core
strengths ........ The successful implementation of our strategy to generate liquidity or free cash
flow from non-controlled interests.”

Instructions
(a) Compute the percentage change in sales, operating profit, net cash flow, and net earnings
from year to year for the years presented.
Answer :
Change (%,yoy) Change (%,yoy)
2012 2011 2010
2012 2011
Revenues £ 46,417 £ 45,884 £ 44,470 1.16% 3.18%
Gross profit % 32.04% 32.84% 33.80% -2.44% -2.84%
Operating profit £ 11,187 £ 5,596 £ 9,480 99.91% -40.97%
Operating cash flow less capital expenditures £ 8,459 £ 9,173 £ 9,145 -7.78% 0.31%
Profit (loss) £ 7,003 £ 7,870 £ 8,618 -11.02% -8.68%

(b) Evaluate Vodafone’s performance. Which trend seems most favorable ? Which trend
seems least favorable? What are the implications of these trends for Vodafone’s strategy ?
Explain.
Answer :
Based on the percentage change in sales, the most favorable trend is from 2011 to 2012
because operating profit and revenues increased even though the profit (loss) and OCF
decreased but still in the positive result. In addition, the least favorable trend is from
2010 to 2011 because operating profit and profit (loss) decrease even though the OCF
and revenue increase but not really significant.
Based on one of the 3 core strengths owned by Vodafone “The successful
implementation of our strategy to generate liquidity or free cash flow from non-
controlled interests'' it's just that in reality what happened to Vodafone was a decrease
in profit from the previous year.
2. Accounting, Analysis, and Principles

The Amato Theater is nearing the end of the year and is preparing for a meeting with its
bankers to discuss the renewal of a loan. The accounts listed appeared in the December 31,
2015, trial balance as follows :

Debit Credit
Prepaid Advertising £ 6,000
Equipment 192,000
Accumulated Depreciation—Equipment £ 60,000
Notes Payable 90,000
Unearned Service Revenue 17,500
Service Revenue 360,000
Advertising Expense 18,680
Salaries and Wages Expense 67,600
Interest Expense 1,400

Additional information is available as follows.

1. The equipment has an estimated useful life of 16 years and a residual value of £40,000 at
the end of that time. Amato uses the straight-line method for depreciation.
2. The note payable is a one-year note given to the bank January 31 and bearing interest at
10%. Interest is calculated on a monthly basis.
3. The theater sold 350 coupon ticket books at £50 each. Two hundred ticket books were used
in 2015. One hundred fifty of these ticket books can be used only for admission any time
after January 1, 2016. The cash received was recorded as Unearned Service Revenue.
4. Advertising paid in advance was £6,000 and was debited to Prepaid Advertising. The
company has used £2,500 of the advertising as of December 31, 2015.
5. Salaries and wages accrued but unpaid at December 31, 2015, were £3,500.
Accounting
Prepare any adjusting journal entries necessary for the year ended December 31, 2015.
Answer :

Dr. Cr.
Depreciation Expenses 9,500
Acc. Depre 9,500
Interest Expense 8,250
Interest Payable 8,250
Service Revenue 10,000
Unearned Service Rev 10,000
Advertising Expenses 2,500
Prepaid Advertising 2,500
Salaries and Wages Expenses 3,500
Salaries and Wages Payable 3,500
33,750 33,750
Analysis
Determine Amato’s income before and after recording the adjusting entries. Use your
analysis to explain why Amato’s bankers should be willing to wait for Amato to complete its
year-end adjustment process before making a decision on the loan renewal.
Answer :

Before After
Dr. Cr. Dr. Cr.
Revenue 360,000 370,000

Depreciation Expense 9,500

Interest Expense 1,400 9,650
Advertising Expenses 18,680 21,180
Salaries and Wages Expenses 67,600 71,100
Total Expenses 87,680 101,930
Net Income 272,320 258,570
Amato’s bankers should be willing to wait for Amato to complete its year-end
adjustment process before making a decision on the loan renewal because there are
slight differences in expenses tha affects the results (net income).

Principle
Although Amato’s bankers are willing to wait for the adjustment process to be completed
before they receive financial information, they would like to receive financial reports more
frequently than annually or even quarterly. What trade-offs, in terms of relevance and faithful
representation, are inherent is preparing financial statements for shorter accounting time
periods ?
Answer :
Increased Relevance:
Shorter periods provide users with more recent information, allowing for quicker
assessment of performance and financial health. Analyzing trends over shorter periods
can be easier, highlighting potential issues or opportunities earlier than annual reports
might.

Decreased Faithful Representation:

Accruing and estimating revenue, expenses, and other items becomes more critical for
shorter periods, as transactions may not be fully completed within the timeframe. This
can lead to inaccuracies if estimations are not precise.
Due to the shorter timeframe, some information might not be readily available, leading
to incomplete or preliminary statements.