Company Annual Report: Four Key Financial Statements Assessment Answer

1. The Annual Report of the Company Includes the following four Financial Statements

• Cash flow statement: This reflects the flow of cash and equivalents for a specific period of time. It includes items such as operating cash flows, financing cash flows and investing cash flows.
• Statement of change in equity (SOCE): This shows the change in equity over a specific period of time. It includes items such as dividends paid, the difference in retained earnings and equity withdrawals (IFRS, 2023).
• Income statement: It is a statement that shows companies' revenues, expenses and profit and losses over a specific period, usually a year. It involves items such as sales, operating expenses, cost of goods sold, taxes and interest.
• Statement of financial position: It shows the company's financial position in terms of liability, equity and assets at a specific point in time. It includes items such as inventory, account payables, loans, share capital, retained earnings, etc (PWC, 2020).

2. The Computation of the Net Income for the Year is as Follows

Hence the net income of Computron for the year was $ 1.5 million

Net cash flow is calculated as a composition of cash flow generated from all the activities, which are as followed

Operating cash flow = Cashflow from operating activity + Cashflow from financing activities + Cashflow from investing activities

The calculation of NOPAT is as follows:

NOPAT = Operating income  * (1-Tax rate)

= $ 4 million * (1 -  0.25)

= $ 3 million

Hence, non-operating profit after tax for the year was $ 3 million.

1.  The net operating working capital calculation is as follows:

The calculation for total net operating capital is as followed:

The formula for calculating free cash flow is NOPAT - Operating capital

Net investment in operating capital is

Free cash flow is

The five uses of free cash flow are as followed:

• Investment in research and development: The allocation of free cash flow in research can direct the development of innovative offerings, which can create an opportunity for future expansion and growth. This will also allow the company to take advantage of the competition.
• Dividend payment: Distribution of Free cash flow as a dividend will develop investors' confidence and attract investment (CFA Institute, 2023).
• Repurchasing of shares: It will reuse the number of shares outstanding and increase the EPS.
• Capital expenditure: Investing in capital expenditure such as upgradation, and expansions of production facilities which alternatively impact the organisation's productivity and can result in savings of cost.
• Repayment of debt: It will help in reducing the interest expenses and accelerate the financial health of the company.

Economic value added is a measure of financial performance that helps in determining the excess value created by the company with respect to its cost of capital.

The calculation of Economic value added is as follows:

Market value added describes the difference between the market value of the company and the total capital invested . As per the given information MAV will be equal to:

Return on capital invested (ROIC ): It is used as a measure of companies investment profitability.

ROIC = Net operating profit after tax / total operating capital

ROIC = $ 3 million/ $ 25 million

ROIC = 0.12 or 12 %

References

CFA Institue (2023). Free cashflow valuation. Retrieved from: https://www.cfainstitute.org/en/membership/professional-development/refresher-readings/free-cash-flow-valuation

IFRS (2023). IAS 1: Presentation of financial statement. Retrieved from: https://www.ifrs.org/content/dam/ifrs/publications/pdf-standards/english/2022/issued/part-a/ias-1-presentation-of-financial-statements.pdf?bypass=on

PWC (2020). Basic understanding of companies' financial statements. Retrieved from: https://www.pwc.com/jm/en/research-publications/pdf/basic-understanding-of-a-companys-financials.pdf

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