Introduction To Accounting of British Airways And The Easy Jet

Question: Describe and analyse the role of accounting information in a business context. Analyse a set of financial statements including balance sheet, profit and loss accounts and cash flow statements. Demonstrate the relationship between accounting data and financial planning and resource allocation decisions. Answer: Introduction Financial statement analysis refers to the process of scrutinizing and evaluating financial declarations of a corporation in a bid to arrive at better economic decisions. The analysis of the financial declarations can help the owners of the business concern as well as other interested users of the financial statements to evaluate the data available from the financial declarations. The present study concentrates on the crucial assessment of the financial declarations as well as analysis of monetary results during a specific period of time by using the important financial ratio. In this particular case, the study draws special reference to the operations of British Airways and Easy Jet Plc. British Airways also popularly known as BA is essentially considered the largest airline in the United Kingdom in terms of the size of the fleet and is the second largest only after Easy Jet in United Kingdom, based on the total number of passenger carried (Britishairways.com. 2016). However, The Ea sy Jet is regarded a low cost carrier (LCA) in Britain that operates in both domestic as well as international services scheduled in 32 different nations (Corporate.easyjet.com. 2016). The financial data that can be accessed from the financial declaration of the two companies British Airways and Easy jet can be analysed for the purpose of understanding the financial conditions of the two firms. Therefore the financial statement analysis of the two firms can help in carrying out a comparative analysis of the financial conditions of the two corporations over a period of three years that is the 2013, 2014 and 2015. In addition to this, the financial statement analysis can help in the providing the users of the financial information with important information regarding key factors that can help in decision making and finally assist in survival of the business. Description and analysis of the role of accounting information in a business context: Comparison of the performance of the companies selected based on these ratios As rightly put forward by Davies and Crawford (2012), there is essentially two factors that can affect the survival of the business. The survival factors include the profitability and the solvency. The profitability of a business concern primarily depends on the capability of a business to generate revenue that is essentially in excess of the total expenses incurred by the corporation. However, the solvency of a corporation mainly refers to the potential of a firm in meeting the requirements of the financial compulsion. The financial statement can also be used to analyse the financial performance and position of a firm and help in prediction of the future performance of the corporation with special orientation to the operations of British Airways and Easy Jet. The comparative analysis by way of the financial statement analysis can be in terms of the intra company basis, intercompany basis and at the same time industry average. The financial ratio can also be classified into five diff erent classers that consist of the profitability ratio, the liquidity ratio, efficiency ratio, market performance test ratio as well as the capitalisation ratio (Eisen 2014) Ratio Analysis Profitability Ratio: Gross Profit Margin As rightly put forward by Harrison, Horngren and Thomas (2013), the gross profit margin refers to a significant profitability ratio that enumerates the percentage of total sales that can surpass the total costs of revenue or n other words the costs of the goods sold. The gross profit margin computes the efficiency of a corporation in utilizing the available materials as well as labours for the purpose of manufacturing and selling the products and services of the corporation effectively. The gross profit margin of British Airways is computed to be 61.13418302 in 2013, 58.08446257 in 2014, and 58.15162272 in 2015 (Britishairways.com 2016). The gross profit margin has decreased during the 2014 and 2015 as compared to the figure registered in 2013. The decrease in gross profit margin over the three years put forwards the fact that the efficiency of the management of the company to generate profit out of the sales of the company y has decreased. Again, the gross profit margin for Easy Jet is recorded to be 21.98215124 in 2013, 23.12789927 in 2014 and 25.86427657 (Corporate.easyjet.com 2016). The gross profit margin for Easy Jet shows a steady increase over the three years. This reflects the fact that the efficiency of the company to generate greater amount of profit out of the sales has increased over the years. However, the gross profit margin of British Airways is comparatively greater than that of the Easy Jet. This implies that the British Airways is superior in terms of the potential of the firm to convert into profit out of the sales (Horngren 2013). Gross Profit Margin British Airways 2013 2014 2015 Gross Profit 426900 441500 458700 Sales 698300 760100 788800 Ratio 61.13418302 58.08446257 58.15162272 Gross Profit Margin Easy Jet Gross Profit 936000 1047000 1212000 Sales 4258000 4527000 4686000 Ratio 21.98215124 23.12789927 25.86427657 Table 1: Gross Profit Margin (Source: Created by Author) Graph 1: Gross Profit Margin (Source: Created by Author) Return on Equity The return on equity essentially represents an important dimension of the profitability of a firm that can enumerate the total profit that the company can create out of the equity of the shareholders of the corporation (Kemp and Waybright 2013). The return on equity of British Airways is registered to be 17.89188665 in 2013, 11.98163734 in 2014 and 20.70904264 in 2015 (Britishairways.com 2016). The return on equity of the firm significantly decreased during the year 2914 as compared to the figure recorded during the year ago period. However the same ratio again registered an increase during the period 2015. This indicates that the efficiency of the firm to generate returns on the invested equity increased during the period 2015. On the other hand, the return on equity of the Easy Jet is recorded to be 18.06627326 in 2013 that again increased to 19.18976546 in 2014 and thereafter to 23.38881776 in 2015 (Corporate.easyjet.com 2016). The increase in the return on equity is a sign of pos itive financial condition of the corporation as the rate of return on equity investments have steadily increased during the period. Again, the return on equity of Easy Jet is comparatively greater than that of the British Airways. Graph 2: Return on Equity (Source: Created by Author) Return On Equity (British Airways) 2013 2014 2015 Profit after interest and tax 123500 78300 132600 Owners Equity 690257 653500 640300 Ratio 17.89188665 11.98163734 20.70904264 Return On Equity Easy Jet Profit after interest and tax 398000 450000 548000 Owner's Equity 2203000 2345000 2343000 Ratio 18.06627326 19.18976546 23.38881776 Table 2: Return on Equity (Source: Created by Author) Liquidity Ratio: Current Ratio: Graph 3: Current Ratio (Source: Created by Author) Current Ratio (British Airways) 2013 2014 2015 Current Assets 446893 390800 409900 Current Liabilities 269545 293800 304400 Ratio 1.657953217 1.330156569 1.346583443 Easy Jet Current Assets 1448000 1261000 1279000 Current Liabilties 1379000 1420000 1768000 Ratio 1.050036258 0.888028169 0.72341629 Table 3: Current Ratio (Source: Created by Author) The current ratio refers to the ability of a corporation to return or pay back the short term obligations in terms of debt (Needles and Powers 2012). The ideal benchmark for particular ratio is 2:1 that reflects the fact that the current assets of a corporation need to be exactly double to that of the current liabilities of a corporation. The corporation that possesses double the current assets in terms of the current liabilities is said to have a favourable or else a desirable financial condition. British Airways recorded a current ratio of the 1.65 during the year 2013. However, the current ratio of the company decreased to 1.3 during the year 2014 (Britishairways.com 2016). Again, the ratio increased during 2015 to 1.34 although insignificantly. On the other hand, the current ratio of Easy Jet is recorded to be 1.05 during the year 2013 that decreased in the subsequent year to 0.88 during the year 2014 and to 0.77 during the year 2015 (Corporate.easyjet.com 2016). The decrease in current ratio of Easy Jet represents an unfavourable condition as the current assets of the company have considerable decreased in comparison to the current liabilities (Needles and Powers 2012). Furthermore, the current ratio of the British Airways is greater than that of the Easy Jet. This indicates that the financial condition of the British Airways is comparatively better than that of the Easy Jet during the particular period although the ratio has decreased over the years. Quick Ratio Graph 4: Quick Ratio (Source: Created by Author) Quick Ratio (British Airways) 2013 2014 2015 Cash and cash equivalents 168160 185200 207100 Current Liabilities 269545 293800 304400 Ratio 0.623866145 0.63036079 0.680354796 Easy Jet Cash and cash equivalents 1013000 424000 650000 Current Liabilities 1379000 1420000 1768000 Ratio 0.734590283 0.298591549 0.367647059 Table 4: Quick Ratio (Source: Created by Author) The quick ratio represents the firms capability to meet up the current liabilities by using the current assets possessed by the corporation except the inventory (Shim, Siegel and Shim 2012). The quick ratio is obtained by dividing the quick assets of the firm by the current liabilities. The quick assets of a business concern essentially consist of the cash and the marketable securities. Based on the financial declaration for the three year 2013, 2014 and 2015, the quick ratio for the British Airways is calculated to be 0.623866145 during 2013, 0.63036079 during 2014 and 0.680354796 during 2015 (Britishairways.com 2016). The results of the ratio analysis reveal the fact that the quick ratio of British Airways have increased during the three years although insignificantly. On the contrary, the quick ratio for Easy Jet is enumerated to be 0.734590283 in 2013, 0.298591549 in 2014 and 0.367647059 in the year 2015 (Corporate.easyjet.com. 2016). The quick ratio of Easy Jet has decreased significantly during the year 2014 and 2015 as compared to the year 2013. The decrease in the quick ratio indicates an unfavourable condition as it reflects the fact that the quick assets are comparatively greater than the current liabilities (Warren, Reeve and Duchac 2013). The lower ratio implies a decrease in liquid position and an undesirable financial condition. The quick ratio of Easy Jet is comparatively higher than that of the Easy Jet during 2013. However, the quick ratio of British Airways is higher than that of the Easy Jet during the years 2014 and 2015. Therefore, the financial condition of British Airways is comparatively better than that of Easy Jet based on the outcomes of the quick ratio. Efficiency Ratio Receivable turnover ratio As rightly indicated by Warren, Reeve and Duchac (2013), the accounts receivable turnover ratio is essentially computed by dividing the overall annual sales of the corporation by the average receivable balance of the corporation during a specific period of time. In other words, this particular ratio also represents the efficiency of the firm to collect the receivables effectively (Deegan 2013). The receivable turnover ratio of British Airways is recorded to be 63.75085923 in 2013. The ratio of British Airways increased to 65.6433364 during 2014 and thereafter the ratio again declined to 64.45803753 in 2015 (Britishairways.com 2016). The decrease in the ratio during the year 2015 reflects the fact that the company isles frequently collecting the receivables during the year 2015 as compared to the year ago period. Again, the asset turnover ratio of Easy Jet is registered to be 11.14372945 in 2013, 8.869008173 in 2014 and 9.346991037 in 2015 (Corporate.easyjet.com 2016). The asset turno ver ratio for Easy Jet first decreased during the year 2014 as compared to the figure registered during 2013. However the figure also increased to 9.346991037 during 2015 from 8.86900 in 2014. The asset turnover ratio of British Airways is therefore higher than that of the Easy Jet that in turn reflects a better financial condition of the British Airways. Graph 5: Receivable turnover Ratio (Source: Created by Author) Receivable Turnover Ratio 2013 2014 2015 (British Airways) Receivables 121965 136700 139300 Credit Sales 698300 760100 788800 Ratio 63.75085923 65.6433364 64.45803753 (Easy Jet) Receivables 130000 110000 120000 Credit sales 4258000 4527000 4686000 Ratio 11.14372945 8.869008173 9.346991037 Table 5: Receivable turnover Ratio (Source: Created by Author) Asset Turnover Ratio Graph 6: Asset Turnover Ratio (Source: Created by Author) Asset Turnover Ratio British Airways 2013 2014 2015 Net Sales 698300 760100 788800 Average Total Assets 1030668 1010300 1029000 Ratio 247.2954433 274.6080372 279.797862 Asset Turnover Ratio Easy Jet Net Sales 4258000 4527000 4686000 Average Total Assets 4412000 4482000 4828000 Ratio 352.2597461 368.6646586 354.2647059 Table 6: Asset Turnover Ratio (Source: Created by Author) Asset turnover ratio represents the efficiency of different corporations to employ assets. This ratio refers to the ability or else the efficiency of the usage of the assets possessed by the firm to generate revenue out of the sales (Vogel 2014). The asset turnover ratio is primarily computed by dividing the total sales of the firm by the average assets and then multiplying the same by 365 days (Watts 2013). The asset turnover ratio for British Airways is recorded to be 247.2954433 in 2013, 274.6080372 in 2014 and 279.797862 in 2015. The increase in assets turnover ratio reflects the fact that the company is utilizing the assets effectively (Britishairways.com 2016). On the other hand, the asset turnover ratio of Easy Jet is registered to be 352.2597461 in 2013, 368.6646586 in 2014 and 354.2647059 in 2015 (Corporate.easyjet.com. 2016). This ratio of Easy jet has decreased during 2015 as compared to the year ago period indicating an unfavourable condition. The asset turnover ratio of Easy Jet is better than that of the British Airways and indicates greater efficiency of the company in comparison to the other. Use of ratio for financial planning and resource allocation purposes The examination of financial announcements by making use of the important ratio is vital for understanding the financial information of the corporation, identifying with the existing financial trends that are visible over a specific period and evaluating the overall financial circumstances of the business unit. Again, the ratio is a marker of different financial inclination and tendency of a firm. The pecuniary managers of both the companies British Airways and Easy Jet can extort significant information that is available from diverse financial propensities that allows appropriate execution of dissimilar financial tactics and amendment of the current financial strategies (Weil et al. 2013). Furthermore, the managers of the two organizations British Airways and Easy Jet can employ the receivable turnover ratio and other asset turnover ratio with the intention and purpose of evaluation of the extent of competence of the two organizations in exploitation of the obtainable resources (Davies and Crawford 2012). Again, the turnover ratio aids in gaining a deep understanding as regards the financial state of the corporation and analyse the reasons that lead to both the increase or decrease in the overall ratio of the two corporations British Airways and Easy Jet. The increase in the inventory ratio implies that the management of both the corporations need to re-examine the overall budget set by the managers for the inventory. This is so because the corporation can miss an opportunity of the sales because of recurring stock-out of the firm. Additionally, the managers in the finance department of the two companies can utilize the cash in addition to the liquidity ratio with the intention of determination of the total amount of investment. Conclusion and recommendations The above study helps in gaining a clear overview regarding the evaluation of the financial condition of British Airways and the Easy jet. Finally, it can be said that the ratio analysis helps in acquiring inclusive understanding concerning the financial state of affairs of both British Airways and Easy Jet. However, the present study also helps in acquiring thorough understanding regarding the financial circumstances based on the outcomes of the ratio analysis. The findings of the result reflect the fact that the British Airways has superior profitability in comparison to the financial condition of Easy Jet during the period 2013, 2014 as well as 2015. Again, the liquidity ratio of British Airways is also greater than that of Easy Jet reflecting higher potential of the firm to meet the current liabilities. However, on the other hand, the ratio analysis reveals the fact that Easy Jet has greater efficiency in terms of the British Airways. References Britishairways.com. 2016.Book Flights, Holidays Check In Online | British Airways. [online] Available at: https://www.britishairways.com [Accessed 26 Jul. 2016]. Corporate.easyjet.com. 2016.easyJet plc. [online] Available at: https://corporate.easyjet.com [Accessed 26 Jul. 2016]. Davies, T. and Crawford, I. 2012.Financial accounting. Harlow, England: Pearson. Deegan, C., 2013.Financial accounting theory. McGraw-Hill Education Australia. Eisen, P. 2014.Accounting. Harrison, W., Horngren, C. and Thomas, C. 2013.Financial accounting. Boston: Pearson. Horngren, C. 2013.Financial accounting. Frenchs Forest, N.S.W.: Pearson Australia Group. Kemp, R. and Waybright, J. 2013.Financial accounting. 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