ACCOUNTING

Nichols and Diageo



Nichols and Diageo

Requirement 1

We are assessing the financial statement of two companies for the financial period of 2010 (year ended on 30th June) Diageo and Nichols Plc financial reporting period of 2010 (year ended on 31st December).



Requirement 2

Diageo

The financial statements are prepared on a going concern basis under the historical cost convention, modified to include revaluations to fair value of certain financial instruments, in accordance with the Companies Act 2006 and UK GAAP.

Nichols Plc

The financial information set out in this report does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The group's statutory financial statements for the year ended 31 December 2009, prepared under IFRS, have been filed with the Registrar of Companies.

Requirement 3

Both companies were using similar policies and accounting treatments in the preparation of their statements, such as using the straight line depreciation method for PP&E and leases. However, one difference in accounting treatment that I was able to find was in the two companies' inventory valuation system. Diageo inventory cost is calculated on an actual usage basis for maturing inventories and on a first in, first out basis for other inventories. Nichols inventory cost is calculated on a first in, first out basis for all inventories.

Requirement 5

Profitability Ratio

Diageo

Nichole

2010

2009

2010

2009

Gross Profit Margin

0.19

0.19

0.49

0.49

Net profit Margin

0.17

0.16

0.17

0.16

ROCE

0.16

0.15

0.43

0.41

ROA

0.13

0.13

0.29

0.28

Asset turnover

0.66

0.68

1.66

1.91

ROE

0.46

0.51

0.49

0.48

ROS

0.17

0.16

0.17

0.16

WC turnover

4.3

5.9

4.5

4.8

ROA

To calculate the ROA, divide the net income for a given time period by the total assets. The return on assets ratio illustrates how well companies utilize their assets to make profits. The higher the ratio, the more effectively the organization uses its assets to generate revenue (Wild, 2001). Nichols return on assets has increased by 1% in 2010 from 28% to 29%. This figure further emphasises the Nichols strong efficiency in converting its investment into profit. The higher figure shows that it earns more money on less investment. Diageo on the other hand, did not have any change in its ROA which has remained 13%, more than half of Nichol's. This goes together with the ROCE figures to support that Diageo did not see a great change in its resource management and efficiency.

ROCE

Return on equity capital indicates that how much company earns for its shareholders. High ROCE attracts investor to invest in the company. ROCE is calculated dividing net profit by equity capital, and it is represented in percentage form (Temte, 2004). Nichols ROCE had increase from already a very high figure of 41% to 43%. Diageo figure increased by only 1% to 16% in 2010. Both companies show stable and consistent trend on increase ROCE, but Nichols high ROCE reflects a much stronger use of its capital resources.

ROE

To calculate the ROE, divide the net income for the time period by the total equity figure. The return on equity ratio helps stakeholders determine how effectively the organization utilizes its equity to make a profit (Rodgers, 2005). Nichols has a very high ROE in 2009 0f 48% which remained stable and increased by 1% in ...