Accounting in

Organisations & Society

Group Report Part A
Understanding Financial Reports and Notes to the
Financial Statements

Lecture: Justin

GROUP 8

Nguyen Thao Uyen S3741238

Lam Nhut Quan S3777202

Hoang Ngoc Minh Thu S3634229

Task I: Understanding financial statements’ items 3

The Income statement 3

The Balance Sheet 4

Statement of Cash flows 5

Statement of changes in Equity 5

Task II: Understanding financial statements’ items 7

Question 1: Describe the principal activities of the company 7

Question 2: According to the report, what is the objective of the remuneration

committee? 7

Question 3: How is inventory measured? Identify the note (number) that deals with this. 7

Question 4: Who is the Chairman of the Board of Directors? Explain the roles and responsibilities
of the Board of Directors as described in the annual report. 9

Question 5: Name the Audit partnership responsible for performing the audit of the company.

Explain why the auditor must declare their independence (according to the annual report), and
also explain why the financial statements must be audited by an external party. 9

References 9

Chosen Company:

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Task I

The Income statement

General purpose Diageo

The income statement is defined as the firm’s Diageo profitable income statement as all the
main financial performance that determines the “income” such as sales, net sales, gross profits
company is maintaining profitability, sustain or and assets increase more sharply than the
losses through the information like revenues, “expanse” such as taxation, excise duties,
expenses, and earning (Fridson & Fernando finance charges, and liabilities when compared
2011). between 2019 and 2018.

The company is profitability when Increase Income

- The income increases while expanses The main revenue of Diageo is the net sales
which maintains the growth over three years.
decreases; or
- The increase of income is over the This growth is due to the increase of
retranslation to actual exchange rates, it was
expanses
minus £67 million in 2018 but in 2019, it adds
to £351 million.
And vice versa for the loss.

Slightly increase in expenses

The expenses for the operations costs slightly

raise over years.

The raising of marketing cost shows the

company concerns on increase brand value for
long-term development. The effective marketing
investment resulted in the increase of sales.

Conclusion, the increase of income is over the

expenses that the income statement presents that
the company is profitability.

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 The Balance Sheet

General purpose Diageo

The balance sheet is a statement of financial The balance sheet of Diago clearly proved three
position of a company in the annual report basic statements:
which detailed covering assets, liabilities, and
- Non-current and current assets
net equity in a point time (RMIT AOS lecturer
- Current and non-current liability
slide week 9).
- Equity.

This provides a snapshot of the firm's financial Debt-to-equity ratio (D/E):

activities shows what the company owns and
In 2019, the D/E gap between liability and
owes (Waxman eds 2018) and the value of the
equity is large as the liability is £10,984 million
company (Silva D 2019).
more than equity. Comparing with 2018, D/E
increases more £4,695 million.

=> The high D/E:

- Related to the high risk of ability to

cover all depts in the worse case
- Shows the company focus on the
financial growth with debts.

Retained earnings:

Equity stakeholders decrease in comparison

with 2018 due to the decrease of retained
earnings.

This shows the company has reduced the

reinvestment and increase the dividends
(Peavler 2019).

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 This shows that company has been maintaining
the good performance recently so that they
change the strategy to focus on attracting
investors by increasing dividends.

Statement of Cash flows

General purpose Diageo

The term “cash flow statement” may refer to a The annual report of Diageo has clearly pointed
projected (budgeted) cash flow statement or a out the cash flow statement of this company
historical cash flow statement (Goosen 1998). through operating activities, investing activities
and financing activities within 3 years, from
In details, the statement of cash flows of a report
2017 to 2019. Overall, the net cash outflows
is providing the details of the cash inflows and
from both financing and investing activities are
outflows of an organization. It also points out
lower than the outflow of net cash used in
the performance of a company in managing cash
operating activities.
position, meaning how well the company makes
cash to pay its obligations and fund its operating
expenses.
The net cash and cash equivalents over the 3
The statement of cash flows also shows the year have declined rapidly from £917 million to
information that is not directly available from £721 million. In 2019, there was a slightly
the balance sheet or the income statement decreased in bank overdrafts and in term of cash
(RMIT AOS lecturer slide week 10). and cash equivalents, it also fell significantly.
This statement is the result of the following
reasons:

Cash flows from operating activities is the Cash flows from operating activities: net cash
amount that run the operation. It directly related inflow from operating activities in 2019 was
to the current assets such as income or taxes higher than 2017 because the inventories of
Diane was increased higher than ever, around

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 £434 million and 2 times higher compared to
2017. Furthermore, tax also takes a key element
that take much money in operating activities.

Cash flows from investing activities related to Cash flows from investing activities: the figure
non current assets including purchase of in 2019 was much lower in 2017 and 2018.
property, plant and equipment. Although Diageo still spent their money to
purchase of property, plant and equipment and
computer software, their sale condition turns the
whole picture when the number of sales in 2019
much higher than the previous 2 year.

Cash flows from financing activities is related to Cash flows from financing activities: most of
upgrade the scale of business, usually prefer to the money was invested in share buyback
proceeds from issue of shares or proceeds from program, dividends paid to non-controlling
borrowings. interests and purchase shares of non-controlling
interests.

Statement of changes in Equity

General purpose Diageo

Equity is the residual interest in the assets of the Based on the Diageo annual report, overall, the
entity after deducting its liabilities. For a total equity in 2016 had no different with the
company, equity might be made up of number of number in 2019 which means Diageo still keep
components, including the following accounts: track and balance its total equity. Although there
Contributed equity, reserves, and retained was a slight growth in profit, the total equity
earnings (RMIT lecturer slide week 9) still remain because of the hedging and
exchange reserve takes a huge amount among
the total equity.

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Task II

Question 1

Diageo is the world’s biggest alcoholic beverage production. Diageo’s principal activities are
producing approximately 240 million alcohol beverage units from 150 manufacturing sites around the
world and selling these products in over 180 countries. Their products were separated into 200
outstanding brands with different prices and categories to meet consumer demand.

Question 2

Currently, the first objective is to hold, attract and motivate all the best global talent by providing
market competitive and cost-effective benefits. Secondly, to focus on key financial metrics and people
who had contributed to the company's performance through annual incentive. Thirdly, to transport
remarkable long-term returns to shareholders by long-term incentives. Lastly, to protect the alignment
of the company’s executive directors and shareholders.

Question 3

Inventories are measured by raw materials and consumables, work in progress, maturing inventories,
finished goods and goods for resale. Following accounting policy, inventories are measured at a lower
cost and net realizable value. Diageo has recorded inventories on the current assets section in their
consolidated balance sheet because inventories can be converted into cash within a year.

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(Extracted from Diageo annual 2019, page 141)

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(Extracted from Diageo annual 2019, page 114)

Question 4

Javier Ferrán is the chairman of the Board of Directors. According to Hillman and Dalziel (2003),
there are two main roles that the Board have which are controlling the organization and providing
access to resources. About Diageo, the role of the board is to build up sustainable success of Diageo
as well as deliver value for shareholders in the long-term. And, their responsibility is to ensure Diageo
maintain the standard of high ethical behavior and corporate governance.

Question 5

Diageo is a partner with PricewaterhouseCoopers LLP (PwC) for auditing their company. According
to The International Organization of Securities Commissions’ Objectives (2002), auditors must be
independent in both fact and appearance in auditing their client company to provide an accurate and
useful financial information to numbers of users for decision-making purposes. An external auditor's
main role examine the financial statement of their client company through give their professional
opinion on whether the company is present a fair view of the company to increase the confidence
level in the financial statement (PwC 2017). In particular, PwC report that Diageo has given an
accurate view of its financial position under the International Financial Reporting Standard (IFRSs).
Thus, because of this role and they must declare independence, financial statements must be audited
by external auditors to provide users an assurance.

References
‘A Statement of the Technical Committee of the International Organization of Securities
Commissions’ 2002, Principles of Auditor Independence and the Role of Corporate Governance in
Monitoring an Auditor’s Independence, viewed on 17 December 2019,
<https://www.iasplus.com/en/binary/iosco/iosco2.pdf>.

‘Understanding a financial statement audit’ 2017, PwC, viewed 18 December 2019,

<https://www.pwc.com/im/en/services/Assurance/pwc-understanding-financial-statement-audit.pdf>.

Diageo 2019, Annual report 2019, company report, Diageo group, viewed 15 December 2019,
<https://www.pwc.com/im/en/services/Assurance/pwc-understanding-financial-statement-audit.pdf>.

Fridson, Martin, S & Fernando Alvarez, ‘Financial Statement Analysis : A Practitioner's Guide’, John
Wiley & Sons, Incorporated, 2011. ProQuest Ebook Central,
https://ebookcentral.proquest.com/lib/rmit/detail.action?docID=693253.

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Fridson, M-S & Alvarez, F 2011, ‘Financial Statement Analysis : A Practitioner's Guide’, John Wiley
& Sons, Incorporated, New York, viewed on 16 December 2019, ProQuest Ebook Central,
<https://ebookcentral.proquest.com/lib/rmit/detail.action?docID=693253>.

Goosen, K-R 1998, ‘March. Cash flow statements: are they important in business simulations?’, In
Developments in Business Simulation and Experiential Learning: Proceedings of the Annual ABSEL
conference, viewed 18 December 2019, Vol. 25.

Hillman, A-J & Dalziel, T 2003, ‘Boards of directors and firm performance: Integrating agency and
resource dependence perspectives’, Academy of Management Review, viewed 18 December 2019,
<file:///C:/Users/ROG%20Gaming/Downloads/c32497.pdf>.

Peavler, R 2019, ‘Retained Earnings Are Important, but How They're Used Is Critical’, the balance
small business, viewed 19 December 2019,
<https://www.thebalancesmb.com/what-are-retained-earnings-393324>.

RMIT University Vietnam 2019, ‘Week 10: General Purpose Financial Statements - Further
Consideration of The Income Statement, The Statement of Changes in Equity, and The Statement of
Cash Flow’, ACCT 2105 Accounting in Organisations & Society, viewed 18 December 2019, RMIT
University Library.

RMIT University Vietnam 2019, ‘Week 9: General Purpose Financial Statement - Further
Consideration of The Balance Sheet’, ACCT 2105 Accounting in Organisations & Society, viewed 18
December 2019, RMIT University Library.

Silva, D 2019, ‘How to read and analyze a balance sheet’, smartasset, viewed 19 December 2019,
<https://smartasset.com/investing/balance-sheet>.

Waxman, K-T (ed.) 2018, ‘Financial and Business Management for Doctor of Nursing Practice’, 2nd
edn, Springer Publishing Company, New York, US, viewed 18 December 2019,
<https://books.google.com.vn/books?id=7S4oDwAAQBAJ&lpg=PA185&ots=yM8voJhCl_&dq=the
%20balance%20sheet%20is%20a%20snapshot%20of%20the%20organization%20at%20a%20point%
20in%20time&hl=vi&pg=PA185#v=onepage&q=the%20balance%20sheet%20is%20a%20snapshot%
20of%20the%20organization%20at%20a%20point%20in%20time&f=false>.

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