Corporate Reporting and Decision Making

Lessons

The primary method for accessing WBS course materials is online via my.wbs.

This content was last updated on December 23rd 2024 at 11:12 PM.

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Module introduction
Welcome to the Corporate Reporting and Decision Making module. Understanding the financial numbers is an essential skill in business and
this module is therefore designed to help you do just that. The intention is not to turn you into accountants (there are perhaps enough of those
around already) but to enable you to have sensible discussions about financial matters.

One key focus of the module is to learn how to make sense of a company's annual report, to do this we will look at various financial statements
and give you some tools that will help you to understand what is happening in the company from a financial perspective. This will enable you to
know what questions to ask and what the answers might mean, as well as giving you the ability to do some financial analysis of your own. We
will also look at a range of accounting techniques that are useful in making both short-term and long-term decisions within the company or
organisation you work for.

The course assumes no prior knowledge, so if you are feeling nervous about dealing with complex numbers, don't worry, as we will keep the
'arithmetic' as easy as possible. Please be assured that there are many fellow students who might feel as nervous as you! We understand this
and will do everything we can to make your journey through this module as useful and enjoyable as possible.
Teaching faculty

Graham Sara - Module Leader, module author and lead tutor - Senior Teaching Fellow, WBS

Graham has been involved with the MBA at Warwick Business School for over 25 years, originally as a tutor on the
Distance Learning programme and also on the original part-time MBA which was the forerunner of the current course.
Graham has been a Senior Teaching Fellow at Warwick University since 2006. Prior to that he was Head of Accounting
and Head of Educational Partnerships at Coventry Business School but was also involved with the Warwick MBA and
various undergraduate courses for many years. Currently he is also the module leader for the evening MBA module Corporate Reporting
and Decision Making at The Shard. He is a qualified accountant, being a member of both ACCA and CIPFA.

Lisa Weaver - Tutor - Professor of Accounting, WBS

Lisa is professionally qualified (ICAEW ) and has been involved in executive financial education for 25 years. Lisa
specialises in financial reporting and audit, teaching topics ranging from basic financial literacy to advanced courses on
specialist topics for qualified accountants working in practice. Lisa is an expert in corporate reporting, having authored a
practitioner manual on IFRS implementation and she also developed ACCA's global education programme on Integrated
Reporting. Lisa has taught in academia for many years, moving to Warwick Business School in 2017, and is a Senior Fellow of the Higher
Education Academy.

Raffaele Manini - Tutor - Assistant Professor of Accounting, WBS

Raffaele is an Assistant Professor at Warwick business school in the accounting department. He has recently moved to
the UK from Barcelona where he studied for his PhD at the University Pompeu Fabra. His teaching experience is related
to both financial and managerial accounting. In particular, he has taught modules in financial statement analysis,
financial accounting and analysis, cost accounting and budgetary management. His research interests focus on corporate governance, the
impact of international regulations, and financial and non-financial disclosure.

Facundo Mercado - Tutor - Assistant Professor of Accounting, WBS

Facundo has been an Assistant Professor at WBS since 2018. He holds a PhD in Accounting from University Carlos III
of Madrid. During his PhD he was a Visiting Research Scholar at Stephen M. Ross School of Business (University of
Michigan). Prior to that he was Data and Applications Specialist for Thomson Reuters. Currently he is also the module
leader of Research Methods in Accounting for the Msc Accounting & Finance programme. His research interests include
financial reporting and disclosure, with a specific focus on the determinants and consequences of voluntary disclosure and the interaction
between voluntary disclosure and reporting policies.

Zhongnan Xiang - Tutor - Assistant Professor of Accounting, WBS

Zhongnan joined WBS as an assistant professor in accounting in 2022. She was a PhD student at Temple University
before joining the accounting group. Her research agenda centres on corporate disclosure, including financial reporting,
corporate governance, innovation activities, and debt contracting.

Pauline Wu - Tutor - Assistant Professor of Accounting, WBS

Pauline is an Assistant Professor in Accounting . She joined WBS in September 2022. She did her MBA at the
University of Oxford and PhD at the University of British Columbia. She worked at PriceWaterhouseCoopers in Hong
Kong for four years as a senior auditor. Her research interests are auditing, regulations, and machine learning
applications in accounting and finance.
Module objectives
By the end of this module, you will be able to:

demonstrate a comprehensive understanding of the basics of corporate financial information

demonstrate a systematic understanding of the use of accounting information in the context of management decision making and for the
purpose of external publication

demonstrate a comprehensive awareness of the wider professional duties on corporate social reporting and ethical responsibilities of the
preparer of financial statements and other corporate reports to the stakeholders of an organisation

identify, analyse and interpret relevant corporate information to facilitate internal and external decision making

assess the nature of accounting information and be able to describe the relationships between different types of financial statements and
behavioural consequences of accounting decisions

apply key accounting and finance concepts and practices to evaluate business problems

develop and demonstrate analytical, and problem solving skills in relation to key accounting and finance issues.
Module outline
Lesson Topics

What's it all about?

Lesson 1 Introduction to financial statements and terminology

Case study: Ashton & Tate

Where do I start?

Lesson 2 The CORE approach

Business context and overview

The main financial statements

The income statement and balance sheet

wbsLive 1
Ashton & Tate case study discussion
Presenter: Graham Sara

How are we doing?

Lesson 3
Performance ratios

CORE - Context and performance

Performance ratios
wbsLive 2
Discussion of M&S case 2
Presenter: Graham Sara

What's our position?

Lesson 4
Liquidity and solvency ratios

CORE - Liquidity and solvency

Liquidity and solvency ratios

wbsLive 3
Discussion of M&S case 3
Presenter: Graham Sara

Cash flow and the cash flow statement

Lesson 5
Understanding cash

The stock market

Lesson 6
Investment ratio

Cash and investment

wbsLive 4 Discussion of M&S stock market view

Presenter: Graham Sara
 Cost volume profit analysis

Cost behaviour
Lesson 7
Break Even analysis
Case study: Brown Ltd

Capital investment decisions

Lesson 8 Evaluating long-term projects

Case study: Hope Electronics Ltd

Management Accounting

wbsLive 5 Accounting for management decisions

Presenter: Graham Sara

Into the future

Lesson 9 Current developments on accounting

Integrated Reporting

Lesson overview and timings

Below is an overview of the lesson content. This includes a guide time for how long it should take you to complete each lesson. Please note that
these estimated timings are for the average student, and it may take you more or less time depending on your schedule. Note that these timings
do not include the set reading for each lesson or preparation for your assessment.

Lesson 1 Lesson 2 Lesson 3 Lesson 4

Activities include: Activities include: Activities include: Activities include:

Talking point: 2 Talking point: 2 Talking point: 1 Quiz: 2

Quiz: 2 Exercise: 1 Stop and think: 1 Exercise: 1
Exercise: 1 Quiz: 1
Exercise: 1

3 hours 30 mins 2 hours 30 mins 2 hours 45 mins

2 hours 10 mins

wbsLive 1: 90 mins wbsLive 2: 60 mins wbsLive 3: 60 mins

Lesson 5 Lesson 6 Lesson 7 Lesson 8 Lesson 9

Activities include: Activities include: Activities include: Activities include: Activities include:

Talking point: 2 Talking point: 3 Stop and think: 1 Quiz: 3 Talking point: 2
Quiz: 3 Quiz: 2 Quiz: 1 Exercise: 2 Exercise: 1
Stop and think: 1 Exercise: 1 Exercise: 2

2 hours 30 mins 3 hours 2 hours 30 mins 3 hours 10 mins 2 hours 30 mins

wbsLive 4: 60 mins wbsLive 5: 90 mins -

Module assessment
The module will be assessed by the following method:

Individual assignment (100%)

Please see the assessment tab above for further details.

Module reading
The textbooks provided for this module are:

Atrill, P. and McLaney, E. (2021)

Accounting and Finance for Non-Specialists (12th edn)
Harlow, England: Pearson
You can access this text through your VitalSource bookshelf

Rice, A. (2021)
Accounts Demystified (7th edn)
Harlow, England: Pearson
You can access this text through your VitalSource bookshelf

Readings
The readings in this module are divided into set readings, further readings and references.

Completing as much of a lesson's set reading as possible before any wbsLive associated with that lesson will provide you with a wider
understanding of the topics to be discussed and therefore enhance your contribution.

Set readings may be comprised of journal or newspaper articles, working papers or case studies relevant to the topic of that lesson. Direct
links are provided to each item.

The set textbooks for the module will be accessible as an eBook via your VitalSource bookshelf, unless specified otherwise. VitalSource
eBooks can be accessed via the eBook tab on the module homepage. Within each lesson, you will be directed to any specific pages,
chapters or sections that you are expected to read in order to complete that lesson. .

Further readings are optional and are not required reading for the lesson. They have been made available to enable you to continue
reading around the topic if you wish to do so. Where electronic sources are available, these are provided as links.

References are provided for all academic works and published materials cited in the lesson. These are not linked and, if you wish to follow
up on any of these references, you will have to use your own research skills to locate these.

Financial Times subscription

WBS has a subscription to FT.com providing students with free access. You may find that you need to sign up to FT.com before you can view
some of the articles that are referenced in this module. Please select this link and follow the instructions on how to access FT.com (/-
/go/clickthrough/ft/).

The Economist subscription

The University has a subscription to The Economist providing students with free access. You may find that you need to sign up to The
Economist before you can view any content from The Economist that may be referenced in this module. Please register on The Economist
website (https://myaccount.economist.com/s/login/SelfRegister) using your university email address (you will receive a verification email prior
to gaining access).

Copyright
Please note that the readings provided are intended for your own individual study for this module and they are not to be copied, sold, or used for
purposes other than personal study. In each instance, the copyright resides with the publisher or author as stated and not with the University of
Warwick.

Third party content

This module contains third party content we cannot be responsible for. The web is a dynamic place and so we cannot guarantee that all links
will continue to work. If you discover any broken links, please alert us by sending an email to Teaching and Learning enhancement
(mailto:[email protected]%20) or use the 'I found an issue' button in the comments section at the bottom of the affected page.
How to study this module

Skip to section:

Organise your time (#organise)

Interact with others (#interact)

How to get help (#gethelp)

Complete all the activities (#activities)

Complete the end of lesson activities (#endof)

Organise your time

This module is comprised of 9 online lessons, 5 wbsLive sessions (totalling 6 hours of contact time), set reading and self-directed study time.
You should aim to have at least read through the relevant online lesson content before attending the associated wbsLive session as this will
give you the opportunity to engage in informed interactive discussions. It is recommended that you set aside time each week to enable you to
work through the online lesson content and associated set reading. Although everyone studies at a different rate, as a rough guide you should
allow around 2-3 hours per week to work through the online lessons, not including the set reading.

To help you keep track of your progress you can mark each page complete when you finish it.

Interact with others

This module is intended to be highly interactive. You will benefit most from it if you interact with others by adding your own thoughts and reading
and responding to comments from other students on the module. We call these activities 'talking points':

Talking point

Talking point

Talking points encourage you to interact with other students using the comments feature at the bottom of each page. You
can add your own comments, indicate agreement or disagreement with the comments of others, and reply to queries.
Sometimes you will need to complete a 'talking point' activity in order to move on to the next step in the lesson.

Activity 0.1

Here are some ways you can interact with others:

1. Clearly see how many views a comment has received:

(This bar appears at the bottom of all lessons).

2. Directly react to a post by clicking on one of the following icons at the bottom of a comment:

Agree with a post

Disagree with a post

Request clarification

Raise an issue

Thank the author for their post

See a further breakdown of the reactions

Each reaction will still open up a text box and invite you to reply to a post
 You can still use the 'Reply' to a post button. You then have the option to add a reaction within your response:

If you agree, disagree or thank the author of the post you can simply save your reaction without needing to type a response. We do, however, encourage
you to tell the author why you agree or disagree with their comment, and we ask you to get involved in the conversation

If you request clarification or find an issue with a post or comment, you will need to give the author details in the text box, before you can save your
reaction.

3. If you submit a response to a post, it clearly marks the reaction(s) you have made within your reply:

4. If you submit a reaction without a text response, your reaction will be clearly registered with the corresponding icon under the original comment. If you are
the author of the post you can clearly see how many reactions you have had to your comment:

How to get help

As you are working through the lessons, if you find something that you don't understand or which isn't clear, please post a comment outlining
your concern on the relevant page of the lesson and mark this with the 'please clarify' reaction, as shown above. If you require clarification on
a wider theme, rather than a specific point in the lesson, then you can post a comment in the lesson forums, again marked with the 'please
clarify' reaction. Comments on the lesson pages and in the forums will be monitored by the module tutor team who will respond accordingly.
If you identify an issue, such as a possible error in the materials, a broken link or you are unable to access a resource, please post a comment,
either on the relevant lesson page or in the forums and mark this with the 'I found an issue' reaction. The Teaching & Learning Enhancement
team will monitor these comments and will aim to respond as soon as possible.

Wider queries regarding the administration of your module or course, such as assessment deadlines, library access should be posted in the
relevant forum and the GLOMBA programme team will reply. If you have personal queries regarding your course, then please contact the
GLOMBA team as advised in your student handbook (/-/academic/311773/resources/in/1468289,1468272/item/1468846/).

Complete all the activities

In addition to talking points, we have created a range of different activities to help you to engage with the content of the module. Here are the
activity types that you will encounter:

Stop and think

Stop and think

Stop and think

A stop and think activity is an invitation for you to pause and consider your personal response to questions that arise during
the module. You may choose to add a comment to the page.

Activity 0.2
 Activity 0.2
Exercise

Exercise

Exercise

Exercises encourage you to apply your learning. You may be asked to practice your skills, reproduce something, or follow a
step-by-step process. You may choose to feed back your results in the comments.

Activity 0.3

Quiz

Quiz

Quiz

Quizzes allow you to self-assess your understanding of the learning materials and to check your answers after completing
the questions. For some quizzes you may be allowed to attempt the questions multiple times.

Activity 0.4

Guided reading

Guided reading

Guided reading

Some lessons have guided reading. These readings are considered to be an important part of your learning. We
recommend that you complete them in order to fully engage with the module content.

Textbook readings are available in your VitalSource bookshelf

Library readings will require you to log in with your University credentials

Web readings (including case studies) are accessed directly via the hyperlinks provided

Guided reading 0.1

Recommended video

Recommended video

Recommended video

Some lessons have recommended viewing. A box like this will appear in the lesson text suggesting recommended videos
that you may wish to explore to expand upon the lesson content. Watching these videos is optional and we recommend
that you watch them when you have time, either during or after the lesson.

Recommended video 0.1

Learning point

Learning point

Learning point

These are key concepts and takeaways that you need to understand in order to progress further through the study
 materials.

Learning point 0.1

wbsLive

wbsLive

wbsLive

Where this activity appears in the lesson, you will need to complete the set task ahead of the following wbsLive session.

wbsLive 0.1

Interactive activities
As you work through the study materials you may encounter interactive activities such as 'drag and drop' or 'fill in the blanks'. These activities
are responsive and mobile friendly, and have been designed to help you test your knowledge and reinforce your learning.

End of lesson activities

Each lesson features an 'end of lesson activity' that allows you to draw on your learning from the lesson to complete a short, individual activity.
Once you have completed this activity, you will then unlock the next lesson, allowing you to progress with your study. It is recommended that you
use this opportunity to review your understanding of the lesson before moving on.
Accessibility
Video content
All WBS-created videos in this module use video transcriptions and subtitling.

To access the subtitles, first click on the 'play' icon and then click on the 'CC' icon, which can be found in the bottom right-hand corner of the
video frame. Select 'English' from the dropdown box.

Transcripts are attached to each relevant page as a PDF.

Where external video content has subtitles (e.g., YouTube), these have not been checked for accuracy by WBS.

wbsLive recordings
wbsLive recordings offer the following features:

Automatically generated subtitles.

Interactive transcripts are displayed alongside the video. This enables you to read and follow along, in addition to being able to search for
key words.

Download the video and/or transcript for offline use.

Download lesson content

My.wbs enables you to download all of the text based lesson content, as well as images, figures and tables, in one file. Please note, this
download does not include any videos, attachments, interactive activities or comments. To download the lesson content go to 'Resources' then
'Study Materials' and select the 'download' option from the top of the list of lesson pages.

We hope that you find these features useful and would welcome any feedback you have on your experiences of using them within your module
feedback.
wbsLive
There will be five wbsLive sessions during the module. These are highly interactive live online sessions delivered by the module team and you
should make every effort to attend. The content in the wbsLive sessions should be viewed as part of the lesson, and not as an optional extra.
During the sessions, you will meet the module authors and teaching team, and you will be able to reflect on and discuss the module content with
them. The scheduled wbsLive sessions for the module along with any materials shared and recordings of the sessions can be found under the
wbsLive tab at the top of the page.
Group work
Many of the lessons in this module contain activities that it would be helpful for you to discuss and reflect on in your study groups. You should
aim to meet with members of your group, to support each other with end of lesson tasks and other aspects of the module as they arise. There is
guidance about working in virtual groups available in my.wbs under the 'Skills' tab and called 'Working online with others' (/-
/academic/244363/home/). Your Module Leader or DL Tutor will be able to provide additional support if needed.
Glossary
Please see attached a glossary of accounting terms that will be used in this module.
Safebury's accounts
Please download the following attachment, which we will be using in subsequent lessons. It's a fictitious company, Safebury's plc, which is
based on the main UK supermarkets.
Reading for Lesson 1
What's it all about?
by Graham Sara

Before beginning the lesson, please read:

Atrill, P. and McLaney, E. (2021)

Accounting and Finance for Non-Specialists (12th edn)
Harlow, England: Pearson - Chapter 1-3
You can access this text through your VitalSource bookshelf

Note: Chapters 2 and 3 should be read before attempting the end of lesson activity (Ashton & Tate case).

During the lesson, please read the following when directed:

Rice, A. (2016)
Accounts Demystified (7th edn)
Harlow, England: Pearson - pp. 10-20
You can access this text through your VitalSource bookshelf

Pages 10-20 are a useful supplement to the main text and deal with the basics in a readable manner (you can omit the section on the Cash
Flow Statement, as we will look at this later).

During the lesson, please read the following case study when directed:

Sara, G. (2022)
Ashton & Tate
Warwick Business School
A PDF of this case study is attached below.
1.1 Introduction
Please watch the following introductory video (01:07 mins):

Note: Audio and video is only available in the online version of this content.

Financial statements incorporate the 'language' of accounting so it is essential to have a firm understanding of terminology and basic principles.
In this lesson we will explore two of the main financial statements: the income statement (profit and loss account) and the statement of financial
position.

Learning outcomes
By the end of this lesson, you will be able to:

understand the main accounting terminology

identify relevant components of the profit calculation

appreciate the difference between profit and cash

understand the main features of the balance sheet.

Talking point

Identifying your accounting experience

To what extent are you involved with accounting information in your current role? How do you think this module will help
you to deal with accounting information in the future?

Please post your answer in the comments below or post a considered response to another student's answer (maximum
100 words).

Activity 1.1.1
1.2 What's it all about?
Please watch the following short video (06:55 mins) which poses an interesting question:

Note: Audio and video is only available in the online version of this content.

All of the options shown at the end of the video are possible ways in which someone might make investment decisions, although they may not
be of equal value. Your friend in the pub might be right but you need to be a good friend or have a lot of trust to act on such advice.

Newspapers and journals often give financial commentary - similarly horse racing pundits might give betting advice, and you might do well to
follow your favourite commentator.

However, be aware that the chances are, by the time you read the recommendation, the market has already beaten you to it as you are coming
late to the game.

Analysts are experts at appraising companies and trends so you could do worse than follow them. However, as you will see, there is rarely a
consensus of opinion amongst analysts so your decision might depend on which analyst you choose to follow.

This leaves the option of doing the analysis yourself, or at least being able to check if you agree with something you have read or seen
recommended elsewhere, and this is a skill that this course will help you to do.

The focus of this module is not on giving investment tactics or strategies but rather on enabling you to better understand your company or
organisation and using this understanding to make decisions. For example, trading with, lending to, investing in or competing with other
companies or organisations.
1.3 The income statement and balance sheet

Textbook reading

Key financial statements

Please read the following:

Rice, A. (2016)
Accounts Demystified (7th edn)
Harlow, England: Pearson, pp. 10-20
You can access this text through your VitalSource bookshelf

Guided reading 1.3.1

Now please watch the following video (28:07 mins) which introduces you to the income statement and the balance sheet:

Note: Audio and video is only available in the online version of this content.

The key points in this video relate to the layout and content of the two main statements. Although the annual reports of different companies may
look different at first glance, you will see that the content is essentially the same.

However, the level of detail provided, particularly in the notes to the accounts, may well vary depending on the extent to which a company
wishes to reveal extra information over and above that required by law or regulation. Do not worry too much about some of the more technical
items in the financial statements as we will mostly be focusing on the major figures.

Quiz

Accounting classifications

Following on from the video, please attempt the following quiz to check your understanding of the classification of a
selection of items.

Once you have completed the quiz, please move on to the next video on the next page, which discusses the key financial
statements before moving on to the principles underpinning the treatment of balance sheet and income statement items.

Activity 1.3.1
1.4 The main principles I
We will build your knowledge of annual reports in subsequent lessons but for now it is important that you understand the basic mechanics of the
two statements and the ways in which they are connected. This video looks at some of the key rules affecting accounting reports. There are
some basic rules relating to the preparation of accounts such as the Matching and Prudence principles. Furthermore, published reports must
comply with International Financial Reporting Standards (IFRS) or in the USA, Generally Accepted Accounting Principles (GAAP). Although,
you are not required to have detailed technical knowledge of the various rules, it is important to be aware of their existence.

Now please watch the following video (16:26 mins):

Note: Audio and video is only available in the online version of this content.

Web reading

Auditing scandals

For those interested, have a look at Professor Jo Horton's article on auditing scandals. (https://www.wbs.ac.uk/news/how-
can-we-stop-the-auditing-scandals/)

Guided reading 1.4.1

Exercise

Try it for yourself

This exercise is optional. If you wish to apply what you have learnt so far to a simplified scenario, please attempt the case
exercise entitled Warwick Specialists (see attached) - making note of any queries as you go.

When you have done as much as you can with this case, please move to the next page, where we will discuss your
responses in more detail.

Activity 1.4.1
1.5 The main principles II
Now please watch the following video (23:42 mins) as we discuss the answers to the Warwick Specialists case.

Note: Audio and video is only available in the online version of this content.

Talking point

Annual report of your organisation

Have a look at the annual report of your organisation (or organisation you are familiar with), particularly the income
statement and balance sheet. What are the three key points which you think are significant or surprising?

Please post your answer in the comments below (maximum 100 words).

Activity 1.5.1
1.6 The main principles III
Although we will discuss the third main statement - The Cash Flow Statement - in a later lesson, it is important that the distinction between cash
and profit is understood at the outset.

Many of you will have been involved in some planning within your organisation such as sale forecasts, production plans and expense budgets.
When all these plans are brought together they form a master budget which includes a cash forecast (cash budget) and forecast income
statements and perhaps a balance sheet. In your business these are likely to be large and complex but the principles behind them are simple
so let's have a look at a simple business plan relating to a fictitious company, Budgie plc (attached at the end of the page).

Now please watch the following video (15:53 mins), which shows how a small start-up business might construct a forecast cash budget,
forecast income statement and forecast balance sheet to make a business plan to present to the bank. You can find the raw data used in the
video attached at the end of the page together with an outline spreadsheet which you can use to construct the cash budget.

Note: Audio and video is only available in the online version of this content.

Quiz

Accounting principles

To check your understanding of the main accounting principles that we have covered in this lesson, please attempt the
following quiz.

Activity 1.6.1
1.7 Summary
This lesson has introduced you to two of the main financial statements - the income statement and the statement of financial position (balance
sheet).

The income statement shows the revenue from sales and the costs associated with generating those revenues for a period - for reporting
purposes this is usually a year, although interim periods may also be reported. The difference between revenue and costs is profit which is a
key figure, particularly for profit led businesses.

The balance sheet shows a snapshot of the assets and liabilities of a business at a point in time - the end of the reporting period. The assets
and liabilities represent the net worth of the business and in a company this is called equity. This fundamental rule is represented by the
balance sheet equation which states assets have been financed by a combination of liabilities and equity and this is represented by the
following equation:

Formula 1.7.1

Assets = Liabilities + Equity

We will be working with real statements over the next few lessons, which will help you to become more familiar with what happens in practice,
but now you understand the basics it should be easy to make the step to the real thing.

Textbook reading

Atrill and McLaney

Please read the following before attempting the end of lesson activity on the next page:

Atrill, P. and McLaney, E. (2021)

Accounting and Finance for Non-Specialists (12th edn)
Harlow, England: Pearson, Chapter 2-3
You can access this text through your VitalSource bookshelf

Guided reading 1.7.1

End of Lesson 1 activity

wbsLive

Ashton & Tate

Please attempt the case study, Ashton & Tate. (A copy of this reading can be found below).

We will go through the first two answers with you at the first wbsLive session. This will be a good opportunity to raise any
queries you might still have on the lesson.

1. Prepare a monthly cash flow forecast for the first 6 months of trading.

2. Prepare forecast profit and loss account for the 6 month period ending 31 December and the forecast balance sheet as
at 31 December.

3. Once you have completed the forecast statements, please consider the third question. Based on your figures in Q1 and
2, what advice would you offer the directors of Ashton & Tate? (Hint: You should have identified that there is a large
negative cash balance which exceeds the agreed overdraft at the end of some months.)

Please post your answer to Q3 in the comments below, in the form of short bullet points (maximum 150 words). Once you
have commented, you will unlock the next lesson.

End of Lesson 1 activity

1. Further reading and references
Further reading
These readings are optional and are not required reading for the lesson. They have been made available to enable you to continue reading
around the topic if you wish to do so. Where electronic sources are available, these are provided as links.

Rice, A. (2021)
Accounts Demystified (7th edn)
Harlow, England: Pearson, Chapter 5

References
There are no references cited in this lesson.
Slides for WBS live Wed 11 Dec 0930
Please find slides attached

You would find it useful to have a look at the Ashton Tate beforehand if possible - we will go through it on Wed so please make a note of any
queries so we can discuss them

Graham
Reading for Lesson 2
Where do I start?
by Graham Sara

Before beginning the lesson, please read:

Atrill, P. and McLaney, E. (2021)

Accounting and Finance for Non-Specialists (12th edn)
Harlow, England: Pearson - Chapter 4
You can access this text through your VitalSource bookshelf

Rice, A. (2016)
Accounts Demystified (7th edn)
Harlow, England: Pearson - Chapter 6
You can access this text through your VitalSource bookshelf
2.1 Introduction
Please watch the following video introduction to the lesson (00:51 mins):

Note: Audio and video is only available in the online version of this content.

In this lesson we start to focus on real companies and real annual reports.

An essential part of analysing a set of annual reports is to understand everything you can about a company, so that you can relate the numbers
to the context in which the company operates. This lesson introduces you to the CORE (Context, Overview, Ratios and Evaluation) approach
which will help you to have some structure in your analysis.

Learning outcomes
By the end of this lesson, you will be able to:

identify the key contextual elements of the company

define the contextual background when analysing a company

produce an overview demonstrating key trends.

Annual reports
You may wonder why we might want to analyse a company ourselves. Or for example, could we not just look at investor journals and analysts'
reports? We have already seen how different analysts have different views and may well offer different and even conflicting advice. Therefore,
the process of analysing a company ourselves can give us a much better understanding of the numbers, and hence of the company and its
prospects. Being able to do this is one of the key outcomes of this module.

You might find it interesting to see what Warren Buffett thinks about annual reports. Warren is known as the 'Sage of Omaha' and is the CEO of
Berkshire Hathaway, a company he took over on 1965. He is well know in the investment world and is one of the richest people in the world. His
fund has grown at over 20% a year from 1965 and if you had invested $1,000 in Berkshire Hathaway in 1965 it would now be worth over $30
million, so he does know what he is doing.

Please now look at this short video (04:42 mins) where Warren Buffet explains how he approaches the analysis of a company:

Note: Audio and video is only available in the online version of this content.

You will see from the Warren Buffet video that he regards the annual report as a key resource in finding out more about a company, and so the
annual report is our starting point in the analysis journey.

Talking point

Analysts' reports

In the video, Warren Buffet is rather disparaging about analysts' reports.

Do you agree with this?

Should we ignore them?

Why or why not?

Please post your answers in the comments below (maximum 150 words).
Activity 2.1.1
2.2 CORE
A good starting point to analysing a company is the annual report. Although numbers are important in analysis, they are fairly meaningless if we
do not know enough about the business to read the numbers in context. In other words, we need to understand the business, its markets,
competitors, strategies etc. so that we can relate the numbers to the specifics of the business.

We will begin by looking at the CORE approach to analysis. CORE stands for Context, Overview, Ratios and Evaluation and thus provides a
structure for analysing reports.

Essentially the main elements of CORE are:

Context: refers to understanding the environment in which the business operates, the market, the competitors, how it does business, its
strategic objectives etc.

Overview: a quick look at the key trends over the last 3-5 years.

Ratios: uses the technique of ratio analysis to obtain a more detailed insight into the company performance, its financial structure and its
financial position.

Evaluation: uses the ratios and contextual analysis to understand what we want to find out about the finances of the business.

Please now look at the video (16:22 mins) below, where we will explore the importance of understanding the business context:

Note: Audio and video is only available in the online version of this content.

You will see from the video that we need to understand the various factors influencing the business.

There are many strategic models that could be used here which help us to understand the business strategy, the environment in which it
operates, competitors etc. We do not go into these models in depth in this video as this is not primarily a strategy module. However, it is good
to use appropriate techniques such as Porter, PEST or SWOT to approach the exploration of the context in a logical way.

Research shows that successful companies are either cost leaders or differentiators and the implication is that companies which are not clear
about which category they fit in to are less likely to be successful. It is also important for us to know this as the numbers will vary. For example,
a cost leader may have lower margins compared to a differentiator - so once we know which category they are we can interpret the figures
accordingly.
2.3 Context
Having reviewed the overall context of the business, the next stage is to explore what the company says about itself in terms of its performance
and strategies. This is where the annual report can provide valuable insights and we will look at this in the next video.

The annual report should enable us to learn a lot about the company, as the various management reports contain plenty of details and views on
how the company is doing and where it is going. Companies spend a lot of time (and money) in making sure the report conveys the best
possible image of the company, even if things have not gone so well. It is therefore important for us as analysts to be aware of any possible
'spin' and to view the reports with a healthy degree of caution - we should, for example, decide if we agree with the judgements of the
management. This might mean that we take a different view based on our own research but that is ok - the successes in the market are often
the result of someone taking a different view and using it to their advantage.

Please now watch the following video (21:37 mins):

Note: Audio and video is only available in the online version of this content.

We will be applying the knowledge and skills developed in this module to a well-known UK high street retailer.

Marks & Spencer PLC is a long established and well respected clothing and food retailer which operates mostly in the UK but also has various
operations overseas - usually on a franchise or joint venture basis.

We will be using the latest Marks & Spencer PLC (often referred to as M&S) annual report during this module, although we will use other
companies for comparison for exploration purposes.

Exercise

Marks & Spencer - Case 1

Please now take a look at M&S case 1 which is attached below. This case looks at the latest annual report
(https://corporate.marksandspencer.com/msar2022/downloads/m-and-s_ar22_full-ar.pdf) of M&S in more detail.

The aim of this exercise is to learn more about the company, so that when we start to look at the financial performance in
the next series of lessons, we are able to relate the numbers to the context of the company.

Once you have attempted case 1, think about how you would build a contextual background from what you have learnt
from the annual report, and then post in the comments area a list of no more than 10 items from the annual report (ideally
one or two words each) which show the key points that you think a reader of your analysis should know to enable them to
understand the numbers more fully.

These will then form the basic structure of the 'Context' section of a report where you would add more detail to tell the
background story of the business.

Activity 2.3.1

Recommended video

Marks & Spencer - Presentation to investors

For those interested in a bit more background on M&S, have a look at their 2022 presentation to investors
(https://www.investis-live.com/marks-and-spencer/6284d0f91e73890c00d0b184/fy22). *Note, the video requests you to
add your details in order to view. It is rather long but try to have a look at the first 10-15 minutes to get a feel of the main
points from the CEO to get a view on priorities and trends. You need to register to gain access to the webcast but it is a
quick and simple process.

What is the general impression of the company you take away from the presentation of the CEO Steve Rowe? How useful
do you think a presentation such as this might be to an interested party such as an investor? In 2023 the approach was
somewhat different with the 2 CEO's each giving a short presentation.
(https://corporate.marksandspencer.com/investors/our-performance-updates/2023-annual-report) How useful is the latter to
give you a more recent into the company's overall performance?

Recommended video 2.3.1

2.4 Overview
Having explored the 'Context' we can now look at the 'Overview' section of CORE.

This is intended to give a quick impression of company activity so we need to identify a few (say around 5-6) carefully selected metrics which
show key trends. The metrics will vary from company but might include for example, sales, profit, capital expenditure, debt, R&D. The idea is
not to analyse at this stage but just to set the scene in terms of what you regard as the most interesting trends.

To explore CORE further, we will use a simplified set of figures for our fictitious company, Safebury's PCL, which is based on the main UK
supermarkets. (Note: A simple set of accounts for Safebury's can be found in the 'Module introduction' section.)

Now please watch the following video (11:00 mins):

Note: Audio and video is only available in the online version of this content.

The overview shows some interesting points in the Safebury's figures such as rising sales and falling profits - this will be something we want to
investigate further.

Similarly, the company is growing its operational assets (capital employed) but the debt has grown even faster. If we had more detailed data we
might be able to find other areas of interest such as R&D spend, marketing costs, cash flow etc. The (brief) 'Overview' thus gives us a starting
point for the next stage of our investigation - the 'Ratios'.
2.5 Summary
This lesson has focused on getting to grips with the contextual background of a company, so that when we come to do the analysis of the
accounts, you will have a better understanding of the numbers.

We have also explored the 'Context' and 'Overview' parts of the CORE approach which will provide us with a good contextual background for
analysing the actual financial statement in the subsequent lessons.
End of Lesson 2 activity

Talking point

Marks & Spencer - Key metrics

Following on from your work on the context of M&S (and now that you are a little more familiar with the company), please
consider what 6 key metrics you would choose to illustrate the overview and how they contribute to the M&S story that your
analysis will tell.

Please post your answer in the comments below, in the form of short bullet points (maximum 150 words).

Once you have commented, you will unlock the next lesson.

End of Lesson 2 activity

2. Further reading and references
Further reading
There is no further reading for this lesson.

References
There are no references cited in this lesson.
Reading for Lesson 3
How are we doing?
by Graham Sara

Before beginning the lesson, please read:

Atrill, P. and McLaney, E. (2021)

Accounting and Finance for Non-Specialists (12th edn)
Harlow, England: Pearson, Chapter 6, pp. 165-183
You can access this text through your VitalSource bookshelf

Rice, A. (2016)
Accounts Demystified (7th edn)
Harlow, England: Pearson, Chapter 8
You can access this text through your VitalSource bookshelf
3.1 Introduction
Please watch the following video introduction to the lesson (01:11 mins):

Note: Audio and video is only available in the online version of this content.

The previous lesson focused on the first two parts of CORE - Context and Overview. Now we'll move to the next stage, which is to look at the
actual numbers and use techniques to make some sense of them.

Absolute numbers on their own have little meaning - we might read that a company has made a profit of £1 million. Is this good or not so good?
It depends on the business: if it is a small shop on the high street then that may be an excellent result but if it is a large multinational, it would be
disappointing to say the least. We should therefore, explore many of the numbers in comparison to another measure to get a relative position.
We might for example, look at profit in relation to our investment in assets, or in relation to sales, or in relation to dividend.

In this lesson we will be exploring the relationship between two numbers to give us ratios, which give us a much better basis for analysis.

When we are analysing a company we might be interested in several different aspects- how well (or badly) is it doing? Can it pay its way? Is the
financial structure effective? What does the stock market think of the company?

It is therefore convenient to break the ratios down into four main types: Performance, Liquidity, Solvency and Investment. Note however, that
there are often links between the groups so our analysis might also need to explore the connections and interdependencies between elements
of the groups.

The first type of ratios we will look at are related to the performance of the company. These will help us understand how well the company has
done over the year, which we ca n then compare with previous years and with expectations and other competitors.

Learning outcomes
By the end of this lesson, you will be able to:

calculate performance ratios to help understand how well (or badly) the business is doing

identify the connection between various ratios

analyse the performance of the business using ratios

identify way in which ratios might be adapted to suit particular situations.

3.2 Walmart example
Please have a look at the short video (02:06 mins) from the Walmart CFO making particular note of the focus on the strategic direction of the
company - the success of this strategy will be determined largely by the accounting numbers. The video also gives some insight into what
Walmart think are their key priorities and the main KPI's (key performance indicators) related to these. If we were analysing Walmart this would
give us a good basis on which to start making some judgements about their success or otherwise. This is a practical illustration of the
importance of how numbers might be related to the contextual background as seen in the previous lesson.

Note: Audio and video is only available in the online version of this content.

Talking point

Walmart performance

How useful was the information to a typical shareholder? Were the figures quoted enough to tell you what you need to
know?

Please post your answer in the comments below (maximum 100 words).

Activity 3.2.1
3.3 Calculating and using the performance ratios
We will start with a few ratios which you might think of as your basic toolkit. Just like a toolkit in your garage or workshop might have tools such
as a hammer, screwdriver, pliers, scissors etc., which are good enough for most jobs, occasionally you might need a more specialist tool. The
basic ratios therefore, are a good starting point but remember that we might sometimes need to modify them to suit a particular need. We will
start off exploring the basic ratios using a fictitious supermarket called Safebury's. (Note: A simple set of accounts for Safebury's can be found in
the 'Module introduction' section.)

Subsequently, you will get the chance to apply these ratios to real companies such as M&S, and at the same time you will see how the
complexities of a real set of accounts often lead to adapting our basic toolkit. You will also start to realise that there is no 'one-size-fits-all'
approach as every analysis and company is different. Nevertheless, our basic toolkit will provide the foundation for more in-depth analysis.

Please now watch the following video (24:58 mins) on some key performance ratios.

Note: Audio and video is only available in the online version of this content.

This video has looked at two key performance ratios, ROCE (return on capital employed) and ROE (Return on Equity), which are focused on
operational returns and returns to the shareholder respectively.

Clearly, the two are linked as operational returns (ROCE) will drive the returns that shareholders receive, but we will explore this more later. For
now, we are going to focus on the operational returns (ROCE) and, in particular, we want to find why the ROCE has changed so that we can
make a judgement on how business is performing and perhaps use this to decide how we think they might perform in the future.

Stop and think

Safebury's plc

Why do you think the ROCE for Safebury's have changed from 14% down to 12%? What might have caused that?

Activity 3.3.1
3.4 Exploring the changes in ROCE
We have now identified the performance of Safebury's with particular focus on the key ratio - Return on Capital Employed (we will explore the
link with ROE in a later lesson). The next task is therefore to see why the ROCE is changing and how it might be improved.

Please now look at the following video (23:54 mins) which breaks down the ROCE into its component parts and uses analysis to identify
possible operational and strategic options.

Note: Audio and video is only available in the online version of this content.

We have now seen how the ROCE breaks down into margins and utilisation to enable us to see the key drivers of ROCE. This approach is
known as the Dupont approach or the Dupont Pyramid after the Dupont Corporation in the US, which early in the 20th century devised a
complex scheme for linking the various ratios in a mathematical way. This helps us to have a better idea of the impact of the various drivers on
a particular ratio.

We saw in the video that ROCE is the product of the margin and the asset utilisation and these two elements were further broken down to show
changes so that we can make a sensible analysis and overall evaluation.
3.5 The strategic pyramid
We have seen how performance can be analysed into detailed ratios. For management, the next task might be to see how these ratios might
inform future strategy. Continuing with our Safebury's example, the next video shows some thoughts on how the margins might be improved.
Clearly not all the possibilities might be viable but the pyramid gives some ideas that might be appropriate depending on the industry.

Please now look at the video (13:17 mins) which explores some strategic possibilities for Safebury's.

Note: Audio and video is only available in the online version of this content.

The strategic pyramid highlights some of the interdependencies of the figures and this can help the management of Safebury's better achieve
their strategic objectives. The video also shows some general points to consider when using ratios and emphasises the importance of using all
the evidence gained in the analysis to evaluate the performance overall.

Quiz

Performance ratios

To check your understanding of performance ratios that we have covered in this lesson, please attempt the quiz below
using the attached income statement and balance sheet for Motor Components GMBH .

Activity 3.5.1
3.6 Summary
This lesson has focused on the ratio part of CORE with particular reference to the performance ratios. Starting with the ROCE (focus on
managers performance) and ROE (shareholders performance) we proceeded to break down the ROCE into its component parts to provide us
with a basic toolkit of ratios, so that we could evaluate performance and make suggestions on strengths, weaknesses and opportunities. The
next lesson will continue with the analysis of the financial position.

Textbook reading

Performance ratios

Please refer to and read the following before moving onto the case study on the next page:

Atrill, P and McLaney, E. (2021)

Accounting and Finance for Non-Specialists (12th edn)
Harlow, England: Pearson, Chapter 6, pp. 165-183
You can access this text through your VitalSource bookshelf

Rice, A. (2016)
Accounts Demystified (7th edn)
Harlow, England: Pearson, Chapter 8
You can access this text through your VitalSource bookshelf

Guided reading 3.6.1

End of Lesson 3 activity

wbsLive

Marks & Spencer - Case 2

You now have the basic performance ratios. Please now apply these to M&S case 2 (performance), which is attached
below. A simple template is also attached to get you started, but feel free to adapt this or to set up your own spreadsheet.
(You can utilise this for later exercises where you are looking at other companies.)

When you have done this, please comment below (maximum 100 words):

A short summary of your findings in the form of key bullet points of your main findings

What they suggest about the past and future performance of M&S.

Once you have commented, you will unlock the next lesson.

We will review this case in the second wbsLive session.

End of Lesson 3 activity

3. Further reading and references
Further reading
There is no further reading for this lesson.

References
There are no references cited in this lesson.
Reading for Lesson 4
What's our position?
by Graham Sara

Before beginning the lesson, please read:

Atrill, P. and McLaney, E. (2021)

Accounting and Finance for Non-Specialists (12th edn)
Harlow, England: Pearson, Chapter 6, pp. 184-189
You can access this text through your VitalSource bookshelf
4.1 Introduction
Please watch the following video (00:41 mins) introduction to the lesson.

Note: Audio and video is only available in the online version of this content.

The previous lesson looked at ratios telling us about performance. This lesson will focus on analysing the impact of a company's day-to-day
operations, as well as their longer-term financial structure. The ratios therefore look at the financial position of a company, focusing on working
capital and exploring the short-term position: 'can we pay our way?' We also ask, 'is our financial structure sound?' and look at the longer-term
position and long-term finance.

Learning outcomes
By the end of the lesson, you will be able to:

calculate ratios useful in understanding the financial position of a business

interpret the connection between various ratios

analyse the financial position of the business using ratios

identify ways in which ratios might be adapted to suit certain situations.

4.2 Liquidity ratios
In an article in the FT on 22 May 2022 ( Target: consumer demand guessing game foxes a pandemic winner
(https://www.ft.com/join/licence/a0024929-51f8-4dde-8cb3-df6129157efb/details?ft-content-uuid=3566e553-deeb-4622-8a86-6fcdb45590ec))
the Lex column said:


Retail is not just a low margin business. It requires careful management of working capital and supply
chains. The smallest errors ripple through to profitability and cash flow. Disciplined companies can
weather external challenges. Target is a diversified retailer. A bad year will sting shareholders but is not
quite the existential crisis gripping the likes of Peloton.

Financial Times (2022)

This quotation illustrates that managing a business (not just retailing) is about more than just margins and profits. It highlights that working
capital management can have an impact on profitability and hence managing working capital is also a critical part of the overall management of
a business. We will now look at ratios that help us to understand how well (or badly) working capital is being managed.

We start by looking at the key elements of working capital (inventory, receivables and payables) to explore how well these are being managed.
We will see that working capital is a substantial part of the balance sheets of a wide range of companies, yet working capital generates very
little profit; it is primarily something that enables the operational activities to flow smoothly. Most businesses need to have some inventory to
ensure they can meet immediate demands for their product, but there is no advantage in carrying more inventory than is necessary for the
normal expected course of business. The more a company has tied up in working capital, the more finance it needs: therefore, carrying working
capital incurs a cost - financial, storage, potential deterioration, etc.

On the other hand, running out of inventory also carries a cost (such as stoppage of production, lost sales, etc.) and it is up to businesses to
manage this balance. We will look at ratios that give us insight into how well the company is managing its working capital so that we can
incorporate a better understanding of the company's finances into our analysis. Similarly, we need to know how well a company is managing the
credit it gives to customers and receives from suppliers; often the first sign of trouble might be an increased time for suppliers to be paid.

You will recall that, in the Dupont pyramid, the ROCE is the product of margins and asset utilisation. The liquidity ratios can help us to see how
well the working capital assets and liabilities contribute to the overall asset utilisation. The higher the utilisation (in other words, the more
efficiently we use our assets), the higher the impact on ROCE will be. The next two videos show some key ratios to help us.

Firstly, we will look at the current and liquid ratios. These can give a quick insight into the overall balance between current assets and current
liabilities.

Now please look at the following video (16:50 mins) on key liquidity ratios.

Note: Audio and video is only available in the online version of this content.

The current and liquid ratios give us a quick way of looking at the overall structure of working capital, but they do not show much detail. To
explore the detail, we will look at the individual components of working capital (inventory, receivables and payables) to see if they are what we
might expect from the business (expressed in terms of days) and whether they are changing. We can use this to assess the impact this has on
financing and cash.

Now please look at the second liquidity video (13:51 mins) which focuses on the individual working capital components.

Note: Audio and video is only available in the online version of this content.

Quiz
 Liquidity ratios

To check your understanding of liquidity ratios that we have covered in this part of the lesson, please attempt the quiz
below.

Activity 4.2.1
4.3 Solvency ratios
The liquidity ratios explore the short-term impact of working capital. We are also interested in the longer-term structure of a company's finances
- the mix between the long-term capital financing from equity and debt. The next video explores this financial structure by considering the
gearing of the business, which is the relative proportions of debt and equity. There are many definitions of gearing, but we will use a good basic
measure which works in most situations. It is possible to vary any ratios to suit specific needs or scenarios, but it is a good idea to have a
straightforward starting point to work from. Gearing is important as it indicates the reliance on borrowed funding which brings with it a
commitment to service the debt in the form of interest so we want to ensure that the company has not borrowed to a point where it cannot
comfortably meet its commitments. At the same time, borrowing can bring rewards to the shareholder so the purpose of our analysis is to
ensure that shareholders are getting the benefits without an unacceptable increase in risk.

Now please watch the following video (14:30 mins) that explains how to calculate gearing and interest cover, and then goes on to demonstrate
the impacts that gearing can have under different conditions.

Note: Audio and video is only available in the online version of this content.

There is no fixed rule about 'ideal' gearing levels as it varies from industry to industry and depends on a firm's attitude to risk, but when debt
exceeds equity (debt/equity >1) it is safe to say that the company is high-geared. Being high-geared is not bad per se, but it does need to be
viewed in the context of the company as a whole. Similarly, an interest cover <1 will ring warning bells because such a condition cannot be
sustained long term but may be acceptable for a year or two.

Quiz

Solvency ratios

To check your understanding of the solvency ratios that we have covered in this lesson, please complete the quiz at the
bottom of this page.

Activity 4.3.1
4.4 ROCE to RoE
We have used the Dupont approach for performance ratios, and we can now complete that by considering how ROCE and RoE are linked. We
saw at the outset that when Safebury's ROCE fell from 14.3% to 12.6%, the RoE fell by a much smaller amount from 11.5% to 11.4%.

The next video shows how RoE and ROCE are linked. In particular, it shows the potentially powerful effect of gearing when it acts as a
multiplier. The good news is that when ROCE goes up, gearing increases the RoE at a faster rate. The bad news is that when the reverse
happens and the ROCE goes down, the effect on RoE is bigger in a downward direction and this is where the volatility and risk can be seen.

Now please watch the following video (08:10 mins). Note the health warning in the video - the formulae used in the Dupont model are only
suitable for use within the model. Outside of this, use the standard definitions given previously.

Note: Audio and video is only available in the online version of this content.
4.5 Summary
This lesson has looked at the importance of analysing a firm's financial position, both from a long-term (financial structure) position and from a
short-term (working capital management/ability to pay) position. The short-term position is important as it focuses on the viability of the day-to-
day operations, particularly credit policies and inventory management. Although working capital is essential to enable the smooth running of a
business, excess working capital needs to be financed and does not add to the business's efficiency. The liquidity ratios help to identify the
levels of working capital and to indicate where efforts to become more efficient might be directed. The long-term is important as it has an impact
on the risk attributed to the business and we will explore this more in Lesson 6 when we look at the stock market.

Remember to use ratio analysis with care. There are a few caveats to consider.

Annual reports are based on historical figures. Although the past is a helpful weapon in our armoury for predicting the future, it is not
infallible so we need to be aware of other factors

Check on discretionary expenditure.

Annual reports will often show an adjusted profit figure, which is helpful but we need to decide if we agree on the judgements made in
arriving at that figure.

Areas of interest might include: development expenditure, brands, goodwill, quality, 'exceptional' or 'non-underlying' items, etc.

We must use the same definitions for comparison. Comparisons are only valid if we prepare them on a like-for-like basis.

Inflation distorts comparison over time. When inflation is very low, this is not so relevant, but when it is high we should try to find the figure
that shows the real performance rather than the inflation-adjusted one.

Ratios ignore many factors not in accounts:

post-balance sheet events

personnel changes

quality of management

skilled labour force.

We should always be alert to and aware of any other sources of information that might be helpful in our analysis.
End of Lesson 4 activity

wbsLive

Marks & Spencer - Case 3

Now please look at the M&S case 3, which is attached below. A simple template is also attached to get you started, but feel
free to adapt this or to set up your own spreadsheet.

1. Calculate the liquidity and solvency ratios

2. Consider the overall picture of M&S's financial position.

Once you have commented below, you will unlock the next lesson.

We will go through the answers with you at the third wbsLive session. This will be a good opportunity to raise any queries
you might still have about the lesson.

End Lesson 4 activity

4. Further reading and references
Further reading
There is no further reading for this lesson.

References
Please find below the reference list of academic works and published materials cited in the lesson. These are not linked and, if you wish to
follow up on any of these references, you will have to use your own research skills to locate these.

Guthrie, J. and Moore, E. (2022)

'Target: consumer demand guessing game foxes a pandemic winner'
Financial Times, 22 May 2022
Reading for Lesson 5
Cash flow and the cash flow statement
by Graham Sara

Before beginning this lesson, please read:

Atrill, P. and McLaney, E. (2021)

Accounting and Finance for Non-Specialists (12th edn)
Harlow, England: Pearson, Chapter 5
You can access this text through your VitalSource bookshelf
5.1 Introduction
Please watch the following video (01:20 mins) introduction to the lesson.

Note: Audio and video is only available in the online version of this content.


Retailers - whether it be Amazon, Tesco or Wayfair - are famous for being low margin but cash
generative. This trick is down to the payment terms. Customers pay almost instantly for their groceries,
protein powder or office chairs, while retailers tend to pay their suppliers at least 30 days later. This
creates a natural 'float' of cash for the company to use at its discretion, and stops the sector being reliant
on outside capital.

Financial Times (2021)

We have looked in some depth at two of the main financial statements: the income statement and the balance sheet. This lesson focuses on the
third main statement, the cash flow statement. A lot of emphasis has been placed on the difference between profit and cash and the fact that
profit is based on economic activity and not cash flow. Nevertheless, cash flow is important because it is the lifeblood of the business and
businesses which do not manage cash properly are likely to have difficulties and even go into liquidation. Therefore, this lesson explores the link
between profit and cash, and shows how the cash flow statement helps to understand where the cash has come from and where it has gone.

Learning outcomes
By the end of the lesson, you will be able to:

define the difference between cash and profit

interrogate the cash flow statement to judge the effectiveness of a company's cash generation and management

explain how good working capital management can contribute towards better profitability.
5.2 Why is cash flow important?
Many retailers get their cash before they must pay for their goods, so this is extremely helpful when it comes to funding the business. We will
explore how this works and how effective working capital management can potentially lead to higher profitability.

For very simple businesses, profit and cash are closely related. For example, if I am selling a self-help magazine on the streets of my town, I
might buy 100 magazines for £1 each (£100) and sell them for say £2.50 (£250) making a profit of £150 and generating an increase in my cash
of £150. In this situation the profit I have generated is the same as the extra cash I have generated - and this is a fundamental principle of
business i.e., that profit generates cash. The problem of course is that most businesses are not as simple as my street seller example, as they
give and receive credit, carry inventory, own depreciating assets, pay tax, etc. In other words there are many activities in a business that affect
both profit and cash, but there are also many that affect one or the other but not both, such as raising funds, investing in assets and paying
dividends.

The cash flow statement is a relatively recent addition to annual reports - dating back to the early 1970s (whereas income statements and
balance sheets have been around for much longer) - and arose as businesses became more complex, and some very famous businesses ran
into what we would now call cash flow problems. The cash flow statement therefore became a major feature of annual reporting, as it reconciles
the profit figure with the change in cash, thus enabling a reader to understand if a company is generating enough cash to sustain its short-term
and long-term needs. Perhaps more importantly, measuring cash flow is more objective than measuring profit, as cash flow is a reality and is
not subject to judgements and estimates in the way that profit calculation is. Cash flow can therefore be a more useful indicator of underlying
trends than profit.

Unfortunately cash cannot give us the whole picture of a business's financial success or failure. However, 'jam tomorrow' (meaning a strategy
that promises rewards in the future, but little in the short-term) is only of any benefit if the short term is survived. The following video (14:58
mins) explores this in more detail: the video discusses how profit is a fundamental generator of cash, but also shows some simple examples of
how profit and cash can be reconciled even though they are different.

Note: Audio and video is only available in the online version of this content.

Quiz

Cash flow

To check your understanding of the importance of cash flow that we have covered in this part of the lesson, please attempt
the question below.

Activity 5.2.1
5.3 The cash flow statement
We have just seen how the cash flow statement links the balance sheets at the beginning and end of a financial year. We know that both
balance sheets must balance, so if all changes between the two balance sheets are expressed in terms of their impact on cash, then we will
have a list of all the cash inflows and outflows with the difference being the overall change in cash over the year. This is the essence of a cash
flow statement, although we do not just list the differences but arrange them in a more useful way to reflect the main activities of generating
cash, investing cash and financing the business.

In practice, of course, the cash flow statement is more complex in terms of the detail it contains but nevertheless the basic principles still apply.
The next video shows the main structure of a cash flow statement - you are not expected to be able to construct one as this is a job for your
accounts department, but knowing the main principles behind its construction is helpful in understanding the statement and therefore forming a
judgement on the cash management process of a company. We will then look at some figures relating to a real cash flow statement and explore
the relationship between profit and cash and in particular try to assess whether a company is generating enough cash for its needs. Perhaps
surprisingly we will see how a company's cash position may be satisfactory even though it has made a poor profit or even a loss.

The cash flow statement essentially has four main sections. It starts with the idea that profit generates cash (if you remember, this is true, but
only in the simplest of businesses) and one could argue that, over time, making a profit is the only regular source of cash. If firms are
consistently making a profit then this should make it easier to raise outside capital, but in addition , if the business is making reasonable
profits, then this should also provide at least some of the funds internally to e.g. invest in more assets or pay a dividend. If, however, profits
year-on-year are not robust, then there may not be enough to invest in growing the business so it will be necessary to raise more capital by
borrowing or issuing shares and this may be more difficult because of the weaker profit trend. However, the market is likely to be less keen to
support a loan or share issue if profits are poor, so profitability over time is a key objective for firms.

Now please look at the video (06:43 mins) which constructs the cash flow statement for Safebury's.

Note: Audio and video is only available in the online version of this content.

We have seen how the cash generated from making a profit (operating activities) is different from the profit itself as a result of some
transactions affecting profit and not cash (e.g., depreciation) and some items affecting cash but not profit, such as trading on credit or building
inventory. The first section of the statement starts with profit and then adjusts this figure to compensate for the effects of these items. This then
results in a figure of cash generated from operations and we can regard this as the cash that is generated internally.

The second section looks at the cash used in investment activities. Companies need to invest in maintaining their physical assets, so this
section shows the proceeds of selling fixed assets and the cash used in investing in more fixed assets.

The third section then looks at the financing activities such as raising and repaying loans, raising share capital and returning capital to
shareholders in the form of dividends.

Once the effect of all these cash flows is added together the final section of the statement shows net cash flow which when added to the
opening cash balance reconciles with the closing balance of cash.

Quiz

Cash flow statement

To check your understanding of cash flow statements, please complete the quiz at the bottom of this page.

Activity 5.3.1
5.4 Interpreting the cash flow statement
Now please watch the following video (12:55 mins):

Note: Audio and video is only available in the online version of this content.

From the cash flow statement, we can make a judgement on whether the overall movements in cash reflect a company which is in control of its
cash or not. We might, for example, want to consider whether the cash from the main cash generator - profit - is sufficient for our needs and, if
not, why not. It may be that the profit is not sufficient, which is not unusual, but also not sustainable for too long. Or it might be that the company
has not been managing its credit transactions effectively - for example, giving customers too much time to pay or not chasing receivables
efficiently. Maybe the company is only managing to keep going by more and more borrowing - this is unlikely to be sustainable in the longer
term, or maybe it is investing more in fixed assets than it can afford.

Note that it is possible that there will be highs and lows in any particular year e.g. a pandemic, a major investment activity, etc., but over a
period of several years, we would want to see evidence of some control and consistency.
5.5 Free cash flow and EBITDA
Please watch the following video (09:58 mins):

Note: Audio and video is only available in the online version of this content.

Stop and think

Cash flow

Why might a company have poor cash flow? Take a moment to consider this before moving on to the next page.

Activity 5.5.1
5.6 Free cash flow and EBITDA (cont'd)
You will see from the Safebury's and Carillion examples that working capital, inventory, receivables and payables can have a large effect on the
cash flow and particularly the cash from operations. In fact, managing working capital well can have a beneficial effect not only on cash but also
on profits.

We have already seen how it is important to check the working capital positions through ratios such as inventory days and receivable days, but
it is not necessarily obvious how this might translate into better profitability. You will know from your own shopping experiences that many
retailers have a sophisticated point of sales technology which gives them a lot of information on customer spending patterns, inventory, and
reordering (as well as loyalty card and promotional uses). Managing inventory so that there is always enough but not too much means that they
are not investing in unnecessary inventory levels. Any extra investment in inventory means raising more finance but the return from that
investment is zero so optimising inventory means that a company only funds what is needed. You will also see this in manufacturing through
'just in time' type approaches which maintain the inventory levels as low as possible through strategic manufacturing plans and collaborations.

Now please watch the following video (10:58 mins), which looks at a simple example of how a company that manages its working capital
efficiently can make more profit than a competitor that is less efficient.

Note: Audio and video is only available in the online version of this content.

Although the assumptions in this video are simplistic, the principles apply to more-complex businesses. Any business has the potential to be
more profitable by managing its working capital effectively.

Now have a go at the following activity. Drag the words into the correct boxes:

Note: Audio and video is only available in the online version of this content.
5.7 Summary
This lesson has focused on cash and the cash flow statement. It explored the relationship between cash and profit and showed how the cash
flow statement reconciles the two figures. The way in which the statement helps to analyse the overall performance of the company was then
discussed. Finally, it explored the importance of managing working capital effectively so that the link to improved profitability can be seen.
End of Lesson 5 activity

Talking point

Your company's cash flow

Have a look at the annual report of your own company (or a company you are interested in) for the last 4 years and
consider the cash flow performance over that period.

1. Does it look to be under control?

2. Does it give a similar impression as the income statement?

3. Are there any areas that cause concern?

4. Does it suggest a strong position for the future?

Please comment below, summarising your findings (up to 5 bullet points, maximum 150 words). Once you have
commented, you will unlock the next lesson.

End of Lesson 5 activity

5. Further reading and references
Further reading
There is no further reading for this lesson.

References
Please find below the reference list of academic works and published materials cited in the lesson. These are not linked and, if you wish to
follow up on any of these references, you will have to use your own research skills to locate these.

Powell, J. (2021)
'THG and the odd case of cash outflow'
Financial Times, 17 Sep
Reading for Lesson 6
The stock market and investment ratios
by Graham Sara

Before beginning the lesson, please read:

Atrill, P. and McLaney, E. (2021)

Accounting and Finance for Non-Specialists (12th edn)
Harlow, England: Pearson - pp. 190-98
You can access this text through your VitalSource bookshelf

Rice, A. (2016)
Accounts Demystified (7th edn)
Harlow, England: Pearson - pp. 59-60
You can access this text through your VitalSource bookshelf

Note that definitions of ratios can vary between authors and sources - it is suggested you use the ones in these lessons for consistency but
alternatives are acceptable. It is not expected that you should agonise too much over the differences.
6.1 Introduction
Please watch the following video introduction to the lesson (00:51 mins):

Note: Audio and video is only available in the online version of this content.

We have previously focused on performance and financial positions and the numbers have been largely based on the annual report. The final
group of ratios are the investment ratios and are less about the numbers in the annual report and more about the stock market and the numbers
generated as a result of the trading that goes on in these markets. We will start by looking at the way in which companies raise finance and
then explore how the market behaves and reports on the trading in shares. This will give us some insight into what the market thinks of a
company - however, it does not provide any solid trading rules or strategies for us all to get rich quick!

Learning outcomes
By the end of this lesson, you will be able to:

define the main sources of finance and assess the advantages and disadvantages of each

identify a variety of possible sources of market information for use in your analysis

calculate key ratios

incorporate your analysis into your overall evaluation of a company.

What is a PE ratio?
We started this sequence of lessons with Warren Buffett so it seems fitting to finish with him too. In this short clip of one of his shareholder
meetings (there are many clips of him if you do a search), he talks about PE (price-earnings) ratios and forecasting. So, what is a PE ratio?

Now please watch the following video (03:09 mins):

Note: Audio and video is only available in the online version of this content.

Warren Buffett explains what he thinks a PE ratio means and the sort of factor that might influence it. He looks at both the relative PE ratio and
the absolute PE ratio as a way of judging a company.

Talking point

Market view of your company

We will consider the PE ratio in more detail later in the lesson but when you have watched the video please take a look at
your own company (or a company of your choosing) on Yahoo Finance (https://uk.finance.yahoo.com/?
guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuYmluZy5jb20v&guce_referrer_sig=AQAAAN3ORTJ5Z8w2h3-
_Tjq3SPxe7A4_kMtMCWkdDjQDbJUfZ2t6Il-
SwwiHFCblv6feftvhQiI2WdA8BC1inMr8KC1duai2KnEuA900Dc7ZDGqcjkGPmotup_ctPeHghNQ01rHKnWd83diT_hCRH-
EE0HCAQJnQS74hWdATo1DAtGXQ) and compare its PE ratio to that of its nearest competitor. What does this suggest
the market thinks about your company?

Please post your answer in the comments below or post a considered response to another student's answer (maximum
150 words).

Activity 6.1.1
6.2 Sources of finance
Now that we have some insight into Warren Buffet's approach to a key ratio, we need to explore the investment ratios in more depth. There are
many different types of investors: individual shareholders, institutional shareholders, lenders and others. They will be investing in the market in
different ways and with different motives. The first video therefore will set the scene of the stock market by looking at the main sources of
finance available to companies.

We can break these sources down into the three main types:

share capital

loan capital

internally generated sources i.e. retained profits.

Please now watch the following video (16:57 mins) which illustrates these main sources of finance for a company. It explains how shareholders
invest, the possible types of share issues and the different debt types.

Note: Audio and video is only available in the online version of this content.

The video has introduced some of the underlying principles of financing a company, although it should be noted that in practice the details might
well be more complex. When a company first sets up, it issues shares. For a large public company this will be through an Initial Public Offering
(IPO). In practice, most large companies might initially be private companies raising funds from a small number of shareholders. If the company
is successful it may start to raise money more widely such as through the 'junior' stock market called the Alternative Investment Market (AIM),
before eventually becoming big enough to raise funds through an IPO on the main market. This is heavily regulated and the company must
provide a lot of information in the form of a prospectus to inform potential shareholders about the company.

Once the issue is open, shareholders then buy shares in the company and this will be the basis of its equity. Once the company is running it
hopefully makes profits and any profits not returned to the shareholder in the form of dividends are kept in the business to fund further growth.
Alongside the share capital and retained profits, the other main source is debt - primarily in the form of long-term debt, short-term debt and
trade credit.

Learning point

Sources of finance

In practice, there are many variations on the three main sources of company finance. Shares might have different rights
and features attached to them, loans might have different interest rates, repayment periods, and optional rights to convert
to shares. Self-generated funds might be mostly used to fund the dividends or, at the other extreme, wholly retained in the
business to fund growth. In this lesson we are focusing mainly on the share capital but it is important not to forget the effect
that the other sources of funds might also have on a share.

Learning point 6.2.1

Once the (ordinary) shares have been issued they are traded on the market and any gain or loss that a share makes subsequently affects the
shareholder but not the company. However, the company is interested in the shares doing well for a variety of reasons - for example, to make
any takeover threat less likely, to keep up a prestigious appearance in the market, to ensure directors' share related remuneration is maximised
and to make raising issued share capital easier. Occasionally, a company will have a major issue of shares to fund a new project or acquisition
and the opportunity to invest more money is often offered to the existing shareholders first in the form of a rights issue.

We have already looked at the idea of gearing in a previous lesson but this is where it comes into play for real. The relative proportions of debt
and equity that a company should use in financing itself is a long-running debate on the most appropriate level of gearing or 'leverage'. Debt is
cheaper, but carries the inescapable burden of interest payments, although these are tax deductible, reducing the net cost. Shareholders want a
higher return, but can do nothing if times are hard and no dividend can be afforded. Suffice to say for now that companies in a stable industry
with relatively predictable profit levels and cash flows can probably gain from having relatively high amounts of debt compared with companies
in a less stable setting.
Talking point
Finance sources of your company

Look at your own company (or one of your choosing) and identify the relative sizes of the main finance sources. Are there
any particular features or peculiarities of interest?

Please post your answer in the comments below or post a considered response to another student's answer (maximum
100 words).

Activity 6.2.1
6.3 Investment ratios
Now that we have covered the main sources of finance, we can start to see how the market works - particularly in relation to shares. The market
is awash with information - share prices, indicators, indices, to name just three. To understand the mass of information that is potentially
available to us we need to understand what numbers the market is using so we will now look at how to calculate the main ratios and then move
on to explore what they mean. We will also begin to see how there are many possible variations in the ratios and their interpretations - which of
course makes the market much more interesting (and potentially risky!).

Please now watch the following video (14:43 mins), which takes you through the main ratios with particular attention being given to the PE (price
earnings) ratio. We explore why what appears to be a simple ratio becomes much more complex in actual usage. The market is of course
primarily interested in future prospects so we also looked at the predictive interpretations of the ratios.

Note: Audio and video is only available in the online version of this content.

Quiz

Investment ratios

Following on from the video, please attempt the quiz below to check your understanding of the investment ratios.

Once you have completed the quiz, please move on to the next video on the next page which discusses the sources of
market information.

Activity 6.3.1
6.4 Sources of market information
There are many ways to find market information, and sites such as Yahoo, Google, Nasdaq, the Financial Times etc., are good starting points.
Similar information is also available on many analysts' websites, often including some commentary/analysis/opinion. The challenge, therefore,
is not 'where can I find information?' but 'how can I filter the mass of information available to give me the information I need in a manageable
form?'

The next video uses one of these sites - Yahoo Finance - and shows the sort of information available. This is just the starting point and you will
find it very rewarding to explore these sites in more depth at your leisure.

Please now watch the following video on market information sources (07:31 mins). You will see as you work through the video and start to
explore the market in more depth that there is no right or wrong answer. The market only works because there are different opinions and
judgements being made by investors so the challenge when analysing is to gather the evidence, analyse it and most importantly to justify your
conclusions with the relevant evidence.

Note: Audio and video is only available in the online version of this content.

In the market information video above we used Yahoo Finance to see examples of the information available and how we can interact with it to
produce timelines and graphs comparing share price history. We also noted that a PE ratio on its own is not sufficient as we need something to
compare it with. In addition to comparison with a competitor we can also compare a company's PE ratio with its sector PE and with the market
PE.

Talking point

Investment information

Think what stock market information you would find most helpful for your own company (or a company of interest to you)
when planning to invest some of your hard-earned money. Where would you look for this? Why?

Please post your answer in the comments below or post a considered response to another student's answer (maximum
150 words).

Activity 6.4.1
6.5 The broader picture
In addition to the source of information discussed previously, it is also possible to find some - albeit limited - information on industry averages to
help with our comparative analysis. Detailed information is hard to find, although there are subscription services available which do provide
comparative information, but the following video shows some images from The Financial Times which give sector and market figures. This is a
good source although the sectors are rather broad so may contain companies which are not close competitors. An alternative approach
therefore could be to select perhaps 2 or 3 close competitors and use those to create some industry averages. Once we compare the company
PE to the sector and the market we start to get a better idea of where the company sits within the market and this comparison can help us
make better judgements about the company.

Please now watch the following video (16:11 mins):

Note: Audio and video is only available in the online version of this content.
6.6 Summary
This lesson has focused on the final group of ratios - the investment ratios. In addition to our own analysis of a company using the annual report
etc., it is often useful to get a market view - we might for example be considering a takeover or amalgamation. The lesson looked at ratios
concerned with dividend and market price - with a particular emphasis on the PE ratio. The lesson also looked at easily available sources of
market information to enable you to build a better picture of the company from the market viewpoint.
End of Lesson 6 activity

Quiz

Investment ratios

To check your understanding of investment ratios that we have covered in this lesson, please attempt the quiz below.

Once you have done so, you will unlock the next lesson.

End of Lesson 6 activity

wbsLive

wbsLive

Marks & Spencer Report

In preparation for this week's wbsLive, please imagine you are working for a competitor of M&S and have been asked to
prepare a report for your CEO on the Stock Market view of M&S.

Calculate appropriate ratios and use these to comment on the stock market view in the form of an executive summary
setting out your key findings.

Post your executive summary in the comments below (maximum 150 words).

We will review this in the wbsLive session.

wbsLive 4
6. Further reading and references
Further reading
There is no further reading for this lesson.

References
There are no references cited in this lesson.
Reading for Lesson 7
Cost Volume Profit analysis
by Graham Sara

Before beginning the lesson, please read:

Atrill, P. and McLaney, E. (2021)

Accounting and Finance for Non-Specialists (12th edn)
Harlow, England: Pearson, Chapter 7
You can access this text through your VitalSource bookshelf

During the lesson, please read the following case study when directed:

Bates, K. and Whittington, M. (2022)

The Diamond Sat Nav Company
Warwick Business School
A PDF of this case study is attached below.
7.1 Introduction
Please watch the following video (00:54 mins) introduction to the lesson:

Note: Audio and video is only available in the online version of this content.

This lesson explores a different area of accounting known as management accounting. We look at how accounting can aid decision-making -
particularly by looking at cost behaviour and applying this to the relationships between cost and profit.

Learning outcomes
By the end of the lesson, you will be able to:

recognise how different costs behave

identify how semi-variable costs can be split into their fixed and variable components

calculate the contribution and apply it to CVP (Cost Volume Profit) situations

calculate the breakeven point and margin of safety

calculate the effect of the cost structure on operating gearing

evaluate the impact of the various calculated measures on business decisions and use this to make management decisions.

Stop and think

Family trip

Imagine if a family of 2 adults and 2 children are planning a day at the seaside. The family are deciding whether to use the
car, or to go by train.

The train would cost £120 for the four of them.

The family car uses 25p of fuel for every mile. It also costs £1,000 a year to tax, insure and maintain the car and a further
£4,000 a year in depreciation. As the car does about 10,000 miles each year, this equates to 50p per mile.

Dad therefore thinks that the car journey will cost 75p per mile (with fuel, insurance, etc), meaning a total of £150 for the
200 mile trip. He thinks the train is the best option.

Mum thinks that the car will depreciate anyway so only the fuel, tax, insurance and maintenance is relevant, hence the cost
by car is only 35p per mile - £70 in total.

How should they travel? Once you have considered your answer, see how it compares with the explanation on the next
page.

Activity 7.1.1
7.2 What is management accounting?
The simple example of the family trip in the previous activity illustrates the dilemma faced by decision makers - what are the relevant costs, how
can these costs be evaluated and what else should be considered?

On the face of it. Dad's reaction seems reasonable as the vehicle does indeed appear cost 75 pence a mile, averaged over the year. However,
saying that this trip uses 75p per mile fails to take into account the relevant costs of the trip: these are the additional costs that would be
incurred if the trip goes ahead whether by train or by car. The insurance, depreciation, etc. are the same whether the trip takes place or not
(assuming that depreciation is not affected by the extra 200 miles journey - even if it was, it would be very small ). The relevant costs are
only the fuel which would be 200 miles x 25 p = £50. The rational decision on financial grounds would therefore be to go by car at a cost of
£120, rather than by rail.

However, the decision might be more complex if we consider other factors. For example:

Traffic jams and/or the possibility of train strikes could make the journey a not-so-relaxing one for the driver, potentially increasing the risk of
road travel.

There is more flexibility in travel times using car.

There is a higher risk of breakdown.

So the decision is not just a financial one. Many business decisions have a financial element, but it is important to consider the non-financial
factors too.

Although management accounting uses information from the same accounting system as financial reporting - sales, costs, assets etc. - it differs
in various ways from financial accounting. Management accounting is an internal process to aid management, so is not impacted by rules and
regulation and is not subject to external audit, although it is of course likely that firms will follow best practice. It also focusses more on forward
estimations rather than historical transactions, as well as being more granular in the way that it looks at; for example, product prices, product
costs, and product profitability.
7.3 Cost behaviour
We will now look at how costs behave in relation to the level of activity. We can observe that, when output changes, some costs do not change
at all, whilst others might change significantly (or perhaps just a small amount). If we are trying to project future activity, a knowledge of how
costs behave is essential in the forecasting process.

Once we know how the various costs behave, we can work out important metrics such as the contribution and the breakeven point. The
contribution is defined as the extra net revenue we will receive from selling one additional unit of product or from each additional £ of sales. This
will enable us to calculate for example, the point at which we have sold sufficient units to earn enough contribution to cover the fixed costs.
Thereafter every additional contribution is profit.

This incremental approach to forecasting and planning is important as it reflects the fact that many business decisions are based on the
incremental change that results from that decision. Annual budgets for example, will usually start with the current activities as a basis and then
explore the impact of additional sales volume, changes in price, product mix or changes in manufacturing processes. The application of the
incremental approach can therefore reflect many decision-making processes. The approach also helps to identify what are known as the
relevant costs - costs (or revenues) which change as a result of a decision or a changing circumstance. Relevant costs might be the
incremental costs or benefits or might include opportunity costs - the costs of losing the opportunity to do Plan A when you adopt Plan B.
7.4 Fixed vs variable costs
Please look at the video below (10:16 mins), which looks at the different types of cost in more detail. The cost behaviour video shows the main
types of behaviour:

fixed costs

variable costs and

semi-variable costs.

Remember that the types of cost are all based on the cost in relation to activity. When we say that a cost is fixed, we do not mean it cannot
change - for example, rent might go up as part of a regular rent review - but it is still a fixed cost as it does not change with activity. The graphs
also assume that the relationships are all linear. In practice of course, this may not be strictly true - for example buying more materials may
mean that the unit price falls, and the graph would then be curved. This should not affect the basic principles, but the mechanics might be more
complex as the lines will be more difficult to define.

Note: Audio and video is only available in the online version of this content.
7.5 Estimating cost relationships from past data

This page is optional. If you wish, you can move on to the next page.

So far we have looked at fixed and variable costs and assumed they behave in a very regulated way. However, in practice costs probably do not
behave perfectly but will be scattered - hopefully with some correlation to usage unless they are random (in which case best guess is probably
necessary!). There are several ways of doing this. If it is a new business or project, we may have to use some technical assessment - for
example, the cost of power for operating a machine used in manufacturing could be estimated from its power rating and usage time estimates.
If the machine has been running, we could look at meter readings over a period of months and then use those to estimate cost.

If you are interested in exploring this further, please look at the video (08:31 mins) below, which shows some graphical and statistical ways of
calculating the way in which cost is related to activity. (Note that the regression example is shown for illustration only - we do not expect you to
do it in this module!)

Note: Audio and video is only available in the online version of this content.
7.6 Break even analysis
A key management metric is to know at which level of activity the business moves from loss to profit - the breakeven point. The following video
looks at the graphical representation of the breakeven relationships and then looks at how to calculate it arithmetically.

The video shows how to calculate the breakeven point by first calculating the contribution and then using that to determine at which point fixed
costs have been covered. Once the breakeven point is determined we can then see how close the business is to going into a loss situation by
calculating the margin of safety. If the margin of safety is low, for example 5%, then this means that the breakeven point is only 5% below the
expected sales so it would only take a small fall in activity to move into a loss position.

The video also shows how similar information can be portrayed using a profit volume graph, where the slope of the line represents the
contribution and the (negative) intersect with the Y axis represents the fixed costs. The steeper the slope, the higher the contribution. Such a
chart enables a variety of alternative scenarios to be represented to help decision-making.

Please now watch the following video (16:45 mins):

Note: Audio and video is only available in the online version of this content.

Although many of the examples calculate the breakeven points in units, in practice this may not be possible as there will be multiple products.
The approach then uses the contribution per £ of sales - the contribution margin - to give the breakeven point in £ of sales. Where there are
multiple products, it is likely that they will have different contribution margins, and so the breakeven calculations are only relevant to the
particular product mix. If the mix changes, then the overall contribution and hence the breakeven level of sales will also change.

Quiz

Breakeven point

To check your understanding of the breakeven point that we have covered in this part of the lesson, please complete the
quiz at the bottom of this page.

Activity 7.6.1
7.7 Brown Ltd case

Exercise

Brown Ltd case

To practice calculating a breakeven point, please read through and complete the Brown Ltd case (attached below).

Activity 7.7.1

How did you get on with the case study? The following video (05:02 mins) below shows the solution. You will see that the key is to separate the
costs into their fixed and variable elements. This enables you to identify the contribution in per units terms or per £ of sales (the contribution
margin) which you can then use to find the break even point.

Note: Audio and video is only available in the online version of this content.
7.8 Operating gearing
We have discussed financial gearing in previous lessons, but there is another type of gearing which relates to the variable/fixed cost structure
called operational gearing (or operating leverage). This acts as a multiplier and shows, for a particular cost structure and volume, the
proportional change in profits when activity changes. This is important to know because if the operating gearing is high then the fluctuation in
profits will be high (and hence riskier).

Now please watch the video (09:53 mins) below, which examines the impact that different cost structures might have on the profit.

Note: Audio and video is only available in the online version of this content.

The operating gearing can be calculated by the formula: contribution / profit. This will be greater than 1 which means that for every 1% change
in sales, the profit changes will be 1% x operating gearing. Businesses with high fixed costs will usually have high operational gearing, so they
are very dependent on volume to cover the fixed costs, and if volume falls then the impact on profit is quick and potentially brutal. Examples
would be airlines, hotels, car manufacturers all of whom do much better if they can keep their output and hence sales up.
7.9 Practical applications
CVP analysis which uses the marginal costing approach is useful in many management decisions such as pricing, manufacturing strategies,
make or buy components and maximisation of scarce resources. For example, a recent question on a car advice page was asking why it is
currently hard to source better-equipped models of cars. The following advice was given:

High specification cars require far more semiconductors than low spec. models.

The feedback received from manufacturers would suggest that the global shortage of semiconductors has forced carmakers to rationalise
what stock they have, which means the vehicles with less tech can be built in far greater numbers than those filled with touchscreens and
digital instrument displays.

Powell (2022)

Using the limited number of chips to make highly specified vehicles would mean that fewer vehicles could be made as output is limited by the
availability of chips. Car manufacturers have decided that, given the shortage of chips, there is more value (contribution) to them in making
more base specification cars than adding extra options to the cars. In CVP analysis, chips are a 'limiting factor' so the optimal strategy is to
maximise the contribution per limiting factor.
7.10 Summary
This lesson has explored the use of marginal costing in management accounting. It looks at the various ways that costs behave and then looks
at the idea of 'contribution' which is a key metric in decisions such as pricing and manufacturing strategy. The importance of contribution in
determining the breakeven point is established, leading to an examination of operating gearing.
End of Lesson 7 activity

wbsLive

The Diamond Sat Nav Company

Now look at the data in the case study, The Diamond Sat Nav Company . (A copy of this reading can be found on the
'Readings for Lesson 7' page.) Please attempt the following task before the wbsLive session, where we will discuss it in
more detail.

1. As the Financial Director, complete the spreadsheet template (attached below) using the data in the case, under the
three different options from the three directors

2. Then, comment below (maximum 150 words) on the advantages and disadvantages of each option, and make a
suitable recommendation to the board.

Once you have commented, you will unlock the next lesson.

End of Lesson 7 activity

7. Further reading and references
Further reading
There is further reading for this lesson.

References
Please find below the reference list of academic works and published materials cited in the lesson. These are not linked and, if you wish to
follow up on any of these references, you will have to use your own research skills to locate these.

Tooze, S. (2022)
''Ask Honest John - Are manufacturers trying to make people buy base models?' <https://www.honestjohn.co.uk/news/car-market-1/2022-
08/new-car-sales-fall-for-fifth-consecutive-month/>
(Accessed 22 July 2022)
Reading for Lesson 8
Capital investment decisions
by Graham Sara

Before beginning the lesson, please read:

Atrill, P. and McLaney, E. (2021)

Accounting and Finance for Non-Specialists (12th edn)
Harlow, England: Pearson, Chapter 10
You can access this text through your VitalSource bookshelf

During the lesson, please read the following case study when directed:

Whittington, M. and Bates, K. (2022)

Hope Electronics Ltd Case Study
Warwick Business School
A PDF of this case study is attached below
8.1 Introduction
Please watch the following video (01:02 mins) introduction to the lesson.

Note: Audio and video is only available in the online version of this content.

In 1626, Manhattan Island was sold to the Dutchman Peter Minuit for $24 worth of trinkets. If instead that $24 had been invested in a bank
account (if there were such a thing) earning say 2% interest it would now be worth over $60,000.

Source: Graham Sara

The value of Manhattan has increased much more than 2% per annum and in 2014 land was estimated to have a value of $1.7 trillion - an
annual growth rate of over 8%. Not a bad investment! What these huge numbers indicate is that over longer time periods the interest rate has
powerful effects. Conversely, it also means that cash flows in the distant future - even 10 or 20 years - are worth much less when converted to a
present value equivalent. It is therefore important to recognise this when evaluating long term projects and investment decisions.

We have previously looked at CVP analysis, which essentially is a short-term decision tool. In this lesson we will look at longer term decisions to
identify how to appraise projects which may have a long-term profile. We will start by looking at the sort of situations where techniques are
useful and then look at the various techniques - one of which is based on profits, and the rest are based on cash flows. We will also look at the
issues around identifying which cash flows are relevant to an appraisal. There is strong relationship between accounting and finance in this
lesson as some of the techniques are based on adjusting for the Time Value Money (TVM). The same cash flow at different times in the future
are not equal value so we need to adjust these to a common basis by the process of discounting them to a present value. We will also look at
how the techniques can be used to obtain information about the impact of changes to the assumptions on the viability of the project. For
example, what happens if sales targets are not met? How big would changes need to be to make the project unviable?

Learning outcomes
By the end of this lesson, you will be able to:

identify scenarios where capital investment techniques can and should be used

apply the main techniques and use the results to analyse the financial consequences of long-term projects

explain the risk of proposals using sensitivity analysis

explain the financial consequences of project proposals

evaluate how non-financial factors might contribute to the final recommendations.

8.2 What is investment appraisal?
We start by looking at the sort of activities which might have long-term impacts - essentially projects where we spend some money now with the
intention to get cash flows back at various points in the future. Examples of this include the acquisition of a new company or purchase of a major
asset where we invest sums now to get benefits in the future.

One of the first major projects to use these techniques was the M1 motorway in the UK, which is somewhat different from the commercial
investment as the returns are measured in terms of social benefits and costs. However, the principle is the same as the Government wanted to
check that the money being spent was worth it - albeit in social terms rather than cash.

More recently, the Channel Tunnel was (is) a commercial enterprise that used the same techniques in its public offering prospectus to
demonstrate to potential shareholders how the tunnel would generate future cash flows and be profitable. In fact, any major expenditure
decision should be subject to a careful appraisal of its worth - if the future cash flows are insufficient to justify the initial cost, then why should
the project go ahead?

Please watch the video (19:17 mins) below which sets the scene for the financial appraisal of capital expenditure. Two possible techniques are
introduced in the video: Accounting Rate of Return and Payback. Recent studies have shown that both techniques are used in decision-making,
even though they ignore the timing of the cash flows. The Accounting Rate of Return is also calculated using profit figures so is also subject to
the judgements and estimates inherent in profit measurement. It is mentioned here because it is still in use but is not recommended as a
meaningful technique as there are better techniques available. Payback also fails to recognise the timing of cash flows but is popular because it
is easily understood and tends to favour the shorter-term projects. Arguably these are easier to predict as the time scales are shorter and the
uncertainties perhaps easier to identify and evaluate.

Note: Audio and video is only available in the online version of this content.

Quiz

Payback period

To check your understanding of payback periods that we have covered in this part of the lesson, please complete the quiz
at the bottom of this page.

Activity 8.2.1
8.3 Time Value of Money (TVM)
If you were offered £100 now or in three years' time, which option would you choose? Most of us would prefer it sooner rather than later.

We showed earlier that the same cash flows at different points in time are not of equal value to us as a rational investor would generally rather
have the money now rather than the money later. There is a lot of finance theory about how these differences in value can be evaluated, but
essentially it recognises that when we invest money, the interest earned is compounded so that we get a larger sum at some future date.

For example, a rational investor whose relevant interest rate is 10% would regard £100 now as worth the same as £110 in 1 year's time, since
£100 invested at 10% will be worth 100 x (1+10%) = £110 next year (this assumes no uncertainty or risk). Working backwards we can therefore
say that £110 in a year's time has a value now (the present value) of £100, and we calculate this in a similar way i.e., PV = £110 / (1+10%) =
£100.

Please now watch the following video (14:28 mins). It explains the theory behind the techniques and particularly how to convert a future cash
flow to a present value. This puts all the cash flows on a common basis and means we can manipulate them legitimately. The unknown factor is
the discount rate - this is a weighted average of the cost of two sources of long-term finance, the returns to the long-term debtholder and the
returns expected by the shareholder. This is commonly referred to as the Weighted Average Cost of Capital (WACC). We do not develop the
theory behind this in any detail as for the moment you will always be given it or can find it in the annual report. However, we do show some
figures of the average WACC for a variety of US businesses to give you a feel for what might be a typical value. This will change as company
and economic conditions change but it is a useful benchmark.

Note: Audio and video is only available in the online version of this content.
8.4 The main technique - Net Present Value (NPV)
The video 'Net Present Value' shows that if we discount all the future cash flows in a similar way we get a set of present values that, because
they are all expressed in present value terms (i.e. the value today), can be added and subtracted. This will give us the Net Present Value
(NPV).

The key to this calculation is identifying whether the cash flows - positive and negative - and their timings that will result from going ahead are
worth the initial outlay in the project. In practice, estimating future cash flows is the hard part: once we have the numbers, we can easily do the
calculations, either manually or, more usefully, with a spreadsheet.

Now please watch the following video (17:07 mins). The video shows a simple application of the DCF approach to give us the NPV. Once we
have the NPV(s) we can decide on which project to choose, if any.

A positive NPV means the project is worthwhile and in a perfect market will increase shareholder value and the value of the company by the
NPV amount. Of course, markets are not perfect, so the change is likely to be proportional. It is also worth emphasising that NPV is generally
the most reliable tool so should feature in any analyst's toolkit.

Note: Audio and video is only available in the online version of this content.

Quiz

Net Present Value

To check your understanding of the Net Present Value that we have covered in this part of the lesson, please complete the
quiz at the bottom of this page.

Activity 8.4.1
8.5 Internal Rate of Return
The second main technique is the Internal Rate of Return (IRR). This is closely related to NPV as it uses the same cash flows and the same
approach of discounting. The difference is, that instead of finding an absolute value (such as NPV), it finds the discount rate that gives a zero
NPV. This is like a breakeven point as it shows the point at which the NPV goes from positive to negative. If the IRR is higher than WACC then
the project is potentially worth doing. The calculation of IRR is a little tricky manually as it involves trial and error and extrapolation - fortunately
Excel springs to the rescue with a good IRR function.

Now please watch the following video (12:14 mins). The video shows how to calculate the approximate IRR by calculating the NPV at two
discount rates which are not too far apart. There will be a difference in NPV at different discount rates, so this difference can be used to
calculate an approximate IRR value, which is normally close enough - particularly as all the cash flows are estimates anyway! Although IRR is
very popular because it gives the result in % terms, it is less reliable than NPV as it is a relative measure, whereas NPV is an absolute
measure. Therefore, IRR may not lead to maximising shareholder wealth when comparing projects.

Note: Audio and video is only available in the online version of this content.

Quiz

Internal Rate of Return

To check your understanding of internal rate of return that we have covered in this part of the lesson, please complete the
quiz at the bottom of this page.

Activity 8.5.1

Exercise

Pillerton case

Once you have completed the quiz question on Internal Rate of Return, please attempt the Pillerton case. We advise that
you use the attached spreadsheet.

Once you have attempted the case you can then move onto the next page and the watch the Pillerton solution video, to
check your answer.

Activity 8.5.2
8.6 Pillerton solution
You will have discovered in this case study the importance of identifying the correct cash flows. These must be the incremental cash flows
arising if the project goes ahead. Please now watch the following video (06:51 mins) which takes you through the exercise in detail.

(Note: There is an error in the video where it initially states that sales in year 4 are 1200. This should read 1000 as this is the figure used in the
solution slides and explanation)

Note: Audio and video is only available in the online version of this content.
8.7 Risk and sensitivity
It is always important when doing forecasts to test the robustness of the results. If the project is sensitive to minor changes, it is riskier than a
project that is not so sensitive. For example, if a small drop in sales would make the project unacceptable, decision-maker needs to decide if
they are so confident in their projections that they should still proceed. We also consider other ways of considering risk.

The main technique in the video below (10:18 mins) is to test the key metrics in the forecast to see how much change would make the NPV
negative (or make the IRR equal the WACC). Typical elements for testing would be the sales and costs but any components of the cash flow
model could be potentially risky so these should be identified if appropriate. We also consider the final decision process which should show
awareness of other possible risks of a non-financial nature such as environmental, regulatory, labour relations etc.

Note: Audio and video is only available in the online version of this content.
End of Lesson 8 activity

wbsLive

Hope Electronics Ltd

Please read the case study, Hope Electronics Ltd. (A copy of this reading can be found at the bottom of the page). We
will review this case and discuss it in more detail in the next wbsLive session.

The case brings in everything we have covered in this lesson and the final recommendation is rather more subtle than it
might seem at first glance!

Attempt the following questions, using the spreadsheet template (attached below):

1. Calculate the NPV and the Payback for the project.

2. Consider the sensitivity of the project.

3. Consider what your advice to the Board would be.

Then select the NPV from the options below. Once you have done this, you will unlock the next lesson.

End of Lesson 8 activity

8. Further reading and references
Further reading
These readings are optional and are not required reading for the lesson. They have been made available to enable you to continue reading
around the topic if you wish to do so. Where electronic sources are available, these are provided as links.

Dugdale, D. (1991)
'Is there a 'correct' method of investment appraisal? (http://0-search.proquest.com.pugwash.lib.warwick.ac.uk/trade-journals/is-there-
correct-method-investment-appraisal/docview/195664197/se-2?accountid=14888)'
Management Accounting, 69(5), pp. 46-50

References
There are no references cited in this lesson.
Reading for Lesson 9
'Into the future?'
by Graham Sara

There are no set readings for this lesson.

9.1 Introduction
Please watch the following video (00:53 mins) introduction to the lesson .

Note: Audio and video is only available in the online version of this content.

By this stage of the module, it may not surprise you that accounting is a more dynamic discipline than many would expect. Fifty years ago, the
accounting and business worlds were more straightforward than they are today and changes in accounting were relatively limited and slow. As
business became more complex and global, the profession had to play catch-up to ensure that accounting rules and practices reflected what
was happening. The profession realised this and started to take more of an initiative to influence business in the 1960s with the introduction of
Accounting Standards, and since then these have been extended and revised so that there are currently over 40 standards in existence being
used in over 180 countries.

The process of innovation in, for example accounting standards, financial reporting generally, audit rules and procedures, is ongoing and this
innovation is often very influential in leading the way. To deal with all such topics comprehensively is beyond the scope of this module but this
lesson aims to give some insight into one of the current 'hot topics', broadly defined as 'Integrated Reporting', as this is going to have a major
impact on the future look of annual reports.

Learning outcomes
By the end of the lesson, you will be able to:

explain the development of non-financial/Corporate Social Responsibility (CSR) type reporting by organisations

recognise the demand for value-driven reporting, focusing on the development of Integrated Reporting

discuss different approaches to Integrated Reporting.

'By Royal Approval'

Please now watch the following video (06:04 mins), which shows then-prince Charles voice his support for integrated reporting.

Note: Audio and video is only available in the online version of this content.

It is very pleasing to see Accounting getting Royal approval - particularly as the UK is taking a big lead in future reporting developments! It does
show the importance of a wider view of financial reporting and the responsibilities of the commercial sector in preparing for and protecting the
future. This lesson will explore recent developments in this area.
9.2 The drivers of change
The annual report of Marks and Spencer plc consisted of 216 pages in 2021. In comparison, the report in 2012 was 116 pages long so over the
9 years between 2012 and 2021 the report nearly doubled in size. This is not out of the ordinary and is in fact fairly typical of annual reports in
general so it begs the question - why? This lesson will explore some of the reasons.

Please now watch the following video (09:21 mins). The video starts to look at some of the main drivers of change that are included in company
annual reports.

Note: Audio and video is only available in the online version of this content.
9.3 Integrated reporting
There are now many pressures on the profession to make financial reporting more inclusive of non-financial information covering issues
including climate change, gender, social responsibility etc. We will now explore a major initiative to make reporting more inclusive - integrated
reporting.

The mission of the International Integrated Reporting Council (IIRC) is to create a globally accepted integrated reporting (IR) framework which
has as its main focus the demonstration of how an organisation creates sustainable value.

Please now watch the following video (14:01 mins), which introduces the idea of identifying and reporting how the various types of capital -
financial and non-financial, can create value.

The video shows how integrated reporting has developed from a corporate base via corporate social responsibility (CSR) and the global
reporting initiative (GRI) to integrated reporting (IR) (there are many acronyms in this area!). The focus of IR is to encourage companies to think
in a more integrated way and to avoid what they call 'silo mentality'.

The process is to break down the firms' activities into 6 different forms of capital:

financial

manufactured

intellectual

human

social and relationship

natural.

Integrated reporting then takes these capitals and uses them to explore how value has been or might be created over time.

At the core of the organisation is its business model, which draws on various capitals as inputs and, through its business activities, converts
them to outputs (products, services, by-products and waste). The organisation's activities and its outputs lead to outcomes in terms of effects on
the capitals. Although the key to value creation are the business activities, which in a traditional view of business performance, should generate
profit and cash the integrated reporting view on value creation is that financial value is just one element, or 'capital' of value creation, and there
are five other capitals that should be considered.

The video ends with a look at an example of the six capitals from Sanford Ltd - a New Zealand Sea Food company. This is just one example,
but the IIRC expects there to be many ways in which companies might approach integrated reporting - so we will undoubtedly see many
variations and alternative approaches in the coming years.

Note: Audio and video is only available in the online version of this content.

Exercise

Identifying the cap

We have now identified 6 different types of capital that might contribute to the value creation process. The exercise below,
based on a fictitious airline, asks you to identify some factors that might be considered as contributing to each type of
capital.

Please read through the Patchouli PLC case attached, before attempting the question below.

Activity 9.3.1
9.4 Integrated reporting in action
The next video (04:33 mins) starts with a short talk from Matthew Cannon - Director of Accounting Development at Unilever plc, where he
explains how Unilever is approaching integrated reporting (IR). This shows how there is no 'one-size-fits-all' template and different approaches
may well be appropriate for different businesses and industries.

Note: Audio and video is only available in the online version of this content.

There are however, some general guiding principles which are designed to ensure similar end results albeit with different styles and these are
considered in the next video. Please now watch the following video (09:48 mins).

The video concludes with some guiding principles and a list of the main content elements. You may notice that these are not dissimilar to the
sort of points we discussed in the 'context' part of CORE - but of course this now includes the wider considerations in the wealth creation
process.

Note: Audio and video is only available in the online version of this content.

Talking point

Applying the guiding principles

This task sets out a scenario where you can consider how the guiding principles might be covered in a simple but realistic
scenario using our Lilac Group case.

Please read through the Lilac Group case attached below. Respond to Colin's comments - are they aligned to the guiding
principles of the IIRF (International Integrated Reporting Framework)? Can you suggest how Colin needs to change his
approach in preparation to the integrated report of the Lilac Group?

Please post your answers in the comments below or post a considered response to another student's answer (maximum
150 words).

Activity 9.4.1
9.5 Integrated reporting in action: solution
The Lilac case gives you an opportunity to consider some ideas of what might be relevant in an integrated report. There is no 'right' answer but
here are a few thoughts.

Colin would like the Integrated Report to focus on just one area of business, the newly acquired company which deals with organic food. One of
the guiding principles is reliability and completeness. This suggests that the Integrated Report should present a balanced picture and not be
biased. Colin is introducing some bias as he wants the report to focus on one part of the business, the activities of Fruitopia Ltd, and the report
clearly will not be complete if it fails to discuss the Group's non-organic side of the business in sufficient detail, or at all.

The new organic business division is not as material in monetary terms as the pre-existing business, contributing 15% to revenue. Colin needs
to evaluate the materiality of the business divisions, and it would seem that while the organic division has growth potential, currently its financial
input to the Group is less than other parts of the business.

It is important to discuss the organic business division as it would seem to be important for the business strategy and future development of the
Group. But it should be done in the context of the Group's total activities. The Integrated Report should be prepared in line with the connectivity
principle. It will be hard to demonstrate connectivity across the Group's business model if only part of it is being discussed. For example there
may be synergies and linkages between the value creation relevant to the two parts of the business which should be identified and explored in
the report.

Trying to make the Integrated Report 'stand out' is not necessarily a bad thing, but Colin should bear in mind the comparability principle.
Readers should be able to compare the Integrated Reports of organisations operating in similar sectors, and using unusual KPIs will detract
from comparability. Unusual KPIs may be hard to explain, making the report difficult for readers to understand. It might be a good idea for the
Group to include some more traditional KPIs, and look to the Integrated Report of its peers operating in the same sector, to provide some
benchmarking. The report certainly can include some unusual KPIs as long as they are relevant and well explained, and used as
supplementary information rather than the main focus of the report.

Finally, Colin is right to consider the views of shareholders as they are a significant stakeholder group. However, a wider range of stakeholders
should be considered in accordance with the guiding principle of stakeholder relationships. So, for example, the information needs of the
Group's customers and suppliers should be considered.
9.6 Integrated reporting: discussion
Please listen to the following podcast (20:46 mins) between Graham Sara and Professor Lisa Weaver, who has prepared research on
International Recruitment, including publications for professional bodies.

Note: Audio and video is only available in the online version of this content.
9.7 Interview with Robin Stalker

This page is optional. If you wish, you can move on to the next page.

The following videos (11:39 mins total) are taken from a presentation given by Adidas' former CFO Robin Stalker and recorded at the Shard. He
offers his thoughts on the role of the CFO and the wider reporting agenda:

Note: Audio and video is only available in the online version of this content.

Note: Audio and video is only available in the online version of this content.
End of Lesson 9 activity

Talking point

Your company's annual report

Have a look at your own company's annual report (or a company you are interested in).

How well does the last report satisfy the guiding principles of integrated reporting? What are the shortcomings? What does
the company need to do to address these?

Please post your answer in the comments below (maximum 150 words), in the form of short bullet points.

End of Lesson 9 activity

Conclusion
You have now reached the end of the journey, which we started a few weeks ago - but you can also think of it as the start of a longer journey
which as many situations and decisions you might face in the future are likely to have a financial element.

If you consider how the module started with the assumption of very little financial knowledge, you have come a long way and will now be able to
have more input into the financial aspect of business decisions.

We hope you have enjoyed this module - we have certainly enjoyed working with you.
9. Further reading and references
Further reading
These readings and videos are optional and are not required reading for the lesson. They have been made available to enable you to continue
reading around the topic if you wish to do so. Where electronic sources are available, these are provided as links.

Druckman, P. (2013)
Interview with Paul Druckman - CEO of International Integrated Reporting Council (https://youtu.be/ojgzys8l9-Y)
KPMGUK

King, M. (2011)
Prof. Mervyn King explains Integrated Reporting for South Africa - Part 1 (https://www.youtube.com/watch?
v=6HRB7aMvT08&t=20s)
TheSAICA

Integrated Reporting (2022)

About us (https://www.integratedreporting.org/the-iirc-2/)
IFRS Foundation

References
There are no references cited in this lesson.