The word ‘consolidated’ or ‘group’ as a part of the title of the profit and loss account indicates that the Unilever group owns a minimum of 50 per cent of the voting share capital of variety of companies. These companies are called ‘subsidiaries’. for instance, it owns 80 per cent of Lyons Tea in Ireland. within the preparation of a consolidated profit and loss account, the revenues and costs of all the subsidiaries are included. this can be because the group fully controls the subsidiaries from a management point of view, whether or not it doesn’t fully own them.
This is the invoiced value of all the products and services provided by Unilever to its external customers. it’s calculated after deducting any sales discounts and value added tax (VAT). within the case of VAT,
Unilever acts as a group agent on behalf of the govt..
Therefore, there’ll be an amount owed to the govt., which is able to be a short-term creditor or an amount due from the govt, which can be a short-term debtor.
This is the direct cost of the sales made by Unilever to its customers. It includes raw materials and packaging (which account for nearly 80 per cent of the entire cost of sales). More generally, it’ll also include the value of the labour involved in manufacturing the products.
This is the difference between revenue, turnover or sales, and therefore the cost of sales. it’s an indicator of the fundamental profitability of the products and services sold. The net income must be large enough to hide a minimum of operating costs, interest charges and taxation so on provide an adequate level of earnings.
These are the prices involved in running the business. within the case of Unilever and other companies, they include distribution and selling costs, staff costs, depreciation, advertising and promotion, research and development, legal fees and therefore the remuneration of the auditors.
The difference between the profit and operating costs is that the operating profit or the profit before interest and taxation. it’s the profit earned directly by the business from its trading activities.
These are unusual items, which require to be distinguished from normal items like ongoing operating costs. they’re shown separately in order that the underlying performance are often assessed additionally because the overall result.
It may be possible, as an example, to point out a superb underlying result but the result overall was stricken by abnormal costs or gains such as:
major reorganization (as within the case of Unilever);
the profit on the sale of a business (Unilever again);
a loss on the sale of a business.
The requirement to disclose exceptional items separately was made in
Financial Reporting Standard 3 (FRS3) ‘Reporting Financial Performance’, published in October 1992.
This is the difference between the interest payable on borrowings and therefore the interest receivable. Interest receivable materializes, for instance, by placing surplus cash balances on the short-term money markets to earn a return.
Profit on ordinary activities before taxation The key term here is ‘ordinary activities’. FRS3 has defined them as almost every conceivable activity or event that happens during a company’s life! this is often regardless of their frequency or unusual nature. FRS3 also requires companies to spot revenues and costs for continuing operations, acquisitions and discontinued operations.
This is the tax charge for the year following a separate calculation of taxable profits. It includes a provision for the tax arising on the profit earned outside the united kingdom.
Many subsidiary companies like the Unilever Group’s 80 per cent interest in Lyons Tea Ireland aren’t fully owned. this implies that there are shareholders in Lyons Tea who don’t seem to be shareholders in Unilever. More generally, subsidiary companies are partly owned by minority shareholders. they’re the shareholders who hold shares within the subsidiary only. they’re stated because the ‘minority interest’.
In the case of Unilever, the minority interest’s figure of £97 million represents the share of the profit after taxation owned by the minorities and not the Unilever Group. Therefore, it must be deducted to gain the Group’s profits after taxation of £3,335 million.
Preference dividends
These are the dividends paid to preference shareholders who, unlike ordinary shareholders, aren’t the owners of the business. Preference dividends must be paid before ordinary dividends, hence the word ‘preferred’. Generally, they’re a set amount for every preference share.
Earnings (the profit because of the normal shareholders)
As mentioned earlier, this is often the ‘bottom line’. it’s the profit after taxation and every one other charges less the minority interest and preference dividends.
Ordinary dividends
This is the number recommended by the administrators, subject to approval by shareholders, to be distributed to ordinary shareholders. the standard shareholders are the owners of the business. the standard dividend varies with the fortunes of the business. it’s dependent both on the extent of earnings and therefore the amount of money available. Most dividends are paid come in cash. they’re an appropriation of and not a charge against earnings. A dividend is an appropriation within the profit and loss account and, if it’s unpaid, a current liability described as a ‘proposed dividend’ within the record. When the dividend is paid in cash, the company’s cash balance are reduced and therefore the proposed dividend are aloof from the record.
Retained profit for the year
This is the difference between the earnings and therefore the ordinary dividends. It increases the equity or shareholders’ section of the record by the quantity involved.
The statement of total recognized gains and losses
The purpose of this statement is to incorporate, in one report, details of all the gains and losses of the amount and thus show total financial performance.
Some transactions like the revaluation of a property won’t appear within the profit and loss account because they’re of a non-trading nature. the identical is true of changes within the sterling value of overseas assets and liabilities because of rate fluctuations.
In the case of Unilever, for the year to the top of 1997, the statement is created of the web profit before preference dividends of £3,335 million less the adverse effects of charge per unit fluctuations of £339 million. This resulted in total recognized gains of £2,996 million.
Earnings per share (EPS)
EPS is calculated by dividing the profit due to the standard shareholders by the amount of issued common stock. within the case of
Unilever, the earnings for the 1997 civil year were £3,330 million.
There are nearly 7.5 billion issued common shares in order that the EPS works out at nearly 45p.
The FRS3 definition of EPS includes all realized gains and losses. But this suggests that the comparison of performance between companies is also difficult. this happens when there are exceptional items of a capital nature like the profit or loss on the sale of a business. within the case of Unilever, as an example, there was an exceptional capital profit of nearly £2.4 billion from the disposal of its speciality chemicals business.
This accounted for 32p of its total EPS of 45p and distorted the EPS arising from underlying trading performance.
For this reason, the Institute of Investment Management and Research (IIMR) has produced a ‘headline’ earnings definition which excludes any capital items. The Financial Times uses the IIMR definition.
2 Comments