Accounting and Finance in AS Diena
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“Accounting is the language of
business”…Indeed, like no man without ability to express his thoughts clearly
and understandably can achieve very much in life, no firm can succeed without a
good accounting system. Accounting is a necessary tool which not only provides
information to the owners about how its money is working, and to the state
about how big the taxes are to be fetched, but, the most important, enables the
company to control, to plan and to trace all the actions, processes and
projects. The purpose of this report is to find out how the accounting is done
in a successful company, and how the principles and methods used there differ
from the traditional accounting theory. In addition, the analysis of the
company’s performance will be worked out using the standard ratios.
The decision to choose AS Diena for the
report has been based on several criteria: it is one of the 100 largest
companies in Latvia, it has a leading position in its branch of industry, and
it is a good example of young and fast-developing Latvian business.
The analyses and findings presented in the
paper are based on the information received from the interview with the chief
accountant of AS Diena Inese Janikovska and from the Annual Report 1997 of the
company. The Report mirrors the financial data of AS Diena and its
subsidiaries: publishing house Diena Bonnier SIA, advertising agency METRO,
Bauskas Dzive SIA, agency Agro Apgads SIA, Kursas laiks SIA, Dzirkstele SIA,
Zemgales Zinas SIA. The information about subsidiaries is included in Annual
Report in limits of financial year starting from the date of acquisition.
Furthermore, the theoretical side was
strengthened with the knowledge gained from the lectures by Elvi Sederlin and
Gunnar Lindholm, and from the course textbooks “Business Accounting” and “The
Profitability, Financing, and the Growth of the Firm”.
To make the key ratio analysis sensible, a
similar size enterprise operating in the same branch of industry was chosen for
comparison. For this purpose, the figures from the final accounts of AS Preses
Nams were taken from the Lursoft database and used in the analysis.
The Latvian-Swedish joint-stock company AS
Diena was founded in 1992. In 1996 it was transformed into stock corporation.
In fact, it is a group of companies with parent company and subsidiaries. The
share capital of the company consists of 6000 fully paid ordinary shares,
moreover, each share has a nominal value of LVL 10 and its owner possesses one
voting right. The shares of AS Diena do not participate in stock exchange, and
no deals among the shareholders are allowed. The most important shareholder is
a Swedish company “Expressen AB”, which owns 2940 shares, i.e., 49% of share
capital and votes. In addition, it can be pointed out that the sales turnover
at 1997 constituted almost LVL 9.5 mil, and the average number of employees was
847. The officially registered kinds of activities of AS Diena are as follows:
printing work and related services
reproducing of computerized materials
agents dealing with sales of the wide range
The present strategy of the firm is
development as a media and media infrastructure company. To conclude, AS Diena
now enjoys the benefits of the large market share and solid reputation, and it
will undoubtedly try to maintain and to improve the current position.
Accounting system in AS Diena is fully kept
on software and all the transactions are done automatically. The main software
accounting program used is Mac Hansa. When the record is made, the account is
closed automatically, and the balance is sent to the next stage, i.e., Profit
of Loss Account, Balance Sheet, Cash Flow Statement etc. Printed information of
accounting actions is kept in the company’s archive. As AS Diena is a very
large company, the chief accountant could not tell exactly how many
transactions were recorded per year, but the approximate number is about
50,000. The most common transactions are those in connection to cash and bank
The Annual report is prepared according to
legislation of Latvia Republic and the laws “About Accounting” and “About
Annual Reports of the Company”. The main principles used in accounting are the
consistency concept (methods of valuation of assets and calculation of revenues
and expenses are kept constant from one year to another) and the prudence
concept (e.g., stock is valued taking the lowest from prime cost and market
value). Cash flow statement is prepared by using indirect method.
As per legislation of Latvia Republic, all
the company’s books are closed at the end of the financial year (in this case
at December 31 each year), when the Annual Report has to be made. This report
is handed over to auditors and to financial inspection. Usually, the inspected
Annual Report is available for users in about three months after the end of the
financial year. In addition, a smaller report for internal use of the company
is prepared at the end of each month. This report is handed over to the
management of the company.
As all the reports are made automatically
by means of software accounting program, the problems occur only when
transactions are recorded. The main difficulties outlined by the chief accountant
of AS Diena were settling accounts with debtors and creditors and recording
expenditures and revenues of the company. Difficulties also appear when making
records for financial and tax accounting.
As per Balance Sheet at December 31, 1997,
the highest value of the company’s assets is taken by debtors which in total
amount to 1,780,777, i.e., 35.42 % of the total assets. The biggest amount of
debts is observed with regard to bought goods and subscriptions. Each debtor is
examined individually by the management of the company, and those admitted as
bad are included in provision for bad debts for 100% of the debited amount.
Quite impressive are also figures observed as creditors. Short-term creditors
amount to 2,619,142 that is 52% of the total passives of the company.
As it was pointed out by the chief
accountant of AS Diena, cash is regarded as the most important asset of the
company because of its liquidity. If the company runs out of cash, it can
easily go bankrupt.
The highest level of revenues is observed
from sales of newspapers. The highest expenses are salaries, purchase of paper
and depreciation of fixed assets.
Analyses used in
The annual report of AS Diena includes
analysis of the current situation and changes during the year 1997.
There was LVL 5.27 million of total assets
in the balance sheet at the end of 1997; of those fixed assets were 30.1%.
Current assets were LVL 3.51 mil; of those debtors comprised of 50.7 %. The
most important fact is that trade debtors have increased by 40.5 % in 1997. The
reason behind it is the increase in net turnover. Unfortunately, previous trade
partners systematically ignore terms of repayment.
27.6 % of all capital plus liabilities was
equity. According to Arvils Ašeradens, the equity has grown to LVL 1.4
millions, which is 2.3 times more than year before (Annual Report, 1997, p. 5).
This was only due to profit for 1997; share capital and reserves were not
Changes in the profit and loss account were
analyzed mostly in the president’s report. The first item mentioned is the
increase in net turnover. According to Arvils Ašeradens, the net turnover
of the whole concern has increased by 29 per cent reaching LVL 9.5 million, and
such a situation is conventional for the company during last years. The main
reason for that is staff’s excellent accomplishment of their job (Annual
Report, 1997, p. 5).
Consequently, also the profit after taxes
has been increased to LVL 813 thousand. It is 16 times more than in 1996
(Annual Report, 1997, p. 5), and there are three crucial factors which
determine such a tremendous change. The first factor is the more efficient use
of resources in 1997. As mentioned above, net income has increased by 29 per
cent, but manufacturing cost of goods sold has increased only by 15% in the
same time. These calculations were made based on the Profit or Loss statement.
(Annual Report, 1997, p. 7) Next, there was a considerable growth in other
operating income. Finally, there was a rapid decrease in effective tax ratio
and reduction in interest payable.
Calculating the key ratios, average values were used because
profit was made during the year. There is also an assumption that profit is the
same each day during the year. All the ratios and necessary data are given in
This ratio does not depend on the capital
structure of the firm (The Profitability, Financing, and Growth of the Firm, p.
26). Profit before interest and taxation should be used in order to separate
ROA from the company’s financial policy. The ratio is 28.83 per cent (Table 1)
which is more than the same ratio for AS Preses Nams, thus telling about better
The difference from the previous ratio is
that ROE shows the return from the owners’ point of view; however, here the
minority interest is also regarded as equity. Thus the profit after taxes (with
minority interest added back) has to be applied. In AS Diena’s case ROE is
69.83 % (table 1). The reason why there is so large difference comparing to AS
Preses Nams (17.91%) is explained under D / E ratio section.
Average cost of debt in 1997 for AS Diena
was 2.15 per cent and being 3 times less than
for AS Preses Nams (Table 1) shows how debt
structure affects COD. AS Diena has higher proportion of non-interest bearing
debt, thus, its COD is lower.
D / E describes the financial policy of
firm. It is 2.53 in AS Diena’s case (Table 1) which shows that concern finances
its operations two and half times more using debt than its own equity. Here an
important notice should be made: LVL 655.7 th (Annual Report, 1997, p. 23) are
subscription fees for the next year which calculating D/E and COD are regarded
as debt. The fact that for AS Preses Nams D / E = 0.52 explains why there is
much sharper difference for ROE than ROA. Equity is less important source of
financing for AS Diena, so the difference in ROE occurs.
It should be noted that effective tax rate
can deviate from the statutory tax rate during years. (The Profitability,
Financing, and Growth of the Firm, p. 60) This difference can be seen in AS
Diena’s case. The denominator in the ratio is profit before tax. In 1997 t was
27.47 per cent. (Table 1) However applying the same formula in 1996 this ratio
was 60.32 per cent.
ratio; Quick ratio
The quick ratio shows the liquidity in very
short terms when it is impossible to sell stock. Both ratios for AS Diena are
similar and larger than 1 (Table 1). Thus, it should not be very hard for AS
Diena to get over short-term problems. Little difference between these ratios
indicates the low proportion of stock in current assets. In contrast, current
ratio for AS Preses Nams is 2 times more than quick ratio because it has large
amount of stock.
Equity ratio for AS Diena is 33.15 %, and
it is 2 times less than for AS Preses Nams. The reason for this difference is
of similar nature as for D / E discussed above.
margin; Capital turnover
ROA depends on two factors. The first one
is profit margin, and it is 13.15 %. (Table 1) The second factor is capital
turnover that can indicate the speed of operations. The decomposition of ROA
shows that the difference between AS Diena and AS Preses Nams in ROA is due to
faster capital turnover in AS Diena’s case.
E / E0
= ROE0 – Div / E0 + NI / E0
This formula decomposes equity changes.
Because there was no new issue of shares in 1997, only profit and dividends
affects equity for AS Diena.
ROE = (1 –
t)(ROCE + (ROCE – COD) * D / E)
In this formula only interest-bearing debt
should be taken into consideration. Thus COD was 7.99% (Table 1), and it is
similar to COD for AS Preses Nams, because there COD does not depend on
company’s debt structure.
It is fair enough to say that
it takes more than just analysing the Annual Reports to draw serious
conclusions about the accounting system and finance in the firm. However, some
important findings can be listed to summarise the investigation conducted in
First, there is no doubt that
the computerised accounting system is the only one applicable for the company
of the similar size because of the immense number of transactions and
complicated structure of the business.
Next, the analysis has revealed some
features that characterise the publishing and printing business:
operating activities are mainly financed by
short-term liabilities, most of them being non interest -bearing
debtors are the main component of the
current assets of the company, due to the need in the high level of stock
To conclude, the AS Diena financial indices
show an outstanding, if compared to competitors, business performance.
- Annual Report of AS Diena (1997).
- Johansson, S. (1998) The Profitability,
Financing, and Growth of the Firm,
- Sweden: Studentlitteratur, Lund.
- The State Register of Enterprises of Latvia
(1999, Feb 18). [on-line], Available:
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