Table of contents
Company background 3
Accounting system 3
Annual reports 4
Analyses used in Annual Report 5
Key ratios 6
Reference list 9
“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
. printing work and related services
. reproducing of computerized materials
. agents dealing with sales of the wide range of goods
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
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
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
Analyses used in Annual Report
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
A?eradens, 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 altered.
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 A?eradens, 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 Table 1.
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
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.
Current 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
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.
Profit 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
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 the report.
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 turnover
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],