Accounting and Financial Statements Revised

MODEL ANSWER
Question One
As per the presentation of the company’s information, WPP plc appears to be a right business partner. It is a multinational firm and a global leader in the communication services industry. Although the company made a slight improvement in the net sales growth, it aims for the sustainable growth. Being the largest advertising company, it aims at maintaining lower operating costs by cutting the cost incurred to pay Martin Sorrell, the chief executive and founder amounting to 24.6 million dollars. The primary strategic priority is to increase the share revenues up to 40-45% by use of new technologies in the media. As at 2017, WPP reported a 17.6% growth in revenue.
Question Two
WPP offers communication services such as Advertising and Media Investment, Data Investment Management, Public Relations & Public Affairs, Branding & Identity, Healthcare and Specialist Communications and digital, promotional & relationship marketing.
Question Three
WPP companies operate in 112 countries including London the state of origin. The group has set a strategic priority to increase the market penetration to the fast-growing markets in the Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe.
Question Four
According to the latest trend analysis provided, the company is successful since the performance trend is upwards.
Income Statement
The net sales margin maintains a constant 16% increase in the past 3 years and 17% increase in 2016.

There is consistent revenue growth in the 5 years with an average 6% increase in the past 3 years and an extraordinary 17% increase in 2016.
There is also a consistent increase in the annual profit realizes in the 4 years. There is a 13% constant profit increase in the past 2years, 8% increase in 2015 and a 20% in 2016.
From the analysis, there is a remarkable performance in 2016 showing a potential growth in the future. The companies also adopt the non-GAAP measures that enhance the internal performance of the operations as explained in Note 2.
Balance Sheet
Although the net non-current assets decreased slightly in 2013, the subsequent years show positive improvement. In 2014, they increased by 6.6%, in 2015 by 8.9% and 24% increase in 2016.
The net liabilities are also growing at a slight rate.
The average debt decreased in 2013 and further showed a slight increase in 2014. From then henceforth, the average debt increase by 18% and 21% in 2015 and 2016 respectively. This shows that the company did seek loans to finance the priority strategies and expansion of the market.
The employees continue to bring more revenue in the past 5 years with the increase in sales per employee.
As at 2012, WPP had 114490 workers but, the number has grown to 132657 workers in 2016 showing that there is growth in the business activities requiring more workforce.
Question Five
As at 31st December 2016, WPP had negative liquidity. This is because the current liabilities amounting to $16765.2M were more than the current assets totaling to $15443M by a margin of $1322M (Working Capital). The information provides that the industry average coverage was 1.6 times yet WPP had 0.9211 times which is lower.
Question Six
Creditors’ days= trade receivables ÷ sales x 365
= 8054.2 (Note 17) ÷ 12397.8 x 365
= 237 days
Debtor’s days= trade payables ÷ sales x 365
=10308.3 ÷ 14388.9 x 365
= 261 days
The creditor’s days seem to be too long as compared to the industry average of 78 days. However, it is favorable since it is shorter than the debtor’s days.
Question Seven
The various risks that face WPP may not affect the customer since the management has developed sufficient strategies that help to mitigate and deal with the uncertainties if they occur. For instance, WPP companies have a policy of maintaining the interest rate risk exposure in order to avoid any future effects in future when the interest rate fluctuates. However, the company fails to mention in intercultural risks that may arise as the companies internationalize. Creation of brand loyalty and maintaining a wide customer base requires accommodation of the cultural practices of the community that a company operates.
Question Eight
Calculation of Free Cash Flow:20162015 2014
Operating cash flow (OCF)1773.81359.9 1703.7
Capital expenditure (CAPEX)- 252.1- 210.3 -177.9
– 33.0 -36.1 -36.5
Disposals of capitalized assets 7.7 13.4 5.9
Dividends paid -616.5 -545.8 -460.0
-89.6 -55.2 -57.7
Free cash flow (FCF)790.3525.9977.5
Investing choices made:
Acquisitions and Disposals- 638.8-669.5- 489.1
Change in cash and equivalents balance335.9 246.6-434.7
Financing choices made:
Net change in borrowings – 22.5 492.0 465.2
Net change in stocks -406.6 – 571.4 -513.3
(Total of immaterial items) -58.3 -23.6 -5.6
Application of free cash flow -790.3 -525.9 -977.5
The company uses a significant part of its cash flows in the acquisition of subsidiary companies. The decision is sensible since it enables the company to create more revenues. There is also a decrease in change in borrowings especially in 2016 indicating the amount borrowed generates almost as equal revenues.
Question Nine
From the analysis of the most recent financial statements provided by WPP companies, the performance is remarkable showing the potential of a good partner. In the trend analysis, the group portrays a consistent improvement in all the elements including revenue, annual profits, assets, and number of workers. This shows that the Groups priority strategies are effective posing a good potential growth in future. The average debt is also growing showing that the company is borrowing to acquire more assets and expand in new markets. An AGM in 2016 allowed the Company to purchase up to 129,365,131 of its own shares where 25,890,000 ordinary shares were purchased owing that the greater percentage to other shareholders.

Reference
Hussey, R. (2010). Fundamentals of international financial accounting and reporting. Singapore: World Scientific.