Friday, 24 March 2017: 09:20
The obligation of a company to publish their financial statements is based on European Union regulations (Directive 2013/34 EU). The main purpose of reporting financial statements is to protect third parties, especially business partners who do business with the given company. The question this paper attempts to answer is whether it is possible to identify unhealthy going concerns for companies from the analysis of financial statements that were prepared by the business partner or by another user of the accounting information. This research, conducted at Skoda Auto University, focused on the analysis of the financial statements of the suppliers of the largest Czech automotive company (Skoda Auto) with the aim of identifying risky suppliers (e.g. risk of time delays in deliveries) based on the suppliers’ financial situation. The research was based on the analysis of 397 domestic suppliers. The financial statements for the years 2011-2014 were analysed. During the analysed time period, 64 of the 733 expected financial statements were not published, in violation of Czech Republic law and the binding EU legislation. Such companies are certainly not trusted suppliers of materials for the Skoda Auto company. But how would one determine whether the supplier is healthy or not? The basic identifier of an unhealthy going concern is the total amount of equity of the company. If the total amount is negative, it is clear that the debts exceed the total assets, and therefore companies should not do business with this accounting entity. If the total amount of the equity is positive but lower than the amount of registered capital, the decision-making is more complicated. It is certainly possible that the company lives on costs of their registered capital (the owners of the company will not receive back even the money invested in the company). In this case, it is necessary to assess the trend of equity changes of the analyzed company. If the equity value trend is close to the value of registered capital, it is possible to detect a potential new violation by a going concern. The most common cause of this trend is increasing cumulative loss in an accounting entity.