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NN43 Accounting and Finance : Income Statement

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a) Identify six different groups of users of financial statements, who would be interested in these companies (ensure that both internal and external users are fairly represented). Provide a brief summary of these users and a brief description of the purposes for which they will use the financial statements.
b) Obtain the latest five consecutive years of the published Comprehensive Income Statement and Statement of Financial Position (Balance Sheet) for this company; most importantly the company should be listed on the London Stock Market (these accounts should be included as an appendix to the coursework). Most importantly, the company chosen should not be operating in any of the following industries: Banking, Insurance, Building Society and Estate Agents.

Answer:

Introduction

This report is for the newly appointed chairperson of Tesco and addressed the six different groups of users of financial statements, who would be interested in Tesco. Within this report it will give you an outline of the Tesco company. This report ensures that both internal and external users: Customers, Employees, Investors, Owners, Competitors, and Management. It provides a brief summary of these users and a description of the points for which they’ll use the financial statements.

In this report, users of financial information may be both internal and external to the company. External users are communicated accounting information usually in the form of financial statements: Income Statement and Balance Sheet. These are help users to measure the financial performance and position of the company. Balance Sheet help users to measure the financial reliability of a company.

This report achieves the latest five years of the published Comprehensive Income Statement and Balance Sheet for Tesco. The company chosen has calculations of various ratios which is used to analyse Tesco’s performance over the years. These are: Profitability, Liquidity and Efficiency. Therefore, this report summarises the findings in the conclusion and has recommendations on the findings of Tesco’s performance over the years.

Tesco 

Tesco is a popular store that sells a variety of product, for example, grocery to clothes. Also Tesco is one of the largest food retailers in the world.

Tesco’s earliest image found life in 1919, when Jack Cohen began selling foodstuffs from his stall in the East End of London. Cohen made a profit of £1 from sales of £4 on his first day. The Tesco brand was first born in 1924. (Willis, 2015). Tesco became a private limited company in 1932. It is in Monopoly Market. In 1992, Tesco introduced its slogan ‘every little helps’. With new technologies, Tesco has continued to grow at a rapid pace. In 2000, Tesco launched an its own website; Tesco.com.


Tesco’s revenue is £64.54bn (2010). The number of employees are 472,000 (2010). The geographical presence is North America, Eastern Europe and Asia. Tesco’s direct ecological impacts and risks are: Property (stores), Distribution and Business travel by employees. (Guardian, 2010). In UK sales; the revenue is £42.8bn, UK operating profit is £2.48bn, UK stores are 2,948, the UK employees are 205,852 (FTE). (Retail-Week, 2013).

Six different users of tesco  

Accounting is necessary for measuring profit and loss and to prepare the financial statements. There are two types of users of accounting information: external users and internal users. In order for companies to meet their targets, they must pay an attention to the product they produce. This is because, these products are targeted for different users. There are six different users of Tesco:

  • Customers

For considering the financial position of its suppliers which is essential for them to provide a committed basis of supply in the long term. When a customer is seeing which supplier to select for a main contract, it wants to assessment their financial statements first, in order to judge the financial ability of a supplier to continue in company long enough to provide the goods or services commanded in the contract. They have potential to supply high quality goods and services. At the same time, they also have interest in the environmental policy of the business in a company.  

Customers are external users, which means they are secondary users of Tesco. Therefore, customers have interest in the accounting information, that is because to assess the financial position of a company to enable to maintain steady source of business. (Siddiqui, 2015).

  • Employees

Employees are internal users. They use the accounting information to find out the financial well-being, amount of sales and effectiveness of a company to establish the job security.

Employees require information on a company performance for two intentions: Wage and salary co-operation and valuation of current and forward employment. They do interest the longer-term financial viability of the company. They also need the financial statement in a clear, simple and understandable form. Profit and loss account is very important to view the performance of the company.

  • Investors

Investors are external users. They examine the viability of empowering in the company. They want to validate that they can earn wise return on their investment before they commit any financial supplies to the company.

This group would interest both existing and conceivable shareholders. There are two main elements in their investment: Income and Gain. This is because income in the form of bonuses and gain in the share price. They have both short and long term viewings. If the investor takes short term view, current bonuses are of interest. Otherwise, if the investors take a long term view, they would concern future earnings.

In the chairman’s financial statement, there is a guide to the future can to some extent be seen in company reports. Which means, it is based on current implementation and also company forward plan is often included. They do also interest in effectiveness and success over a period of time.

  • Owners

Owners are internal users. They analysing the viability and profitability of their investment and they do determine their future. It is very important when owners understand the financial statements. As the owner, the important thing is to create a profit plan for their business. They need to follow their profit and loss and balance sheet to determine their company’s future. Understanding the numbers is a key for running a company successfully to simplifying the process of their business. (Sonnhalter, 2017).

  • Competitors

Competitors are external users. It is always good to know the relative strengths and weaknesses of the company’s competitors for strategic purposes and analyse the financial statements of other business establishments. Through this connection, business enterprises must keep a continuous touch with the accounting information and financial statements of their competitors.

  • Management

Management are internal users. They analysing the business’s performance and situation and also take measurements to improve the company outcomes. They must to understand the profitability, liquidity and cash flows of the company every month. Within this structure, it can make financial decisions about the company. (Bragg, 2014).

Financial Statements

They contain an extensive set analysis of the financial data. They provide a detailed analysis of the income statement and balance sheet.

Also known as profit and loss statement. It files all the financial changes that happened due to functioning the company over a certain time period. Summarises a company’s revenue and expenses. It is the synthetic statement because it includes very clear view of the company’s monthly revenue and expenses.

The income statement is very critical for external users. It tells how much money a company made or lost in a given time period (Belton, 2017). Therefore, it tells external users how much of the net income shown on the income statement is ploughed in the company.

It is very significant financial statement that keeps a record of the financial position of a company that involves assets, liabilities and the net equity. Balance sheet offer a quick view of a business’s financial standing (Bromwich & Scapens, 2016). Investors would examine the amount of cash on the balance sheet to comprehend if there is enough available to pay them dividend. (Bragg, 2015). Investors appreciate businesses with high cash assets, as this implies a company will grow and succeed. (SAGE, 2015).

It is helpful for users to track their spending and earnings. Also known as financial position.

Tesco’s Latest Five Years of the Published Comprehensive Income Statement and Balance Sheet 

Tesco’s Performance Over Years : Ratio Analysis 

Tesco has calculations of various ratios which is used to analyse Tesco’s performance over the years.

The profitability ratio of the company shows that the company is not performing well and is well below the industry trend. It has been in losses and the return on equity to shareholders is below 5% or negative at times.

The efficiency ratio shows that gross margin and net margin of the company is continuously decreasing and is just breaking even i.e., the company is not earning any profits in the long run, which again is not a good sign for the company (Das, 2017).

In case of the turnover ratios, we see receivables turnover ratio has decreased alarmingly and inventory turnover ratio has increased which shows that the company has not been able to make the collections or to liquidate the inventory within the correct time.

The current ratio is a liquidity ratio that measures a company’s capability to pay short-term duties. Acceptable current ratios vary from between 1 and 3 for healthy businesses. The higher current ratio means more capable the company is of paying its duties (Trieu, 2017). A ratio under 1 means that the company would be unable to pay off its duties. Similarly, the quick ratio is also below 1 which shows that the short term liquidity of the company is not good.

Finally on the long term solvency ratios, it shows that debt has been continuously increasing in the company and it is way above the ideal trend of 1:1 (Heminway, 2017). The ownership in the company is dissolving.

Balance Sheet of Tesco in GBP

Tesco Plc is a global leading retailer. Characterized by low profit margins, inventory management, and economies of scale. Profitability ratio measures the overall performance of a business.

From the above analysis, it is clear and evident that the company is not performing well either on the profit front or even in terms of the internal control. Its ownership is being diluted as the company is trading on equity and the return on equity is not as per the expectations of the shareholders (Meroño-Cerdán, et al., 2017). Though the company has had a great reputation in the past, but it has not been able to perform well in the last few years.

References

Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd.

Bragg, S., 2014. Accounting Tools. [Online] Available at: https://www.accountingtools.com/articles/users-of-financial-statements.html

Bragg, S., 2015. Accounting Tools. [Online] Available at: https://www.accountingtools.com/articles/the-purpose-of-the-balance-sheet.html

Bromwich, M. & Scapens, R., 2016. Management Accounting Research: 25 years on. Management Accounting Research, Volume 31, pp. 1-9.

Das, P., 2017. Financing Pattern and Utilization of Fixed Assets - A Study. Asian Journal of Social Science Studies, 2(2), pp. 10-17.

Guardian, 2010. theguardian. [Online] Available at: https://www.theguardian.com/sustainable-business/profile-tesco

Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and Organic Documents. SSRN, pp. 1-35.

Meroño-Cerdán, A., Lopez-Nicolas, C. & Molina-Castillo, F., 2017. Risk aversion, innovation and performance in family firms. Economics of Innovation and new technology, pp. 1-15.

Retail-Week, 2013. RetailWeek. [Online] Available at: https://www.retail-week.com/home/profile-tesco-the-uks-largest-retailer/5046179.article

SAGE, 2015. SAGE. [Online] Available at: https://www.sage.com/ca/Sage-Advice/Articles/19769/2015/6/16/What-are-balance-sheets-and-why-are-they-important

Siddiqui, F., 2015. Business and Finance. [Online] Available at: https://businessandfinance.expertscolumn.com/users-accounting-information-and-their-needs

Sonnhalter, A., 2017. Small Business TRENDS. [Online] Available at: https://smallbiztrends.com/2017/05/understand-financial-statements.html

Trieu, V., 2017. Getting value from Business Intelligence systems: A review and research agenda. Decision Support Systems, Volume 93, pp. 111-124.

Willis, R., 2015. NABCO. [Online] Available at: https://www.nabcouk.com/news/a-brief-history-of-tesco/

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