Financial Accounting at Tesco Plc - Case Study Example

? Financial Accounting Inserts His/Her Inserts Grade Inserts 7 December INTRODUCTION Tesco Plc is a global retailer of grocery and other products. The research focuses on Tesco’s statement of financial position. The research includes financial statement analysis of the company’s 2010 accounting period and 2011 accounting period. The financial statements indicate Tesco Plc fared financially well during the 2010 and 2011 accounting periods. Part 1 (a) Chief Executive’s Review Some of the contents of the chief executive officer’s report are useful. One useful content is the report that the company was able to achieve a good set of results in the areas of sales, profits, and earnings per share growth. Another useful content is the increase of the company’s ROCE by 13 percent. The increase brings the company closer to achieving its 2014 benchmarks. Another useful content is restating the United Kingdom as the company’s outstanding core business (http://www.tescoplc.com/). Some of the contents of the chief executive officer’s report are irrelevant. Stating that the company must focus on increasing sales is redundant. All companies strive to increase sales, without exception. Another irrelevant content is the focus on climate change policies. All companies are required to implement environmental laws. (http://www.tescoplc.com/). (b). Chairman’s Statement. Some of the contents of the Chairman’s report are useful. The useful contents include reporting the company’s successful business operation during the 2011 accounting period. Tesco’s Chairman, David Reid, emphasized favorable financial results in the 2011. Another useful content is stating the current year’s dividend is 10.8 percent higher than the prior year’s dividend distribution. Some of the contents of the Chairman’s Review report are irrelevant. One of the irrelevant contents is focusing too much space discussing the change of officers. The retirement of Charles Allen and Dr. Harad Einsmann is irrelevant because anyone can replace them. The retirement of Rodney Chase is irrelevant to the equation because other officers can fill his big shoes. Another irrelevant content is focusing excess attention on the people of Tesco Plc. (b) Audit Committee Chairman’s Report. Some of the contents of the Audit Committee Chairman’s report are useful. One of the useful contents is focusing on the Audit Committee’s meetings focusing on internal control matters. Another useful content is stating that the Audit Committee meetings are done five times during the year. Likewise, another useful content states that the affected departments cooperated with the Audit Committee. Some of the contents of the Audit Committee Chairman’s report are irrelevant. One irrelevant content is stating the group internal controls and risk management processes are embedded in their businesses. All businesses are required to implement internal controls to reduce or stop fraudulent and erroneous transactions. Another irrelevant content is stating the board is organized each year to one or more of the Group’s international businesses. PART TWO Background Information (a) Property Plant & Equipment IFRS compliance: Property, Plant and Equipment. Tesco Plc records the ? 24,398 m property plant and equipment at cost less accumulated depreciation. IFRS standard Section 17, Property, Plant, and Equipment, requires entities to property, plant, and equipment at cost less accumulated depreciation. Cost includes all amounts paid to put the said assets into operations. The same IFRS concept requires entities to record the same assets at carrying value (net of accumulated depreciation). The assets must be depreciation over each asset’s useful life (Mehta 2010) Intangible Assets. Tesco Plc complies with International Financial Reporting Standards (IFRS). Specifically, Tesco Plc’s ?4,338 m goodwill and other intangible assets amount complies with IFRS no. 3, Business Combinations, which states that must identify and fair value the intangible assets amortization charges and costs. IFRS defines an intangible asset as lacking physical substance and are not financial instruments. Likewise, IFRS requires entities can identify the intangibles. To identified, the intangible asset can be bought or sold. Goodwill is one of Tesco’s IFRS- based intangible assets (Kieso, Weygandt, & Warfield 2011). Inventories. Tesco Plc’s 2011 inventory is ? 3,162 m. Inventories are valued at lower of cost and fair value less selling costs. IFRS states that market price is equivalent to the inventories’ net realizable value. IFRS does not approve of U.S. GAAP’s use of the ceiling and floor factors in computing for market prices. IFRS agrees with U.S. GAAP in terms of recording the cost of the inventory. Tesco Plc’s inventories include the goods displayed in the company’s sales counters. The company’s inventories also include properties in the course of development. Tesco Plc complies with IFRS concepts (Kieso, Weygandt, &Warfield 2011). International Accounting Standards compliance. Property, Plant, and equipment. The company’s ? 24,398 m property plant equipment amount complies with International Accounting Standards. IAS 16 mandates that the company recognize the cost of the property, plant and equipment amount. The carrying value is the resulting from the depreciation expenses from the cost of the property, plant, and equipment accounts (Kieso, Weygandt, Warfield 2010). Intangibles. Tesco records its intangibles in compliance with IAS 38, Intangible Assets. The standard mandates all entities to record all intangible assets that include software, licenses, customer relationships, contracts, and brands at cost. The intangible cost is amortised over the straight line basis during the intangible assets’ remaining useful life. In addition, management must record the research and development as expenses, not amortized over the remaining life of the asset involved. The standard requires that research cost should be expensed outright and development cost can be capitalized (intangible assets) if the asset will generate future economic benefits (Nikolai, Bazley, Jones 2009). Inventories. The inventory value complies with IFRS’s implementation of IAS no. 2, measurement of inventory. The standard requires entities to record their inventories at lower of cost or net realizable value. Cost is equal to the purchase cost, cost of conversion, and other costs incurred in bringing the inventories to their present location (Esptein 2008). (b) Note Disclosure Property, Plant, and equipment. In terms of disclosure, the company’s balance sheet presentation shows the property, plant, and equipment at cost less accumulated depreciation. The assets are recorded at cost. Likewise, the assets are depreciation using the popular straight line method. Depreciation extends over the assets’ economic (useful) life. In terms of usefulness of the above disclosure, the note disclosure shows the company complies with the directives of IAS no 16 and IFRS concepts indicating entities record all property, plant, and equipment accounts. Assets are recorded at cost amount less accumulated depreciation. The notes ensure comparability. Compliance with recording standards persuades interested parties to confidently transact with Tesco Plc. Intangibles. In terms of disclosure, Tesco Plc expenses its research and developments costs, instead of capitalizing. The company’s intangibles include software, customer relationships, pharmacy licenses, contracts and brands. The intangible amount is amortised using the popular straight line method. Amortization is spread over the life of the intangible. In terms of usefulness of the above disclosure, the disclosure shows that company complies with the directives IAS 38, and IFRS concepts on intangible assets. The standard indicates intangible assets include assets that cannot be identified. This includes Tesco’s software. Compliance with established accounting standards strengthens investor confidence. Compliance enhances the third parties’ understanding of the intangible assets amount. Inventories. In terms of disclosure, the Tesco Plc inventories include all goods that are held for resale in the company’s groceries. Other inventories kept in warehouses. Likewise, the inventories portion of Tesco Plc’s balance sheet includes all properties held for sale. Tesco Plc records the inventories using the lower of cost or fair value less costs to sell under the weighted average cost valuation method. In terms of usefulness of the above disclosure, the above disclosure shows Tesco Plc complies with IAS no 2 and IFRS concepts that requires entities to record inventories at the cost equal to the amount paid for the inventory purchases. Compliance permits comparison between accounting periods. Compliance with accounting standards enhances the confidence of the Tesco Plc financial statement readers (Mirza, Hold, Knorr 2011). PART THREE Background Information Current Ratio: The current ratio indicates the company’s capacity to use its current assets to pay its current liabilities on time. The formula is shown as follows: Current Ratio = Current assets/ Current Liabilities. The following table shows the calculation of Tesco Plc’s current ratio. The table 1 computation above shows that Tesco Plc generated a current ratio of 73:1 for the year 2010. Tesco Plc generated a current ratio of 67:1 for the year 2011. The computation shows that Tesco has less than 100 percent current assets available to pay the company’s current liabilities. Comparing the two accounting periods, the 2010 accounting period performed better than the 2011 period; the 2010 current ratio is higher than the 2011 current ratio. The current ratio has dropped by as much as 9 percent from 2010 to 2011 alone. The increase in the current liabilities from 2010 to 2011 by 11 percent is the best reason is for the current ratio decline. Quick ratio: The quick ratio shows the company’s ability to use its most liquid assets (excluding inventories) to pay its currently maturing liabilities. The variance between the current ratio and the quick ratio is that the inventories are included in the computation of the current ratio, not in the quick ratio analysis. The formula for calculating the quick ratio is shown as follows: Quick Ratio = [Current assets- Inventories] /Current liabilities Comparing the two accounting periods, the 2010 accounting period fared better than 2011; the 2010 quick ratio is higher than the 2011 quick ratio. Table 2 computation shows that the quick ratio of the company had declined from 2010 to 2011 by 21%. The increase in company’s current liabilities triggered the decline. In addition, the decline in the company’s quick assets contributed to the quick ratio reduction. The current assets minus inventories reduced had dropped by as much as 12 % from 2010 to 2011. The current liabilities had climbed by 11 % from 2010 to 2011. Both factors contributed to the decrease in the Tesco Plc’s quick ratio. Consequently, the company’s liquidity had worsened from 2010 to 2011. The computation above shows that Tesco Plc generated a quick ratio of 31:1 for the year 2011. Tesco Plc generated a quick ratio of 39:1 for the year 2011 (Hansen 2006). Interest Cover: The interest cover ratio shows how many times the company paid interest amounts on its liabilities using the company’s profits. The interest cover ratio is shown in the following table. The interest cover computation, Table 3, shows Tesco Plc generated an interest cover of 3.88 times during 2010. Tesco Plc generated an interest cover of 5.71 times during 2010. The interest coverage ratio of the company had improved from 2010 to 2011 (47 percent) specifically due to the 23 percent increase in the company’s operational profits. Furthermore, the 17 percent decline in the company’s finance costs significantly aided the improvement of the company’s interest cover ratio. GearingRatio. The gearing ratio computation shows the relationship between the company’s debt and its assets, excluding the company’s current assets. The Gearing Ratio calculation is shown below as follows: Based on table 4, Tesco Plc generated a gearing ratio of 45 percent for the year 2010. Tesco Plc generated a gearing ratio of 36 percent for the year 2011. The gearing ratio had declined from 45% (2010) to only 36 percent (2011). The gearing ratio decline is pegged at 23 percent. The 3 percent decline in the company’s total assets less current assets contributed to the gearing ratio decline. Similarly, the 19 percent decline in the company’s total debt precipitated to the gearing ratio decline. CONCLUSION: Based on the above discussion, Tesco Plc engages in marketing to the global retail market segment. Tesco’s balance sheet shows the company generated profits for 2010 and 2011. The financial statement analysis of the company’s 2010 accounting period and 2011 accounting period indicates the company generated profits. The above discussion shows that Tesco Plc is not at risk of not achieving its goals and objectives. Indeed, the financial statements of Tesco Plc gives strong evidence Tesco Plc will generate the required revenues and profits for the next five or more years. References: Esptein, B. (2008) Wiley IFRS Policies and Procedures. London, J Wiley & Sons. Kieso, D., Weygandt, J. T Warfield. (2011) Intermediate Accounting: IFRS Edition. London, J Wiley & Sons. Hansen, D. (2006) Management Accounting. London, Thomson Press. Mehta, K. (2010) Understanding IFRS Fundamentals. London, J Wiley & Sons. Mirza, A., Hold, G., Knorr, L. (2011) Wiley IFRS. London, J Wiley & Sons. Nikolai, L., Bazley, J., Jones J. (2009) Intermediate Accounting. London, Cengage Press. Tesco Plc, retrieved 7 December 2011, from Appendix: Table 1 2011 2010 Change in Percentage Current Ratio 0.67 0.73 -9 % Current Assets 11,869 11,765 1 % Current Liabilities 17,731 16,015 11% Table 2 2011 2010 Change in Percentage Quick Ratio 0.31 0.39 -21 % Quick Assets 5,545 6,307 -12 % Current Liabilities 17,731 16,015 11% Table 3 2011 2010 Change in Percentage Interest Cover Ratio 5.71 3.88 47 % Profit from Operations 2,757 2,249 23 % Finance Cost 483 579 -17% Table 4 2011 2010 Change in Percentage Gearing 36 % 45% -23 % Total assets -current Assets 35,3372 34,2587 -3 % Total Debt 12852 15327 -19 % Read More