TESCO Annual Report 2011 - Coursework Example

Introduction: TESCO is one of the largest retail businesses in the food and grocery segment today. It large size is best depicted in its large workforce and thousands of retail food and grocery outlets that are scattered all over the world. TESCO workforce is approximately 47,000 employees that are scattered in its 4,331 store that are scattered in 14 countries. TESCO realizes the importance of establishing cordial relationships with its customers, business partners, employees, suppliers, and the community that it serves. It has particularly realized that for this relationship to materialize it has to continue to be grounded by ethical business practices. In doing so it has established a code of ethics for its staff, which basically set the standards for business behavior within it. In realization of the impossibility of covering every aspect of its activities, TESCO has instead set out principles of business ethics that have to be applied by every team member of TESCO. These sets of principles are in form of laws, policies, local customs and regulations, all of which lays down some of the crucial duties and responsibilities that have been placed on the employees, whenever they might be based. An important component of this code of ethics is the so-called “protector Line” which is basically an anonymous and confidential helpline that allow staffs to report any wrongdoing that they might encounter in course of their day to day activities from their colleagues. Code of Ethic This code of ethics also contains modalities on how to raise queries on compliance with the code of ethics where need arises. It is this code of ethics that reinforces TESCO’s commitment in doing business in a way that make a positive contribution to each and every stakeholder in the company. TESCO has always endeavored to work within the British Code of Advertising, Sale Promotion and Direct Marketing. It’s standard contracts that include standard terms and condition guides all its business transactions with external parties like suppliers. TESCO has however faced accusation of price fixing in the past. In this regard, I am referring to the 2007 investigation by the UK Office of Fair Trading (OFT) over accusation of acting as part a cartel with a number of UK hypermarkets (Asda, Safeway, Salisbury and Morrison) in fixing butter, cheese, and milk prices, an accusation that it still rebuff even after a number of its co-accused admitted acting against consumer interests. I have heard on the news that the retail industry has been performing badly because of the ongoing global financial crisis. How serious are the elements of risk faced by Tesco Plc? Do you think the company will improve in the future? The group policy of TESCO is not to use derivatives for the trading purposes; rather some derivatives do not qualify for hedging financial risk which is brought about by global financial crisis. This is because if the hedge is designated where losses and gains on the instrument offset the overall group income. Considering TESCO group, it had a liability relating to the future purchase of minority shareholding of its subsidiary which was purchased during the year. This strategy was aimed at hedging over the risk of global financial crisis. Other than the above strategies, the company would considerable hedge against, foreign exchange risk, credit risk as well as interest rate risk. Therefore, considering the above strategies adopted by the company then it is likely to improve in the future. Do you have any insights from the financial press on this? The main aim of preparing financial statements is to inform the public about the performance of the company so that they can make appropriate investment decisions s whether to invest or not to do so based on their personal decision. The fact that the financial press published the weaknesses that firms are experiencing the global financial crisis, then this was sufficient information to be relied upon in making any decision. What sort of audit opinion did Tesco Plc receive in 2011? In your own words, what does this audit opinion mean for me? Having critically analyzed the financial statement of TESCO, then it is quite clear that, the audit opinion would be unqualified opinion. This is because the financial statement s gives a clear and true view of the financial statement; therefore the information can be relied upon by the users who are investors as well as the management. How is the use of IFRSs to prepare the financial statements helpful to me? In general standards represent themselves in different ways, standards are a mark of quality, in most cases IFRS is widely recognized as the legal standards to be adhered to by all the financial statement prepares. This framework enables all the reporters and users to have a uniformity data, therefore, overcoming the chances of variation in reporting. Those without IFRS if they are looking for investment then they might struggle against those which have in this competitive arena. Adopting g the IFRS will assist in the ease of linking with bigger players. Does that mean that financial statements are free of assumptions and estimates? In professional terms, it is not correct to assume that financial statements are free of assumption. Assumptions may contradict or violate the IFRS is they are governed under the standards. When Users and preparers of the financial statement are considering including assumptions, then such assumptions should be those provided under the IFRS provisions. I am puzzled with the ways certain things are accounted for in the annual report. Please explain Tesco Plc’s accounting policy for the treatment of: Research and development (R&D) expenditure The required treatment for research and development is to be expensed as incurred as well as be reflected each year in the financial statements. Research and development activities are activities are expensed as consumed including the depreciation over the useful life if it alternate for future use. These R & D might be capitalized and depreciate equipment acquired for research and development purposes if it is proven that the enterprise has alternative future use of the asset. Considering the case of TESC, having included depreciation on the R& D, this means that; the expensed amount was attributed out of depreciating the equipment acquired for R & D purpose. Depreciation of property, plant and equipment Property plant and equipment was carried at accost less accumulated depreciation as well as any recognized impairment value. TESCO treatment for the plant and equipment was the straight line to its residual value over an anticipated useful economic life. For example; the following depreciation rates were used, freehold and leased buildings with over40 years were depreciated at a rate of 2.5%, those with less than 40 years were depreciated by equal annual installment over an unexpired period of the lease while plant and equipment, fixture and fittings at a rate of 50 %. The aim is to minimize the total expenditure so as to reflect a more operating profit in the financial statement. Inventory valuation Inventory valuation allows the company to generate monetary value for items that make up the inventory. The inventory is usually the largest assets of the business therefore providing proper measurement of inventory is very necessary assure very accurate financial statement. If they are not properly measured, the overall expenses and incomes cannot be properly matched and thus, the company might make poor business decision. Missing ratios in the annual report of TESCO limited company and their relevance in decision making Debt to equity ratio: Debt to equity ratio, measures the amount of debt being used by the company or the interest earned as well as assessing how the company can service its debt liability. This ratio helps the company who run the high risk of defaulting on loans, and is therefore very helpful in accessing a stock’s exposure. The recommendation is that companies should not over rely on debts so much but instead, they should generate more revenue through sales, therefore making huge amount of profit which intern leads to more reserves which increases the overall capital of the company; Debt to equity ratio=Long tern debt / stockholders equity Price to sales Ratio (PSR): The PSR relates sales per share to the market price the overall company’s stock. The ratio is normally used in identifying overpriced stocks, which should be avoided as much as possible. The principle is that; the lower the PSR, the less it is likely for the stock to be overstated. Overstatement of stock has a direct effect on the overall profit made as well as the results in the Asset valuation in the final statement. Therefore, to ensure that this law ratio is maintained, the company should consider not to over relying on long-term debts, rather to raise more internal equity by issuing new ordinary shares to the existing shareholders; PSR=Market price of the common stock /Annual sales per unit Calculation for another ration not found in the annual report explanation and recommendations. Net profit Margin This is a bottom line of operations which indicates the rate of profit as well as other revenues. The net profit margin tends to look at profit as a percentage of sales, since it moves with cost, it reveals the type of control the management has over the cost structure of a company; Formula: Net profit margin=Net profit after tax /Total revenue In the year 2010 the Net Profit Margin= Net profit after tax /Total revenue =2327/62537=0.037 =3.7% In the year 2011 the Net Profit Margin= Net profit after tax /Total revenue =2655/67573=0.039 =3.9% Analysis: For the two years, the net profit of is generally very low which means that the company is not generating enough sales or the company is not keeping operating controls under control so as maintain an acceptable profit. Though there is a small increase in the ratio from 3.7% in the year 2010 to 3.9% in the year 2011. Thus, there is no problem in using this ratio to analyze the competiveness of Tesco with other companies’ performance in the same market. To improve the situation, TESCO limited company has to consider making more sales and reduce the overall expenses. Probably the ratio was not included in the report deliberately because it shows that the company is underperforming and this could have sent a bad signal to the public in making there investment decision. In your opinion what are the limitations of TESCO Plc’s Annual Report? What additional information likely to be useful to me could have been included? The relevance of any financial statement is to show a clear view of the overall performance of an entity, either performing well or underperforming. Considering Tesco the company in question having not included all the require information in the annual report, this could give the public who are willing to invest that the company is performing very excellent which is not the case. This is because for any investor would consider investing in a company where they are guaranteed that their money will attract more interest, thus generating more returns. The idea that Tesco dint include all the relevant information to show a clear picture of the company performance, then this attributes to some biasness in the report published which is contrary to the IFRS requirements. Other additional information which an investor can relay on in making an investment decision and were included in the annual report of TESCO financial statements are; return on shareholders fund as well as the return on the capital employed. All these information are so essential for an investor in making an appropriate investment decision making. References Baker, N, MP, 2004, How green is your supermarket? A guide to the best practice Beeassley, M.S., Clune, R & Hermason, 2005, ERM: report of internal Auditor. 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