Financial Statements of a Barber Shop, Tesco Plc. and ASDA Ltd - Case Study Example

Managing Financial Resources and Decisions Paper 3 Introduction The essay highlights decisions that are to be taken based on the analysis of financial statements of a barber shop, which is owned by a sole trader, Cassey. He needs financial advice related to the operation of his business. The sources of the data that are used to make the financial statements are acquired from the Case Study 2. Task 1 The barber shop attends three customers per hour and the working time is six hours a day. Thus the shop attends 18 customers a day and within which 50% is children that means 9 are children. Number of working days in a month is 20 days or 21 days respectively from 1st month to 6th month (five days a week) The number of customers Casey is attending in a month is calculated below: Customer No of customers (if 20 days) No of customers (if 21 days) Adult 9*20 = 180 9*21 = 189 Children 9*20 = 180 9*21 = 189 Total 360 378 The following table shows the forecasted cash flow budget of Casey’s business for the next 6 months: (20 working days for 30 days a month: 21working days for 31 days a month) From the above table it is observed that the Casey will be achieving negative cash balance at the end of every month which indicates that the barber shop will be running its business at loss if the above expenses and income are experienced by it for the next 6 months. The following table shows the predicted profit and loss account of Casey’s business for the next 6 months (Fridson and Alvarez, 2011): The forecasted profit and loss account is showing negative profit at the end of each month which indicates that the business will be running at loss if the income and expenses are not modified. Task 2 From the profit and loss account and cash flow budget mentioned in Task 1 it is evident that Casey’s barber shop will be running at huge loss if he does not modify the business structure. The owner should bring in appropriate changes in business so as to earn profit. The owner should increase the working hours from 6 hours a day to 8 hours a day so that the barber shop attends 24 customers a day instead of 18 customers a day. It will bring in revenue without increase in any further cost. The owner should also modify the customer charges which are as follows: Adults are to be charged £ 25 for the first two months and then £ 30 for the next 4 months. The children should be charged £ 15. The table below reflects the changes that are made in order to have postive ending cash balance at the end of every month. Task 3 The following table calculates the variable and fixed cost per unit for the business (Shim and Seigal, 2007): Calculation of variable and fixed cost per unit Fixed cost per unit   (378 units)   Rent of the house 2000 Lease Payment 2084 Business Rates 200 Utilities 70 Total fixed cost 4354     Fixed cost per unit 11.51851852     Variable cost       Salary to the assistant 1512 Bottle expenses 16 Sweet Expenses 38   1566     Variable cost per unit 4.142857143 The charge of the services should be increased in order to bring in profit at the end of every month in the business. Adults are to be charged £ 25 for the first two months and then £ 30 for the next 4 months. The children should be charged £ 15. Task 4 The following table shows the cash flow statement of the business. Calculation of Net present value of the business (Gibson, 2013) Conclusion It can be concluded that the business will be suffering loss if Casey does not modified its business structure and plan for new set of charges as suggested above for the customers. Reference List Fridson, M. and Alvarez, F., 2011. Financial statement analysis: A practitioners guide. New Jersey: John Wiley & Sons. Gibson, C., 2013. Financial reporting and analysis. Connecticut: Cengage Learning. Shim, J. and Seigal, G., 2007. Handbook of financial analysis, forecasting, and modelling. New York: CCH. Appendix 1 Balance Sheet of Casey’s barber shop Balance Sheet Assets   Current Asset   Cash 600000 Accounts receivables 18000 Other assets 5850 Total asset 623850 Liabilities   Current Liabilities   Accounts payable 12504 Salaries Payable 8856 Interest payable 2490 Bank loan 600000 Total Liability 623850     Paper 4 Introduction The main aim of this section is to compare the financial statements of two listed companies published in their annual reports and examine the financial performance of the companies by comparing the performance of the financial ratios. The two companies that are chosen are ASDA Limited and Tesco Plc. Both the companies are dominating the supermarkets in United Kingdom. The data required for the ratio analysis are collected from the annual reports of both the companies. A comparison is drawn between the two with respect of their performance: liquidity, solvency and profitability. The presentation and the formats of the two company’s published financial reports are also examined to examine their appropriateness. Task 1 The companies that are chosen for the analysis are Tesco Plc. and ASDA Ltd. Tesco Ltd. is a public limited company and is a British multinational grocery retailer, headquartered in England, United Kingdom. It is listed under London stock Exchange and is the second largest retailer in the world with respect to profit. The consolidated financial statement of the whole group is prepared according to the International Financial Reporting Standards (IFRS). It also follows the Companies Act 2006 which is applicable to the companies who are listed in IFRS. The statements are presented in pound sterling (Yahoo Inc, 2013b). ASDA Ltd. is a subsidiary of Walmart and is listed under London Stock Exchange. The British supermarket has gained prominence by selling clothes, food and general merchandise to the mass in Yorkshire (Yahoo Inc, 2013a). The financial statements are prepared according to the generally accepted accounting principles that are followed in Unites States. The principles need management so that right estimates and assumptions are made which will have no affect on the reported amounts of the liabilities and assets. The estimates of the management are also affected in the disclosure of the assets and liabilities during the reporting period. The company classifies the payments made by credit card, debit card and electronic benefits under the cash and cash equivalents. It includes the restricted cash which is basically related to the collateral holdings for the counterparties. The Company undertakes financing strategies after ensuring that adequate cash is available in country where it is planning to operate in so that minimum cost is required. The Company do not have the believe that it is necessary to send back the cash and cash equivalents that are from outside U.S. The company rather anticipates that domestic liquidity will be needed to meet the sources of finance for the company. The sources of finance include the current cash flows that are generated from the operations, the cash generated from the external borrowings. The company follows certain limited exceptions for continuing the reinvestment strategies in the foreign operations. The intention of the company for changing most of the amounts that is held for foreign operations are easily done by the company since it complies with the US tax laws and is subject to the U.S. federal income taxes. The company does not give that much emphasis on the foreign tax credits. It was noticed that $768 million and $691 million are freely transferable by the companies in January 31, 2012 and 2011 approximately without facing any restriction from the US local laws and other laws. The Company does not expect that the local laws and other limitations or any potential taxes on the anticipated future amounts would be held from outside of United States. It is not expected because it will affect the liquidity of the company to a great extent (Warren, 2009). Task 2 The following table shows the keys ratios of Tesco Plc.: Tesco PLC. Ratio Analysis Short term liquidity ( in £ million) Current ratio 2012 Current assets 12,863 / Current liabilities 6,386 = Current ratio 2.01 Quick ratio (Acid Test) (Cash 2,305 + Accounts receivable) 2,657 / Current liabilities 6,386 = Quick ratio 0.78 Profitability Ratios Gross margin Gross profit 5,261 / Sales 59,278 = Gross margin % 8.9% Profit margin Net income 2,814 / Sales 59,278 = Profit margin 4.7% Total asset turnover Sales 59,278 / Average total assets 12,451 = Total asset turnover 4.76 Current asset turnover Sales 59,278 / Average current assets 11980 = Current asset turnover 4.95 Solvency Ratio Debt ratio Total liabilities 13,731 / Total assets 12,863 = Debt ratio 1.07 The following table highlights the key ratio of ASDA Ltd. (Bloomberg, 2013: MarketWatch Inc., 2013) Ratio Analysis of ASDA Ltd. Liquidity ratio (in $ million) Current ratio 2012 Current assets 54,975 / Current liabilities 62,300 = Current ratio 0.88 Quick ratio (Acid Test) (Cash 6,550 + Accounts receivable) 5,937 / Current liabilities 62,300 = Quick ratio 0.20 Solvency ratio Debt ratio Total liabilities 71,315 / Total assets 1,93,406 = Debt ratio 0.37 Gross profit ratio Gross profit 24,398 / Sales 4,43,854 = Gross profit 5.5% Operating profit Operating profit 26,558 / Sales 4,43,854 = Operating profit 6.0% Net Profit Ratio Net income 15,699 / Sales 4,43,854 = Net Profit 3.5% The following table draws a comparison between both the companies (White, Sondhi and Fied, 2003): ASDA Ltd. Tesco Plc Current ratio 0.88 Current ratio 2.01 Quick ratio 0.20 Quick ratio 0.78 Inventory Turnover Ratio 8.69 Inventory Turnover Ratio 17.54 Debt Ratio 0.37 Debt Ratio 1.07 Gross Profit Margin 5.5% Gross Margin 8.9% Net Profit Margin 3.5% Net Profit Margin 6.7% The following interpretations can be done from the results that are provided above: 1) Tesco Plc is in a financially healthy position than ASDA Ltd since Tesco Plc has a current ratio, which is more than 1, which implies that the ability of Tesco Plc in meeting up the future obligations is higher than that of ASDA Ltd. 2) The quick ratio of Tesco Plc is more than that of ASDA Ltd. thus it implies that ability of Tesco Plc in meeting up the short term obligations is higher than that that of ASDA Ltd., without hampering the inventory (Griffin, 2011). 3) The inventory turnover ratio of Tesco Plc. is higher than that of ASDA Ltd., which indicates that the sale of goods of Tesco Plc is higher than that of ASDA Ltd. 4) The debt ratio of ASDA Ltd is lower than that of Tesco Plc., which indicates that Tesco Plc should improve its total assets. 5) The profitability ratios of Tesco Plc are better than that of ASDA Ltd and the company has a good profit margin as compared to ASDA Ltd. Thus, it can be concluded that the ASDA Ltd has been performing well when the solvency of the company is concerned. However, the overall performance of Tesco Plc. is better with regard to overall profitability. Conclusion It can be concluded the financial statements of both the companies are presented in compliance with the accounting principles that are followed by the industry. Both the companies have a deep understanding regarding the accounting principles which have created clear and error free financial reports. The financial performance analysis of both the companies have pointed out that ASDA Ltd. has been performing well with respect to the solvency of the company. However, the overall performance of Tesco Pc. is more noteworthy than the former. Reference List Bloomberg, 2013. Wal-Mart Stores Inc. [online] Available at :< http://www.bloomberg.com/quote/WMT:US> [Accessed 19 December 2013]. Griffin, R., 2011. Management. OH: South-Western Cengage Learning. MarketWatch Inc., 2013. Wal-Mart Stores Inc. [online] Available at: [Accessed 19 December 2013]. Warren, C., 2009. Managerial accounting. Connecticut: Cengage Learning. White, G., Sondhi, A. and Fied, D., 2003. Analysis and use of financial statement. New Delhi: John Wiley & Sons (Asia) Pvt. Ltd. Yahoo Inc, 2013a. Wal-Mart Stores Inc. [online] Available at: [Accessed 19 December 2013]. Yahoo Inc, 2013b. Tesco Plc. [online] Available at: [Accessed 19 December 2013]. Read More