Business Operation at Sainsbury PLC - Essay Example

Finance and Accounting Q1. Narrative and audit report a) J Sainbury’s Plc Business operation and position: Sainsbury’s is regarded as one of the largest supermarket chains in the United Kingdom (UK). It has captured around 16.8% of the total super market sector (J Sainsbury plc, 2014a). Presently, the company owns more than 1203 convenience stores and supermarkets worldwide and employs around 161000 employees from different countries. The company aims to deliver the products to its customers and have accordingly invested huge amounts in developing stores around the world. The marketing channels are developed for convenience of the shoppers. The values and culture of the company are identified as the cornerstone of success. In order to meet the objectives, the company develops long-term strategies for underpinning five areas by incorporating its operational excellence and values (highlighted in the Figure 1) (J Sainsbury plc, 2014b). Figure 1: Business strategy (Source: J Sainsbury plc, 2014b) Competitors: According to a survey conducted by Somerville, Geraghty and Maher (2014), main competitors of the company, among the Big Four peers, are ASDA, Morrison and Tesco. Among the four firms, Sainsbury’s is believed to be the most expensive one in terms of essential products. Tesco is the cheapest supermarket chain as customers are provided with commodities at a price that is cheaper compared to all others. However, ASDA is the second cheapest, followed by Morrison. The survey is based on the number of products sold to customers and their prices. b) Usefulness of narrative reports The information provided in the financial statements of a particular company is not sufficient for the stakeholders and investors to measure its economic values (ACCA & Deloitte, 2010). It is vital for the companies to present narrative and quantitative reports along with the financial statements so as to enhance transparency and relevance of information disclosed. Such reports are presented as the Management Discussion and Analysis, Management Commentary and Operating Financial Review by different companies (Financial Reporting Council, 2009). The reports are supported by non-financial and financial key performance indicators, which explain the business strategy and its progress towards success (Zeini, 2011). The narrative reports as a Management Commentary highlight on financial condition of a company, along with the changes that have taken place within one year. The Operating Financial Review of Sainsbury’s presents the note of Chairman for the shareholders, which emphasises on improving business status and operational efficiency. This report greatly benefits the shareholders by way of foregrounding the company’s operating profit and net income. The status of Earning per Share (EPS) is also included in the report, recording a rise or fall compared to that of the previous year. Return on Capital Employed (ROCE) is another essential indicator of a company’s financial condition. It is incorporated in the narrative report so as to make the shareholders aware of the financial condition (J Sainsbury plc, 2014c). Then again, conditions of the retail sector are also indicated in this report. Hence, a narrative report is quite necessary for a company, apart from financial statements in the annual report. c) Characteristics of a good narrative report Narrative report is essential for the company annual reports as it elaborates on operational excellence and financial condition. Both of the factors require to be portrayed substantially to the investors, shareholders or stakeholders. The stakeholders are interested to invest in a company when they are assured that the financial position is stable. The main characteristics of good narrative reports are as follows: Transparency: The narrative reports should contain details of the business operation so as to give a transparent view to the investor. The financials should be properly depicted in the report, which will help the stakeholders to become aware of the facts and figures related to business. Important information: Vital information is depicted in the narrative report as it is associated with financial and operational structure of a company. Appropriate Structure: Structure of the report must be appropriate because it majorly draws attention of the investors or stakeholders. d) Three issues in Sainsbury’s strategic report The three main issues in Sainsbury’s strategic report, which Kelly must be aware of, are mentioned below: The suppliers appear reluctant in terms of delivering raw materials to the company. The quality managers are not adequately efficient in order to estimate standard and quality of the company products. The external auditors are reluctant to provide any detailed information regarding the company’s financial condition. Q2. Audit report a) External auditors The external auditors of Sainsbury’s are the auditors of PricewaterhouseCoopers LLP (PWC). The company makes sure that external auditors do not have access to the non-audit services, which is one of the main functions of the audit committee, thereby increasing independence of the auditors. PWC is assigned to audit the financial reports of Sainsbury’s for the coming few years. b) Opinion of the external auditors The external auditor of Sainsbury’s had given the following opinion after auditing its financial reports: The financial statement provides a fair and true view pertaining to financial state of the Group. It also highlighted external and internal affairs of the company as of March 15, 2014, along with profit earned by the Group. The financial reports presented the actual cash flow for 52 weeks and give the actual figures. The financial statement of the Group is prepared by complying with rules and regulation of the International Financial Reporting Standard (IFRS), which is adopted by the European Union. The statements are accurately prepared with respect to the Companies Act 2006. The significance of the external auditors’ opinions is stated henceforth. The external auditors noted that business of the group is divided into three segments i.e. retailing, property investment and financial services. The financial statements consolidate the six reporting units, which form the financial service, retailing of the group and joint ventures. All six units of reporting are audited by the external auditor so as to ensure that the reports are accurately developed and adequate evidences of audit are present in form of opinions. The external auditors noticed that of the six units, two of them required critical review, owing to large size and presence of risky financials. The main areas of focus for the external auditors are as follows: Supplier rebates, incentives and discounts: The calculation of the figures is dependent on estimation of the amounts held under the agreement of supplier. Such discounts or rebates are earned on the balance sheet date, which is also based on the purchased inventory and goods sold. The calculation of discounts and rebates are done on grounds of the manual process that is prone to errors. Revenue recognition: The external auditors assumed that a risk of fraud in the financial statements pertaining to revenue recognition (J Sainsbury plc, 2014d). As a result, the auditors feared failing to achieve the desired goal of auditing. A majority of the revenue is obtained in form of cash or credit, which the company provides manually. Hence, the external auditors have predicted that the figures can be subject to manipulation. Accounting associated with property transaction: There had been several property transactions during the period of one year. The external have focused on these transactions as they are materialistic and complex in nature. They considered the amounts appropriate when the ownership was transferred to the Group, thereby affecting recognition of the liabilities and assets in the balance sheet. Risk assessment: The external auditors perform risk assessment in order to detect fraud in specific areas of management. The risk is related to overriding of the management’s controls that is reflected in the financial statements. For identifying the risky areas of management, the individual journals are checked manually and adjustments are made in the income statement. This process is undertaken for mitigating the risk pertaining to misrepresentation and manipulation of the profit and revenues. The auditors assessed the accounting estimates independently, which are relevant to the financial statements. This assessment underlines whether or not the Director is biased towards any particular department. The controlling system was also examined, including arrangement of the staff, situations related to whistle-blowing and meetings held with the members of Board as well as the Internal Audit of the Group. c) Date of financial statement and audit report The audit report was prepared on 6 May, 2014, whereas the financial statement was made for the period 1st April 2013 to 15th March 2014. So clearly, auditors had prepared the reports after studying the financial statements. Q3. Performance Analysis The following ratios are calculated so as to evaluate the company’s financial position. Interest Coverage Ratio: The ratio is employed for measuring whether or not a company has the ability to pay off its interest on outstanding debt. Quick ratio: This ratio gauges a company’s ability to pay off the short-term liability without harming the inventory. Gearing ratio: The ratio indicates at the main source of finance for a company, namely debt or equity. If the company is financed by higher equity, then it follows an aggressive way of financing business. The table shows the ratios calculated for ascertaining financial health of Sainsbury’s (Refer to appendix for calculation): 2014 2013 Interest Coverage Ratio 6.817 6.167 Gearing Ratio 0.374 0.448 Quick ratio 0.496 0.293 Considering the above table, the liquidity position of Simsbury’s appears to be weak as the quick ratio is below 1.5, which is standard for the retail sector. The figure indicates that the company will encounter problem in paying off its current liabilities in short run. The gearing ratio implies that the company is conservative in nature and have chosen its source of finance strategically. Nonetheless, the interest coverage ratio denotes that the company is capable of paying off its interest (J Sainsbury plc, 2014e). Q4. Plant, Property and Equipment The transactions pertaining to property, plant and equipment are presented in the financial statements on balance sheet. They are highlighted as non-current asset; the amounts spent to acquire the fixed assets and the sum received from disposition of the same are stated in the income statement as profit or loss (Monday, 2008). The same is depicted in the cash flow statement as investing outflows or inflows. The international standard guiding the presentation of property, plant and equipment is the International Accounting Standard (IAS) 16. The main objective of IAS 16 is related to accounting treatment and presentation of plant, property and equipment. The key issue in accounting of the assets is its recognition. It also determines depreciation charges, carrying amounts and impairment losses pertaining to the assets. The scope of IAS states that accounting should be applied to plant, property and equipment. Accordingly, the accounts related to property, plant and equipment are depicted as historical costs. The elements of cost comprise purchase price, allocation of assets and cost directly attributable to the assets. The costs constitute that of benefits that are provided to the employees, which arise from acquisition or construction of items like, property, plant and equipment. The cost of site preparation, assembly and installation cost, initial delivery and cost of testing are also included in the accounting of plant, equipment and property. Q5. Limitations of annual reports As per the auditor’s report and general preparation of the financial statements, the annual report of Sainsbury’s is appropriate for the investors to take any investment decision. The narrative report effectively helps in assuring the investors that investing in the company’s share is a right decision. Therefore, there is no limitation in the annual report of Sainsbury’s as it has followed the rules and regulations pertaining to International Accounting Standards. Reference List ACCA & Deloitte, 2010. Hitting the notes, but what’s the tune? An international survey of CFOs’ views on narrative reporting, A report from ACCA in partnership with Deloitte. [pdf] Deloitte. Available at: [Accessed 7 August 2014]. Financial Reporting Council, 2009. Rising to the challenge. A review of narrative reporting by UK listed companies, a report from the Accounting Standards Board. [online] Available at: [Accessed 7 August 2014]. J Sainsbury plc, 2014a. About Us. [online] Available at: [Accessed 7 August 2014]. J Sainsbury plc, 2014b. Business Strategy & Objectives. [online] Available at: < http://www.j-sainsbury.co.uk/about-us/business-strategy-objectives/ > [Accessed 7 August 2014]. J Sainsbury plc, 2014c. Annual Reports And Financial Statements. [online] Available at: [Accessed 7 August 2014]. J Sainsbury plc, 2014d. Our Values. [online] Available at: < http://www.j-sainsbury.co.uk/about-us/our-values/ > [Accessed 7 August 2014]. J Sainsbury plc, 2014e. Financial Performance. [online] Available at: [Accessed 7 August 2014]. Monday, S., 2008. IAS 16 and the Revaluation Approach: Reporting Property, Plant and Equipment at Fair Value. University of Tennessee Honours Program, 5. pp. 1 – 30. Somerville, M., Geraghty, S. and Maher, R., 2014. Sainsburys Most Expensive Of Big Four Supermarkets - New Survey. [online] Available at: [Accessed 7 August 2014]. Zeini, Z., 2011. It’s not what you think it is. The importance of narrative reporting. [pdf] Deloitte. Available at: [Accessed 7 August 2014]. Appendix Read More