Accounting Representation: Public and Private Sectors - Assignment Example

Accounting Representation: Public and Private Sectors Executive Summary Tesco PLC is a British grocery retail chain that was established back in 1919(Tesco, 2014A). The company has grown over the years only to emerge as the largest retail chain after US based Wal-Mart. The company has established a strong foothold in about 14 countries with 6351 stores generating revenues up to £72,673 million in 2013. Tesco is also listed on the London Stock Exchange having a strong market capitalisation of £24.4 billion (Tesco, 2014A). The following analysis is based on the CORE framework developed by Moon and Bates, 1993. Tesco is analysed based on the company’s external and internal environment, overview of company’s financial statements and a critical analysis of their financial ratios. The second part of this report consists of a case study analysis on the city of Yorba Linda, California. Task One Context and Strategy Analysis Industry Analysis and Growth Rate Tesco is the largest supermarket retail chain in United Kingdom and the second largest in the world after Wal-Mart. However, Tesco experienced a fall in of 0.6% market share after the European economic crisis. The general trend in the supermarket industry is was a loss in market share. This is was primarily because of lack in consumer spending reduced after in the recent past following the financial crisis. The total market for groceries rose by about 3.6% while Tesco sales rose by about approximately 1% (Tesco, 2014A). The company also faces with local competition from a growing competitor ALDI which is capturing markets by selling quality and company branded products rather than competing on prices. Concentration and Balance of Competitors The industry is marked by few large players, which are concentrated well within UK. The company has competes with local competitors like such as Sainsbury PLC, ASDA, Morrison’s and Marks and Spencer PLC. With a few players, the market is highly competitive (Tesco, 2014B). but has few players but The entry of new players is not very easy because it involves huge costs in terms of establishment of stores and sourcing of products from different manufacturers (Theguardian, 2014). Degree of Differentiation The market for this sector provides fierce competition in terms of price wars where each company tries to establish itself as a provider of the cheapest prices for standard products, give competition in providing freshness of grocery items, challenge in providing healthier foods and selling more environment friendly products (Moon and Bates, 1993; Theguardian, 2014). Supermarket chains do not try to differentiate among products being sold because they are largely standardised and branded. However, they differentiate in the provision of speed in delivery and freshness of products being provided (Theguardian, 2014). Competitors The key competitor of Tesco PLC is Wal-Mart. Wal-Mart is the largest chain of grocery and supermarket chain. Other companies that offer tough competition to Tesco PLC include Sainsbury PLC and Morrison’s in UK, the company’s primary area of operations. Company Strategy The company is a seller of fast moving consumer goods that are generic and standardised in nature follows a cost leadership strategy. This is because the margin on such products is the same for every company (Hitt, Ireland and Hoskisson, 2008) who sells these products however; the company can offer higher discounts and pass on the benefits of cost savings to its customers when they have significant savings in terms of cost. In the business of grocery retailing, it is essential to have lower prices for goods that are standardised in nature in order to attract and retain the customers (Hitt, Ireland and Hoskisson, 2008). The value chain of the company needs to be improved continuously in order to remain competitive in the global context. In this reference, Tesco needs to review its inventory management policies and logistics management systems in order to reduce the overall operational cost. Overview Comment on Income Statement for Tesco and Wal-Mart Tesco experienced a rise of 0.44% in gross sales when sales rose from GBP 64,539 to GBP 64,826. Wal-mart, on the other hand, experienced a rise of about 1.5% rise in sales. Both the companies seem to be having have a similar growth phase while Wal-Mart appears to be performing perform slightly better in terms of growth. The revenue of Wal-Mart is 7.4 times of that of Tesco proving that Wal-mart is a much larger in terms of sales. When consider the gross profit ratio, Wal-Mart with 5.6% and Tesco with 6.3%, this showed that Tesco did slightly better in terms of managing company sales and reduced its cost for goods sold to raise profit levels. The profit margin ratio, however, showed the different picture. Wal-mart appeared to be able to manage the debt fund expenses and taxes better than Tesco with the profit margin ratio, 7.53% and 3.38% respectively.Wal-Mart has experience a fall in Gross profit by 0.1% while for Tesco, the fall was about 1.9% in gross profit margin between 2012 and 2013. This implies that both the companies have been working over reducing their operating costs significantly but the higher fall in costs for Tesco implies that the company is managing the operational costs better over the previous year. Comment on Balance Sheet for Tesco and Wal-Mart Tesco has increased its long-term liabilities over the previous year from GBP320 million to GBP 9199 million in 2013 (Tesco, 2014B). by about GBP 320 million whereas Wal-Mart’s long-term debt has increased it to GBP 30305 million by from about GBP 2540 (Wal-Mart, 2014). The absolute rise for Wal-Mart was much higher owing to mere size of operations. However, in terms of debt equity positions, Wal-Mart had a better management of owned and borrowed funds with debt equity standing at 2.69 compared to that of Tesco at 3.21. This implies that Tesco relied more on borrowing which added an unavoidable obligation to pay interest expenses. Wal-Mart, on the other hand, can manage to finance itself with slightly better proportion between debt and equity, leaving Wal-Mart with fewer obligations from paying interest but dividends. Ideally, is limited by its owned capital for borrowing more funds for investment purposes. This implies that owned capital does not provide much asset back up that is necessary to source debt funding. Additionally, it is desired that the ideal debt equity ratio is should be maintained at 1:1 but for grocery industry, it should be maintained at 1.11and therefore it becomes important that debt ratio is maintained as per the equity funding available (Merchant and Stede, 2012). Accounting policies and Audit Report Tesco has 5 non executive and 8 executive directors on their board which has jointly decided to follow IFRS accounting policies. The company has an established framework for managing its internal control where the any investment is subject to formalised reviews under strict quality and integrity control of its personnel. The audit has presented their view on financial statements to be fair and true to the state of affairs for the financial year 2013-2014. Evaluation Organizational performance The analysis takes the first look at the liquidity position of the two competing companies. It is observed that Tesco had a higher current ration than Wal-Mart at 2.22 compared to Wal-Mart’s 0.88. This implies that Tesco had a more efficient in paying its short-term debt management of its operational funds than Wal-Mart. Low cash in operations allows for a crunch in short term finance and this reduces the flexibility of the company to use funds for investment purposes. The scenario is similar in case of quick ratio as well. The low level of quick ratio also implies that Tesco has a high inventory which needs to be managed well in order to bring the ratio to the ideal levels. Wal-Mart suffered from a deeper inventory problem than Tesco. Interest cover for Tesco is was at 4.77 compared to Wal-Mart’s 11.51 implying that Tesco Wal-Mart has had a better ability to manage its debt obligations over Tesco Wal-Mart (Wal-Mart, 2014). Tesco operates operated at a higher gross profit ratio than Wal-Mart. This implies that Tesco was able to minimise the cost of the commodities sold better than Wal-Mart has to work on reducing its operating expenses. The rise in operating costs has reduced the net profit figures which in turn reduces the net margin. On the other hand, Wal-Mart has had a higher efficiency in management of its operating expenses showing increases the net profit margin raising it to 7.54% in profit margin. Additionally in profitability ratios of the Tesco and Wal-Mart, it is reflected that Wal-Mart is operating operated at a lower operational cost higher net profit margin than Tesco. This is was primarily because Wal-Mart has had a higher scale of operations than Tesco PLC (Theguardian, 2014). Tesco has lower cost of goods being sold reinforcing its efficiency in managing company operations. The difference is was reversed when the gross profits of the two companies were are compared. Additionally, Wal-Mart gives gave a much higher return on long-term capital than Tesco as represented by their ROCE figures. The steep decline observed in the OCE figures for Tesco is owing to huge losses made in stalling of US operations. When the efficiency of the company is was analysed, the inventory days got Tesco is was 22 days while for Wal-Mart, it stood at 45 days. This implies that Tesco manages its stocks better and spends less in inventory warehousing. It is essential that grocery companies provide fresh produce in order to remain competitive. Lower inventory days represent that goods move comparatively quickly in Tesco than at Wal-Mart. Hence the company enjoys a better inventory management position than Wal-Mart. In terms of asset turnover, Tesco has a figure of 1.3 while Wal-Mart has a figure of 2.35. This reflects that Wal-Mart has a better utilisation of its assets than Tesco because the company generates more revenue for its asset base as compared to Tesco. Wal-mart has higher earnings per share, 360%, making the stock more attractive than Tesco whose shareholders only enjoy 27% of earning per share. Tesco also fall quite short in terms of the price earnings ratio where the book value price per share comes to GBP 0.15 while for Wal-Mart, the share prices come to 13.32 per share. The dividend yields for Tesco is 6.66 while that for Wal-Mart is 747.7. The dividend yield for Tesco is much lower than that for Wal-Mart. High price of shares is a reflection of investor sentiments and their perception of stock. Tesco enjoys a greater perception of future prospects than Wal-Mart. Strategies Pursued Tesco PLC follows a cost leadership strategy whereby the company tries to reduce its operational costs so as to increase its profit margin. The company also sells a whole host of products that are kept fresh and well in stock. The company is renowned for the freshness of its grocery offerings. Competition in terms of prices is very high in the grocery retail business. Competition is in terms of prices. Each company wants to sell more and if prices are high in one company, the customer shall easily move on to the other looking for a better price for the same standardised good as the switching cost is quite low. This implies that the company needs to bring structural efficiencies in logistics and operational facilities so as to maintain minimum cost levels and provide consumers with the best competitive price. Additionally, companies like ADLI are now preparing their own brands and selling under company name. This shift in strategy is because the consumers are finding the standardised products everywhere with not much difference in their prices. Hence, in order to retain the consumer interests and customers loyalty, companies have to differentiate themselves and win consumers from different perspective, not only price. are trying to find newer and better ways of competing with each other. Such products produced by the company sell quality products and the companies have begun to compete on quality. So, the future competitive territory will be changing toward quality base (Theguardian, 2014). Tesco can also take up competing on quality. Its competition in terms of freshness is well placed. The study is a comparative analysis between the inventories ratios maintained by both the companies. The freshness measure is taken as per the common items being sold by both the companies assuming the inventory ratio figures represent and average and do not apply the same for grocery items or hardware. Hence, the freshness of goods in terms of shelf time is being compared. Task Two Question 1 Fund accounting refers to the form of accounting followed by non-profit organizations where all funds are categorised and segregated into individual fund categories, which have their own set of assets, liabilities, financial accounts expense accounts and revenues. The balance of each fund account is expected to nullify on both sides. Such type of account is particularly popular for non-profit organizations where the money received from donors and fundraising camps are collected and segregated into different funds for managing administration and operational expenses. Non profit organizations like the city of Yorba Linda have a different purpose of accounting where they want to know that the funds they have dedicated to a particular mission is being efficiently and effectively utilised. The advantage of fund accounting is that it enables one to allocate the necessary amount of assets essential to meet the desired purpose. Fund accounting separates such funds and prevents it from mixing into other funds thereby setting a specific limit and providing a specified financial assurance to the particular project. Fund accounting makes sure that the money assigned to a purpose does not mix with other accounts and remains available for it as and when required (Granof and Khumawala, 2013). Another advantage associated with fund accounting is that it ensues accountability among the fund managers who have been designated the fund. The managers can be held responsible for any detail of use of funds and results achieved. Additionally the organization also becomes collective accountable to the donors of the funds. The financial results declared by such non profit organizations have to furnish the utilisation details for each fund. Despite their advantages, more and more organizations are now moving towards the accrual system of accounting because it is deemed to be more transparent and accountable. This is because accrual basis of accounting does not allocate a specific sum to a project. It assigns money as and when the fund receives the money. This follows the principles of accounting assuring that the fund inflow is well tracked. In terms of expenses too, the liabilities are recognised when they are incurred assuring full details of the expenses incurred. Question 2 The city of Yorba Linda expects to have a more transparent and accountable fiscal year 1991-92. In other words, with the three major changes introduced by Mr Simonian, it is expected that Yorba Linda shall have a better representation of funds and a more understandable budget that shall allow the citizens as well the city council to understand the flow and utilisation of funds within the city. An evaluation of the projected as well as present resources by department directors shall assure easy prioritisation and completion of tasks. With the introduction of a rewards management system for recognising people for high performance, the City of Yorba Linda expects to have higher work efficiency among the council members over different tasks. With the new system of multiyear budgeting, it is expected that a better outlook towards each project shall be facilitated when the complete picture of the 2 yearly plans are presented on the budget estimations. The budget also enabled one to prioritise tasks. This assures that more critical work of the government like building of the community centre in the city, are completed on priority receiving preferential fund allotments. Hence it is assured that important work is not stalled owing to lack of funds. The new format of accounting based on the accrual system also allowed for mid year as well as annual reviews to manage shortfalls in budgeted estimations and thereby assigning additional funds for the completion of projects. The department managers were required to make their budgeted projections and also making such projections in line with budgeting guidelines. Closer monitoring of budget outlay was made possible through such department level budgeting and expenditure monitoring (Merchant and Stede, 2012). When each member at the departmental level is held responsible for his budget and expenses, it is assured that the expenses shall be taken care of at the lowest level possible. Moreover, with regular calls to reduce budgeted outlay’s efficiency was brought in the programs by elimination of unnecessary expenses. The new budgeting system shall bring in greater levels of efficiency in fund management and also sourcing owing to the rewards mechanisms and strictness in budgeting outlays. Note : 1 USD = 0.7255 EURO as on 31 December 2013. Reference List Granof, M. A. and Khumawala, S. B., 2013. Government and Not‐for‐Profit Accounting. New York: Wiley Global Education. Hitt,M., Ireland, R. D. and Hoskisson, R., 2008. Strategic Management: Competitiveness and Globalization, Concepts and Cases, Connecticut: Cengage Learning. Merchant, K. A. and Stede, V. D., 2012. Management Control Systems. London: Prentice Hall. Moon, P. and Bates, K., 1993. Core analysis in strategic performance appraisal. Management Accounting Research, 4(2), pp.139-152. Tesco., 2014A. About Tesco. [online] Available at: [Accessed 9 May 2014]. Theguardian, 2014. Fresh, but not so easy: Tesco joins a long list of British failure in America. [online] Available at: < http://www.theguardian.com/business/2012/dec/09/fresh-not-easy-tesco-british-failure-america> [Accessed 9 May 2014]. Wal-Mart, 2014. Annual Report: 2014. [online] Available at: < http://cdn.corporate.walmart.com/66/e5/9ff9a87445949173fde56316ac5f/2014-annual-report.pdf/> [Accessed 9 May 2014]. Tesco., 2014B. Annual Report 2013, 2012, 2011. [pdf] Tesco Plc. Available at: [Accessed 15 May 2014]. Appendix Ratio Analysis – Tesco PLC and Wal-Mart Comparative Statement Ratios Tesco , 2014 Wal-Mart, 2014 Liquidity Ratios Current ratio 2.22 0.88 Acid test Ratio 0.49 0.24 Interest Cover 4.77 11.51 Profitability Ratios Profit Margin Ratio 3.38% 7.53% Gross Profit ratio 6.31% 5.64% Return on Capital Employed 7.03% 26.81% Efficiency Ratios Inventory days 22.50 45.73 Asset Turnover 1.29 2.35 Investment Ratios Dividend Yield 6.66 747.10 Earnings per share 0.27 3.60 Price earnings ratio 1208.80 13.32 ( Source: Tesco, 2014A, Wal-Mart, 2014) Read More