Financial Reporting & Management Accounting - Assignment Example

Financial Reporting & Management Accounting Contents Introduction 4 Discussion 5 Answer 5 Liquidity Ratios: 5 Current Ratio: 5 Quick Ratio 6 Cash Ratio 6 Efficiency Ratios 7 Working capital Ratio 7 Fixed Asset Turnover ratio 8 Profitability Ratios 8 Net Profit margin 8 Operating Profit margin: 9 Investment Ratios 10 Dividend payout ratio 10 Price earnings ratio: 10 Gearing Ratio 11 Debt Ratio 11 Answer 2 12 To what extent do shareholders use their annual reports? 12 b. What particular items are they interested in? 12 Can they follow the structure of them? 13 Do they understand the terminology used in the report? 14 Would they like a different type of annual report, and if so what?  15 Conclusion 15 References 17 Introduction Tesco Plc is a British multinational company that deals in the general merchandise and grocery. The headquarter of Tesco is at Chestnut Hertfordshire which is situated at England in United Kingdom. The chief executive officer of Tesco is David Lewis and the founder of Tesco is Jack Cohen and it is considered and ranked as the second largest in the retail industry of the world in terms of its revenue that is generated. Tesco is being regarded as the role model in the supermarket industry throughout the world. Tesco is engaged in selling more than 40, 000 food products in its supermarkets which includes the non food lines and the clothing. The company carries or conducts its operations in the rest part of Europe which mainly includes the countries such as Hungary, Slovakia, Poland, Republic of Ireland and Czech Republic. Tesco Plc is considered as the main and important retailer that carries out its main operation in United Kingdom. The companies carries out its operation in more than 2291 supermarkets, convenience stores and also super stores in the United Kingdom and also it carries out its operation in the rest part of Asia and Europe. The company also deals with financial products which include the banking services and the insurance and it also deals with the telecommunication products and the electrical appliances. Tesco captures or occupies more than 13% of the share of the retail market in UK. It has been observed that the international market of UK has been growing rapidly and it is expected that it will contribute to the increase in the profit through the next four years. The format of the food stores of Tesco comprises of the Tesco Superstores, Tesco express, Tesco Extra, Tesco Metro, Tesco Home plus, one stop and Dobbies. Discussion Answer 1 The financial position of Tesco can be analyzed with the help of the following ratios: Liquidity Ratios: Current Ratio:   2014 2013 Current asset 15572 13096 Current liabilities 21399 18985 Current ratio can be calculated as current asset divided by current liabilities Current ratio in 2014 = 15572 / 21399 = 0.73 Current ratio in 2013 = 13096 / 18985 = 0.69 Therefore from the above current ratio it can be observed that the liquidity position of the company is not sound for the past two financial years. But the liquidity position in the year 2014 has improved as compared to that in 2013. The company is not capable of fulfilling its short term debt obligations as the current ratio of the company is less than one. Therefore it is required to increase or improve the liquidity position of the company by reducing its allocated overhead cost (Artill and McLaney, 1995). Quick Ratio   2014 2013 Inventories 3576 3744 Current asset 15572 13096 Current liabilities 21399 18985 Quick ratio can be calculated by subtracting the inventory from its current assets and dividing it by current liabilities. Quick Ratio in 2014 = (15572.00 – 3576) / 21399.00 = 0.56 Quick Ratio in 2013 = (13096.00 – 3744) / 18985.00 =0.49 The quick ratio of the company for the financial year 2014 and 2013 indicates that the liquidity position of the company is not sound and the company cannot meet its current liabilities with the current assets that are available with the company. But still the quick ratio has increased in the year 2014 as compared to that in 2013. But there is a need or requirement for improvement because the quick ratio less than one is not favorable for the company. To improve the quick ratio the company is expected to timely purchase its assets, make the collection and payment of its policies and the company is expected to provide the proper allowances for its bad debt. Cash Ratio   2014 2013 Cash at Bank & in Hand 2506 2512 Current Asset Investments 1096 580 Total Current Liabilities 21399 18985 Cash ratio can be calculated by adding the cash at bank and in hand together with the current asset investments and then dividing it with the total current liabilities Cash ratio in 2014 = (1096 + 2506) / 21399 = 0.17 Cash ratio in 2013 = (580 + 2512) / 18985 = 0.16 Cash ratio also determines the liquidity position of the company. The cash ratio indicates that liquidity position of the company is not sound but as compared to 2013 it has improved slightly in the year 2014. But overall it can be observed that the cash ratio of the company is not sound Therefore the company is required to increase its quick ratio by increasing its cash and cash equivalent base in order to pay off its current liabilities. Efficiency Ratios Working capital Ratio   2014 2013 Total Assets 50164 50129 Total Liabilities 35442 33468 Working Capital can be calculated by dividing the total asset of the company from its total liabilities Working Capital in 2014 = 50164 / 35442 = 1.42 Working Capital in 2013 = 50129 / 33468 = 1.50 The working capital ratio determines the financial health of the company. By comparing the working capital of the last two years it has been found that the working capital ratio in 2013 has decreased as compared to that in the year 2014. Therefore in order to strengthen and develop the working capital base of the company it is required by the company to increase its assets. Fixed Asset Turnover ratio   2014 2013 Revenue 63557 63406 Property, Plant & Equipment 20522 18855 The Fixed asset turnover ratio of the company can be calculated by dividing the revenue of the company by the fixed asset of the company which mainly includes the property plant and equipment of the company. Fixed asset Turnover ratio in 2014 = 63557 / 20522 = 3.10 Fixed asset Turnover ratio in 2013 = 63406 / 18855 = 3.36 The fixed asset turnover ratio of the company has decreased in the year 2014 as compared to that in 2013 which is not a good indication towards the financial position of the company and therefore it is expected that the company should strengthen its fixed asset base in order to generate more revenue and also increasing the output of the company. Profitability Ratios Net Profit margin 2014 2013 Profit Before Tax 2259 2057 Revenue 63557 63406 The net profit margin of the company is calculated by dividing the profit before the calculation of tax by the total revenue. Net profit margin in 2014 = 2259 / 63557 = 4% Net profit margin in 2013 = 2057 / 63406 = 3% By comparing the net profit margin which indicates the profitability condition of the company for the two financial year 2014 and 2013 it has been observed that the net profit margin in 2014 has increased as compared to that of 2013. But the net profit margin is required to be increased more by the company it is a signal or the indication that the company is improving or developing. Operating Profit margin:   2014 2013 Operating Profit/(Loss) 2631 2382 Revenue 63557 63406 The operating profit margin also indicates the profitability position of the company and it is calculated by dividing the operating profit generated or the operating loss that is incurred by the company by the revenue of the company. Operating profit margin in 2014 = 2631 / 63557 = 4% Operating profit margin in 2013 = 2382 / 63406 = 4% By comparing the operating profit margin of the company for the two years 2014 and 2013 it has been observed that the operating profit margin of the company has been constant for the two years the company has to increase its operating profit margin as the increase in the operating profit margin indicates or resembles that the company is in more sound and preferable condition in transforming or converting its revenue for generating income for the company. Investment Ratios Dividend payout ratio   2014 2013 Dividend per Share 14.76 14.76 Earnings per Share - Adjusted 32.09 33.76 The dividend payout ratio can be calculated by dividing the dividend per share from the earning per share of the company. Dividend payout ratio in 2014 = 14.76 / 32.09 = 0.46 Dividend payout ratio in 2013 = 14.76 / 33.76 = 0.44 The dividend payout ratio of the company has increased in the year 2014 as compared to that of the payout ratio of 2013. The increase in the dividend payout ratio attracts more investors. Although the company has improved its dividend payout ratio in the year 2014 as compared to that in 2013. It is expected that the company should increase more its dividend payout ratio (Eskew and Jensen, 1999). Price earnings ratio:   2014 2013 Stock price per share 188.5 187.3 Earnings per Share - Adjusted 32.09 33.76 The price earnings ratio can be calculated by dividing the stock price per share by the earning price per share of the company. Price earnings ratio in 2014 = 188.5 / 32.09 = 5.87 Price earnings ratio in 2013 = 187.3 / 33.76 = 5.55 The price earnings ratio of the company is improving and it has increased in 2014 as compared to that in 2013 which is favorable for the financial position of the company and the company will be able to attract its investors. Gearing Ratio Debt Ratio 2014 2013 Total Liabilities 35442 33468 Total current asset 15572 13096 The debt ratio can be calculated as total liabilities divided by total current assets Debt Ratio in 2014 = 35442 / 15572 = 2.28 Debt Ratio in 2013 = 33468 / 13096 = 2.56 By comparing the debt ratio of the company for 2014 and 2013 it has been found that the debt ratio has been decreased in 2013 as compared to that in 2014 which indicates that the company is experiencing and decreasing its financial risk condition. Answer 2 To what extent do shareholders use their annual reports? There exists a principal agent relationship between the shareholders and the managers or the directors running the company. The shareholders are the investors of the company. Of any person invests in any assets he has the right and is interested to know if the investments they have made are in the right hands and whether they will get the desired return on the investments. Thus the shareholders of the company are mainly interested to find out if the company they have invested in is profitable. The annual report in fact is brought out by the company to appease the shareholders and share with them the information that they desire to find out. The annual report is the main source of communication between the shareholders and the company. In fact the company brings out the annual report to communicate with its shareholders or other interested stakeholders of the company the current financial position of the company and its future prospects. The point of an annual report is to tell the persons interested or reading it information about how the company has performed in the past year and what are the prospects and opportunities of growth that exists for the company. Tesco’s annual report clearly states about the financial performance of the company. There is a separate chairman’s report, members of the board of director, corporate governance report, key financial performance data presented in a lucid and presentable manner, a report on the risks that exist for the business and the steps taken by the company to mitigate the risks (Tesco Plc., 2014). Tesco’s future market opportunity is also presented in the report. b. What particular items are they interested in? The ASX listing rules states that an annual report must contain the following information Director’s report Corporate governance statement Financial report- A detailed description of the financial statements and key indicators of the financial performance of a company Auditor’s report As can be seen from the above listing the basic information that a shareholder searches for in an annual report is to know what the financial parameter states about the company, i.e. What is the financial position of the company what is likely future position of the company. The next important information is what the director has to say about the company. The director’s report talks about the future prospects of the company. If the financial performance is poor then it states the reason for it and lists out the steps the company is taking to rectify the same. What are the risk factors that exist for the company and how the company is taking steps to mitigate the risks (Hawkins, 1998)? Important information is what the auditor has to say about the company that is whether the financial reporting has been prepared following all the necessary standards or is the agents that is the managers over here trying to deceive the principal that is the shareholders. Another piece of information that the shareholders look for is the corporate governance report. If one looks at the annual report of TESCO Plc one finds that the annual report of TESCO has well defined sections. The annual report has been presented in a lucid language and the financial data presented is easy to understand. Can they follow the structure of them? The hallmarks of any good annual report are following: Consistent- The data should be presented in a similar format year to year so that any investor can easily compare the financial performance of the company and trend of financial data (Elliot and Elliot, 2003). Additionally they should be able to analyze and compare the firm’s performance with other companies of similar kind present in the Industry. Straightforward- The annual report should be written in a simple and lucid language. The report should be written keeping in mind that the shareholders are not experts in reading and interpreting financial data and information. Succinct- The information presented in the annual report should be concise and to the point. The shareholders are just like other peoples. Although shareholders are interested in knowing about the company they have invested in they do not have all day in trying to decipher and find the information they are looking for in an annual report. Clear- The report should be written in clear language with a simple layout so that the key messages that the shareholders look for in a report is easily identified by them. If one looks at the annual report of Tesco from the shareholders viewpoint then one finds that the report has all the hallmarks of a good annual report. It has clearly mentioned sections which tell the investors briefly about different information that the shareholders look for in a clear concise and direct way. The annual report of Tesco is consistent, straight forward, succinct and clear. Do they understand the terminology used in the report? An important characteristic feature of any annual report which sets the annual report as a good and distinguishable from other annual reports is that the annual report should be written in a language such that even a layman can understand what it tries to say. The shareholder is neither a financial expert nor an expert from the industry. So it is likely that he may not understand and strong financial terminology that might be used in the report. So the annual report should be prepared using clear English language and an easy to follow structure by which the shareholders may easily get to the information that they require and understand what the information has to say in simple terms. If one analyzes the annual report of Tesco then it can be found that the annual report of TESCO has been written in plain English language and the structure and flow of the report is easy to understand and follow. The report uses a lot of diagrams in order to present the financial data in a presentable manner that can be easily understood by the shareholders. Would they like a different type of annual report, and if so what?  The annual report of Tesco is good and has the hall mark of being a good report. However in any annual report the shareholders or the investors are mainly interested in the quantitative data and that too presented in a lucid manner. The investors normally tend to skip the qualitative information or data present in an annual report. However, in almost all the annual reports there are a lot of qualitative and repetitive information that are repeated year on year. This information are neither liked nor desired by the investors. The Tesco should therefore try and incorporate more quantitative data. The report should be made more concise and only the most important information be presented in the report. Conclusion After analysis of the financial performance of Tesco it can be concluded that the current financial position of Tesco is not good. An analysis of the liquidity ratios presents a sorry picture about the company. The liquidity position of the company was not good in both 2013 and 2014. If one looks about the profitability ratio of the company then in 2013 the profitability position of the company was not good. However the situation has improved in the year 2014. A look at the operating profit ratio of the company shows that there is a steady improvement in the operating profit margin of the company. The picture of the fixed asset turnover ratio of the company is also not good. It can be seen by looking at the various ratios of the company that the company’s financial position is not good and so there is a lack of performance as shown by the different financial indicators. However there has been an increase in dividend payout ratio in 2014 which will be liked by the investors but shows that there is a lack of other investment opportunities for the company in which they may invest in order to generate higher future income. One of the main causes of worry is that TESCO which has for so long remained the largest retailer in UK is losing its relevance. TESCO is losing the competition to different smaller retailers in UK and that is the main reason why TESCO is faltering. Tesco has to do something radical and unpredictable to again bring itself on top. Tesco can increase its investment in fixed assets in order to increase profitability. If one looks at and analyzes the annual report of Tesco then it can be easily said that Tesco’s annual report has all the hallmarks of being a good annual report. It is easily understandable and portrays all the information that may be required by the shareholders of the company in an easy to understand manner. However there is still scope of further improvements that exists. References Artill, P. & McLaney, E. (1995) Accounting and finance for non – specialists, New York: Prentice Hall. Elliot, B and Elliot, J. 2003 Financial Accounting & Reporting, Ney York: Prentice Hall. Eskew, R.K. & Jensen, D.L. (1999) Financial accounting, 5th ed. New York: McGraw-Hill. Hawkins, D.F. 1998. Corporate financial reporting and analysis: text and cases. Chicago: Irwin. Tesco Plc. 2014. Annual Report and Financial Statements 2014. [Online]. Available at. http://www.tescoplc.com/files/pdf/reports/ar14/download_annual_report.pdf [Accessed 3 February 2015]. Read More