Accounting Information of Tesco PLC and British Telecommunications PLC - Assignment Example

ASSIGNMENT ON ANALYZING TWO COMPANIES BASED ON QUESTIONS [Name] [Institutional Affiliation] [Date] Table of Contents Introduction 3 Question 1: Users of Accounting Information 3 Internal Users of Accounting Information 4 External users of Accounting Information 6 Question 2: Primary Objectives and Four Secondary Objectives of both Companies 7 Primary Objectives and Evidence of Success in both Companies 7 Secondary Objectives and Evidence of Success in both Companies 8 Question 3: Critical Analysis of Financial Ratios 10 Profitability Ratios, determines the company’s return on investment which will communicate to the investors on their profit and normally stated in percentage terms. Profit margins assess the ability of a company to convert revenue into profits. 11 A number of profitability ratios are discussed herein. 11 , 11 If a long-term credit is meant to increase production capacity, the net profit margin will significantly reduce. The rationale of this ratio is to determine business profitability, especially from the company’s primary operations. High ratio indicates the efficient management of business 11 Current ratio is the relation between current assets and current liabilities. This can be illustrated by the formula: 13 Investor ratios are measures that investors use to determine if their projected investment with be profitable. Profit margin ratio may be used for the analysis. 14 Question 4: Importance of Cash Management and Capital Budgeting to both Companies 14 Importance of Cash Management 14 Importance of Capital Budgeting 15 References 17 Introduction This research entails the analysis of two companies based on the criteria of four questions. In broad terms, the analysis covers the external and internal users of accounting information. The research also examines the primary and secondary objectives of both companies, the financial ratios of the companies and further, explores the importance of cash management and capital budgeting in the two companies. Question 1: Users of Accounting Information Accounting information communicates financial status of a business at a given period. This information is useful to both the internal and external users as discussed herein. The internal users include the management, the owners and the employees whereas the external users include the tax authorities, creditors, investors, customers, and regulatory authorities (Shick 2009). The internal & external users of accounting information can be summarized as shown in Figure 1. Figure 1: Diagrammatic Representation of Users of Accounting Information Internal Users of Accounting Information Internal users are also referred to as primary users, who are directly involved on day to day basis of company’s operations. There are different needs and requirements attributed to internal users in regard to accounting information. For example, management uses the accounting information to gauge how the company is performing and how well is management (Pincus 1995). This information includes an analysis of the current result for the management to formulate measures to improve the company performance. The analyzing may entail ratio analysis and profit and loss account statement. Accounting helps to fulfill all statutory provisions. Determination of sale price and know how much labor is available of a certain wok to be done. They may also use this information to show evidence in the court. Past information will help to grow the nation and forecast the future demand Employees Employees are internal users who are entitled to access and assess the profitability of the company. The reason for this is to be guaranteed on stability of the company to pay them remunerations and possibility for them to grow their career and other benefits and allowances. A highly rewarding institution will motivate its workers to contribute greatly to the set goals, which are usually measured on the basis of companies’ performance as per the numbers on the financial information (Romney & Steinbart, 2006). Owners and Investors Owners and investors, they are concerned with the profitability of their investment and what action needs to be taken to increase the current results. Further, they are concerned with how much was sold in the last period. For instance, a share holder will need accounting information to decide if to sell or hold shares. External users of Accounting Information External users of accounting information are also known as secondary users. They are investors who need to gauge on the financial status and past performances of the company. They may include customers, lenders and creditors, and the government (Romney & Steinbart, 2006). Customers Customers, who depend on the supply and operations of the company, will mainly be concerned on their stability and longevity. Accessing this information will enable them analyze the profitability and reliability upon the company. For example, a retailer will need a stable supply within a given lead time to ensure he never runs out of inventory upon demand. Lenders and Creditors Lenders and creditors need to determine the credit limit the company can be offered or it can offer. Accounting information will enable lenders to analyze the solvency of the company. This means that when the company can pay any due debts on its liabilities, the confidence level of its lenders increases. Government The government’s main concerns about financial information are to ensure the company adheres to the stipulated laws on paying taxes and requirements. Legal requirements on public companies include publicizing their financial records and adapting the amendment of the laws. This financial information will also enable the tax authorities to determine the tax due from different companies Question 2: Primary Objectives and Four Secondary Objectives of both Companies This section aims at critical analysis of the primary objective and the four secondary objectives of both companies. The section provides the evidence of the success of these companies whilst analyzing their objectives. Primary Objectives and Evidence of Success in both Companies Primary objectives of a company are the main corporate objectives set and to be achieved within a long term period (Tennent, 2008). These include profiting, growth, meeting society needs, maintaining finance and marketing needs. The primary objective of a company is to maintain a higher net profit than the cost of doing business. This means having a stable profit margin on production & operations. In the case of X LTD, 12000 profit after taxation is much lower than that of Y LTD 25000 profit Growth may be forecasted by analyzing the financial information of the company at a given period to be able to plan for future projection. Strategies are formulated to achieve set objectives. The beliefs a company supports in terms of customer interaction, maintaining a productive and positive employee matters. To maintain growth and survival is the objective of every business, including the two companies. Another objective is to meet the human wants of the society. Expansion of the business, whilst coming up with new concepts, goes along with meeting human wants. In such regard, there are rules and regulations within which the business has to act as opposed to corruption and unlawful practices. Maintain finance in order to grow a company’s future capital is needed. Thus, the company should meet short term requirements such as payroll, as well as saving for long term goals. Profit carried forward is retention of future growth capital. For example, in the case of X LTD, a reserve of 64000 against 54000 of Y LTD is a higher profit savings. Marketing is also a primary objective and entails specifying a target market, understanding customer needs and behavior, analyzing the market and coming up with a product to satisfy the requirement. The main objective of the company will be to build long term sustainable relationships with the clients. In most cases, consumers analyze the world differently whereas social and environmental aims are to deliver a safe, reliable and efficient strategy. Understanding of decision-making processes and how to formulate operational strategies so as to understand what the consumer requires the concept of marketing. Secondary Objectives and Evidence of Success in both Companies Secondary objectives of a company make a direct contribution to the primary objectives and thus, focus on short term goals. They may include customer service, creating a good cooperate image, economic health and safety of employees, sponsorship of sports and events, cooperate analysis and retention of employees. Good customer service should be maintained and accessed for some time to make a determination on how well the customer service strategies are. When the customer is not satisfied, a change to strategy should be made as a tactical secondary objective. Protecting a company’s core values creates a positive corporate image of the company. This is a summary of customer relations, social corporate responsibility and employees, and business enterprise as per the government guidelines The secondary objectives include economic health and safety of the employees and their psychological satisfaction. Conducting proper training and development programs improves employee skills. Further, monetary and non-monetary incentives like bonus, increments, and promotions to employees motive them. Public relations skills should be a key objective for employee who interact direct to customers Also sponsor games and sports at national level. The employers should not exploit the employees. Companies should supply services and goods on a regular basis, contribute capital, bear the business risks, avail reasonable credit and pay the dues in time. Business need to be innovative and a limited resource should be avoided. The companies should aims at improving the quality of products. Competitive analysis assists in understanding how products are ranked in the market to better decide how to improve revenue (Libby, Libby & Short, 2011). Not undertake any ignorance of customer services and prevent the customers from being exploited. Being able to produce quality products with fair prices is a desirable aspect in the two companies. Competitive analysis helps companies to widen supply chain to enable access to new and restricted markets for exportation. This will enhance foreign exchange for the government. It is wise to deter any new entry into the market by maximizing sales and minimizing prices. Profits are invested in infrastructure of building roads and widening electricity to reach a wider population. Better employee environment and training improves employee retention. This will avoid costs of recruiting and advertising. Motivating employees should be based on increased allowances and benefits. Employees can feel satisfied if put on the right job according to their skill. Question 3: Critical Analysis of Financial Ratios For the purpose of analysis of the two companies (X LTD AND Y LTD), a number of financial ratios shall be considered and include the profitability ratios, efficiency ratios, financial stability ratios and investor rations. Profitability Ratios, determines the company’s return on investment which will communicate to the investors on their profit and normally stated in percentage terms. Profit margins assess the ability of a company to convert revenue into profits. A number of profitability ratios are discussed herein. , If a long-term credit is meant to increase production capacity, the net profit margin will significantly reduce. The rationale of this ratio is to determine business profitability, especially from the company’s primary operations. High ratio indicates the efficient management of business Return on assets measures efficiency of the business in using its assets to generate revenue. It communicates ways to generate profit from assets. Income is derived from the income statement. A higher return on assets implies that company under consideration is more efficient in the usage of its assets. The measure of return on assets is commonly reported on a trend and applied in comparison of the results of the business with their competitors. The accounting information of both net profit and gross profit is normally available from a company’s income practices and systems. Gross profit margin is a source for paying additional expenses and future savings whilst the company is able to pay its operations expenses. Higher gross profit margin means that the company is less efficient than other competitors. In this case execution of the formula on GROSS PROFIT MARGIN: For example, X LTD Gross profit margin = = 20 % Y LTD = 25% Efficiency Ratios gauge on the day to day operations of the company to enhance efficiency on budgeted expenses because a company will have to invest in assets that will be used to perform its operations. Efficiency ratio will then analyze how well a company uses its assets and liabilities internally. These will be a platform to turn its resources into revenue. Thus, it is of great significance to maximize the efficiency ratio (Libby, Libby & Short, 2011). COMPANIES: X LTD Y LTD For company X, Efficiency ratio = 3: 1 whereas for Y it is 11.4 Financial Stability Ratios measure how the company is able to meet the current liabilities. Thus a company may use its liquidity ratio to determine its capability in meeting its financial obligations. This ratio functions as a test of the financial strength of a company and shows the company’s relative efficiency. Financial ratios enable investors to see how a company is financed, the resources and ability to pay its debts. These Investment valuation ratios attempt to simplify this evaluation process by comparing data that help users gain an estimate of measurement (Romney & Steinbart 2006). Current ratio is the relation between current assets and current liabilities. This can be illustrated by the formula: COMPANIES: X LTD Y LTD = 0.5 = 0.7 Investor ratios are measures that investors use to determine if their projected investment with be profitable. Profit margin ratio may be used for the analysis. The expression for profit margin is given by: PROFIT MARGIN = / SALES   COMPANIES: X LTD Y LTD 0.3 0.5 Question 4: Importance of Cash Management and Capital Budgeting to both Companies Part four of this analysis will focus on the importance of cash management and capital budgeting of the two companies. Cash management refers to cash flow where it involves collection and usage of finance whereas capital management entails a planning process to forecast and determine the finance one will spend on a specific asset Importance of Cash Management Cash flow determines solvency of a company where the company can be assessed on how liable they are to lenders or coeditors in relevance to their liquidity. Cash flow will determine how an asset is profitable to a company in terms of its rate of return on investment Thus, cash management will enable an investor to decide if there is adequate cash to purchase assets and other expenses and see exchange for cash at a given period (Checkley 2002). Cash management includes management of customer accounts in other banks. Customers can register the payment instructions to an account in another bank and the bank will convey to the account-holding bank for execution. Cash management in the commercial markets is aimed at helping companies to optimize the use of liquidity. The evolution of the necessary trading capital can be followed in report with an indicator that some financial analysts calculate in eliminating. Cash management plays a vital role in daily businesses. One needs to allocate one's recourses to see that the optimization is achieved. In case of lack of funds, a business needs to raise funds through various means. Therefore, financial institutions should have innovativeness and anticipate their customer’s needs by providing some cash management information. Importance of Capital Budgeting Capital budgeting allows one to plan for the future growth of the company by coming up with long-term strategies and goals (Preve & Sarria-Allende 2010). Further, it controls expenditure where one defines specific expenditure to assets so as to monitor the cash flows. In capital budgeting, IRR (Internal Rate of Return) method is used and the decision based on its results are same as those for Net present value(NPV) method for projects that are not mutually exclusive. Capital budget enhances decision making on which projects to accept and which ones to eject since it estimates and forecasts future cash flows. This ensures accountability and measurability to understand the risk involved before project investment. One needs to analyze the market and see the survival chances (Harrison & Horngren 2001). Capital budgeting mainly involves investment and financial decisions. To valuate projects there are techniques that one may follow. For instance, the payback method is used to determine the time it would take a company to recover its initial business investment (Needles & Powers, 2004). Payback period can be defined as the duration it would require a company to pay the initial cash investment. Therefore, the use of payback period in capital budgeting takes into consideration the projected cash flows from a project. Investment appraisal is a general theory used for pricing assets and supports the fact that the expected returns from financial assets can be modelled by use of linear functions and other economic factors (Sagner 2011). It acts as the planning process applied in determination of an organization's long-term investments such as the purchase of new machinery and replacement of old machinery. The use of investment appraisal in capital budgeting allows a company to quantify the value it has created from its unit investment. Projects rely on the analysis of the cash flows that are obtained from the project and its associated costs. In the process of capital budgeting, the only cash flows that are discounted are those after-tax. Such an idea works well in a situation where we have the principal-agent relationship between cooperate managers and the shareholders. Sometimes the expenditures associated with capital are very large and can have a major effect on how a firm will perform financially. The main costs that are associated with debt financing are the financial distress, especially those in form of under-investment and the defection of supplies and customer. References Top of Form Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Top of Form Bottom of Form Top of Form Checkley, K. 2002. Strategic cash flow management. Oxford: Capstone Pub. Harrison, W. T., & Horngren, C. T. 2001. Financial accounting. Upper Saddle River, NJ: Prentice Hall. Libby, R., Libby, P. A., & Short, D. G. 2011. Financial accounting. New York: McGraw-Hill/Irwin. Needles, B. E., & Powers, M. 2004. Financial accounting. Boston: Houghton Mifflin. Pincus, K. V. 1995. Core concepts of accounting information. New York: McGraw-Hill. Preve, L. A., & Sarria-Allende, V. 2010. Working capital management. New York: Oxford University Press. Romney, M. B., & Steinbart, P. J. 2006. Accounting information systems. Upper Saddle River, N.J: Pearson Prentice Hall. Sagner, J. S. 2011. Essentials of working capital management. Hoboken, N.J: Wiley. Shick, . . 2009. Accounting fundementals. Englewood cliffs, NJ: Prentice-hall. Tennent, J. 2008. Guide to financial management. London: Profile Books. Bottom of Form Bottom of Form Bottom of Form Read More