Tesco Plc Financial Reporting - Assignment Example

MSc Accounting Name: Tutor: Subject: Date: Introduction The accounting information in any company is very essential for both internal and external users. This paper analyses the financial statements of Tesco for the last five years and how it has been useful for both internal and external users. Tesco is one of the leading merchandise and retail store in the UK which is dedicated to serving shoppers all over the world. The accounting information assists the users to make sound financial decisions since it is the heart of business management. The internal users such as managers communicate the objectives of the company with outside parties. To accomplish the normal running of the company, the needs, and requirements of both the internal and external users must also be addressed. Question 1 Internal users The internal users of accounting information are also referred to as primary users. Primary users include management, owners, and employees. The internal users normally obtain the accounting information in the form of financial statements, budgets, forecasts and management accounts. Employees Employees of any company use accounting information to assess company’s profitability and the impact on their future remuneration and job security. The employees of Tesco PLC are all involved in financial information. The financial information of Tesco was compared with top performers in the five years period. The financial information provides Tesco’s employees with information which will help to determine if they will earn a bonus or not. The information assists the employees to establish the stability of the company, and this is crucial in determining if the company will be bankrupt or not. This will also tell them if they will retain their jobs or not. Management Managers of Tesco range from the lowest level to the highest level. Managers of Tesco are interested in financial information because they will use the information to analyze the performance of the company and to establish the appropriate measures for improving the company’s performance in future. The information is also used by the management as a tool for making a sound decision for the company. This is because the report indicates if the company made a profit or not. This is important particularly for allocating the resource of the company. In every organization such as Tesco, the resources are usually scarce, and it is important that there is a guide which is used to distribute them to most productive part. The financial report of the Company released in 2015 indicates that the company made about £1.4bn profit which is a drop of about 58% from what was recorded in the previous financial year. The drop is associated with the changes in sales which turned out to be inefficient. This kind of information is useful to the management in that they can use the information to restructure their financial programs so as to focus on available resources and selecting favourable prices which will attract and keep the customers. From the financial report the management can decide how much to empower the employees to offer the right thing to the customers because when they are empowered, they are motivated to take the right actions. Owners The shareholders or owners of Tesco need the accounting information for analyzing the capability, and the profitability of their investments and they will use the information to determine the future course of the company. The owners also use the accounting information to determine the funding needs of the Tesco Company. Projects which need funding are identified, and the amount of capital is required so that the owners can search for funders. The business plan clearly outlines the growth of the company, and the owners check the plans if they are achieved and if they are not, review of the plans is important to ensure that the company will make a profit. External users (secondary) Customers of Tesco use the accounting information to assess the stability of the company. This helps them to determine if they will rely on the company for their supplies or not. If the information indicates that the company is stable, then customers will make a long term contract. Tesco was increasing its profits from 2011 until last year when it recorded some drops. The Company has come up with strategies on how to maintain and attract more customers. The CEO said that one of the ways is to empower the team members to deliver action to the customers. Creditor -Like any other company, Tesco borrows money to fund its projects. The creditors of Tesco use financial statement to determine the worthiness of the credit to the organization. Normally, terms of credit are established by the creditors basing on the assessment they have made on Tesco’s financial health. From the financial report for the last five years of Tesco, the company made a small profit and thus the company owes so much to the lenders (about £22bn debt). Despite huge debts, the lenders still fund the company because Tesco plans to increase its sales and the Company also has a good history of good financial performance. Government- The government will use the accounting information to determine whether the company is capable of paying its tax obligations or not. Tesco being an international company is one of the major tax contributors to the UK government. The government must, therefore, check the financial information of the Company to find how much it contributes to the economy. The government also provides rules and regulation policies which every company must adhere to. Government regulatory agencies, therefore, are interested in the financial information so to support decisions about the grants and takeover. Question 2 Primary objective of Tesco The main objective of Tesco is to increase volatility performance. This is because the company is facing stiff competition in the market and this is the major challenge they have at hand. The company plans to achieve this objective by offering the best to the customers, and this offer will act as a strategy of attracting more customers. The focus is on four things in this financial year; to offer quality services to the customers which is something they have not yet achieved since 2011 to 2015, to increase the variety of products they are offering, availability of valuable items especially during the peak season and lastly checking on the price of the items especially those which are important so that they are affordable to the customers. The products are to be channelled through small shops both small and large through an online business which is growing. Secondary objectives One of the secondary objectives which Tesco prioritize in the report 2014/2015 is to strengthen and protect their financial statement so that they can invest on the flexible environment which is favourable for customers. Tesco has a huge debt of about £22bn, and they need to reduce this value. The management agreed not to share the dividends for the financial year. The company also focuses on reducing the expenditure cost to about £1bn. The table below The other focus is on pension plans by providing a competitive scheme to its members. The other secondary objective of Tesco in 2014/2015 is to increase their transparency with the customers and all other parties who are involved in the company in one way or the other. Some income mistrust was identified in the year, and this has to be eliminated so that the trust of customers and shareholders is increased. The other objective which the company has is to underpin liquidity and funding by ensuring that they remain undrawn at the end of the year. These facilities when they remain for some years without being drawn will assist in addressing the main priorities of the company. The table below shows a 5-year growth in Tesco Company. YEAR 2011 2012 2013 2014 2015 Revenue % 8.91 8.64 6.51 3.35 1.82 Operating income% 11.43 8.52 -4.75 -3.65 -9.80 Net income % 11.03 8.20 -43.34 -14.51 -21.12 EPS % 10.76 8.17 -44.44 -14.89 -0.6 Question 3 Financial Ratios Financial ratios are the ratios which are obtained from dividing one financial measurement with another one. They show the relationships which are given by company’s financial information, and it is useful for comparison purposes. Examples of financial ratios include; Return on Investment (ROI), gearing ratios among other ratios. These ratios provide an assessment tool for the management of Tesco Company to determine if the internal goals are achieved or not. Financial ratios are categorized into profitability ratios, efficiency ratios, and liquidity ratios to mention a few. Profitability ratios Return on investment This ratio is used to measure the profit or loss which is earned by an investment after a certain period. It can also refer to a performance measure which is used to compare the efficiency of different investments (Gil-Lafuente, Anna Maria). ROI is considered to one of the most efficient methods of measuring profitability. The formula gives it; ROI= (Gain from investment – cost of investment)/cost of investment The table below shows the return of investment of Tesco PLC from 2011 to 2015. In 2011/2012, the ROE of Tesco PLC was stable showing that the cost of investment and the profit from the investment remained fairly stable. In 2013, there was a great negative deviation in ROE from 10.64 to 1.23. This indicates that the cost of investment was high. There was a rise in 2014 followed by the negative record in 2015. The cost of investment was more than the gain made from the investment; this was a loss. YEAR 2011 2012 2013 2014 2015 ROI % 10.49 10.64 1.23 4.65 -23.54 GROSS PROFIT MARGIN GPM is a financial tool which is used to measure the financial health of a company. it indicates the amount of money which is left after cost of goods have been deducted. It measures the margin on sales which a company is gaining (Investopedia 2016). It is a useful indicator of marketing effectiveness of a firm. It is calculated by the following formula; When the cost of goods sold increases, the ratio is affected negatively but when the price of the goods is high, the more profit is made, and the ratio is also high. When the ratio declines, this shows that the company is making losses. Below is Tesco’s gross profit margin from 2011. The GPM declined from 2011, but the decline was small in 2012 compared to 2013. In 2015, there was a sharp drop from 6.31 to -3.39. The reason this decline was recorded is mainly due to the accounting scandal of £263M, and also, there was slumping in sales and profit which made the CEO leave the company. The company came up with strategies for ensuring that such losses are not recorded again. YEAR 2011 2012 2013 2014 2015 GPM % 8.48 8.15 6.31 6.31 -3.39 Efficiency ratio These ratios assist the managers of a company to assess the company’s use of credit, assets and inventory. A firm makes this assessment through the use of a business letter. The information obtained from the ratios is useful to the management of a company because it enables them to determine whether the purchasing effort of the company is carried out in an efficient manner and also to determine if the credit terms of the company are appropriate. One of the efficiency ratios is; Average stock turnover This shows how a firm is efficient in managing its production and distribution of the products by considering the volume of sales (Holopainen, J., 2015). The rate of stock turnover is used to determine the performance of business. If the rate of stock turnover is high, the performance of the business is better. The stock performance of Tesco for five years is indicated in the table below. In all the financial years, the stock turnover was almost stable. There are no high fluctuation rates, and this indicates that the funds are no invested for long in the stocks, and there is good cash flow in the company. YEAR 2011 2012 2013 2014 2015 STOCK TURNOVER % 18.78 17.54 16.55 16.27 19.71 Liquidity ratios These are ratios which indicate the ability of a company to pay its obligations. They relate to the availability of cash and other assets to cover payable accounts and other liabilities such as short-term debts. In mature companies such Tesco, low levels of liquidity indicate poor management or need for extra capital. Creditor Days Ratio This refers to the number of days a company takes to pay its creditors. When the number of days increases from one period to another, it shows that a company is slower in paying the creditors. It is obtained by dividing trade creditors by credit purchases, and the result is then multiplied by 365 days. The creditor days’ ratio for Tesco for the last five years is shown below. a YEAR 2011 2012 2013 2014 2015 CREDIT DAYS RATIO 34.64 33.77 33.99 33.49 31.91 The information above indicates that Tesco is stable in paying its obligations. On average, the company takes about 30 days to pay the creditors. Tesco also established new ways of increasing g the trust of its suppliers. Leverage ratios These kinds of ratios look at the extent to which a company depends on borrowing to finance its operations. High leverage ratios expose a company to risks and downfall of businesses but sometimes the high risks can amount in high returns. It is also referred to as gearing ratio, and it compares the owner’s equity to borrowed funds. It means the degree to which the activities of a company are funded by the owner’s capital to that of the creditor. An example of the leverage ratio is Debt to equity ratio which shows the relative mix of a company’s investor-supplied capital. A company is safe when the debt to equity ratio is low. The table below indicates the debt to equity ratio of Tesco PLC. The ratio is low although there is a gradual increase from 2011. On average, a company should have 50-80 percent of debt to equity. In 2015, this limit was exceeding meaning that the company had high leverage risk, but the company laid down strategies on how to lower this to lay within the recommended limits. YEAR 2011 2012 2013 2014 2015 Debt/equity ratio 0.59 0.56 0.60 0.63 1.51 Investment ratio Investment ratio can be defined as the relationship between the amount of money invested and the profit made from the investment (Dictionary.cambridge.org, 2014). There are several ways in which investment ratios can be determined. One of them is; RETURN ON EQUITY (ROE) This can be defined as the amount of net income returned as a percentage of the shareholders equity. This ratio measures how much profit is obtained from the capital invested by shareholders (Investopedia, 2016). ROE is calculated using the formula; Return on Equity= Net Income /Shareholder’s Equity ROE shows how well a company utilizes investment to generate growth. This ratio is also useful for Tesco because it is used to make a comparison of profitability within the company. The table below shows ROE of Tesco from 2011 to 2015 as at December 31 of each year. This data was obtained by dividing the net income by average shareholder’s equity (adding shareholder’s equity at the beginning of a period to that at the end of the period and dividing by two). It is clear from the table that there was a good increase in 2012 from 6.88% to 11.36%, and there was a great drop in 2013. The returns increased again in 2014, and this can be associated with an increase in profit after tax. In 2015, Tesco recorded negative ROE, and this was contributed by the unstable nature of the company. There were some irregularities which were reported in the financial year and cost the company. YEAR 2011 2012 2013 2014 2015 ROE 6.88% 11.36% 1.17% 4.08% -28.80% Conclusion Accounting information assists the users of Tesco to make sound financial decisions since it is the heart of business management. The internal users such as managers communicate the objectives of the company with outside parties. To accomplish the normal running of the company, the needs, and requirements of both the internal and external users must be addressed. The internal users normally obtain the accounting information in the form of financial statements, budgets, forecasts and management accounts. The internal users include managers, employees, and the shareholders. . The information assists the employees to establish the stability of the company, and this is crucial in determining if the company will be bankrupt or not. The external users include customers, competitors, and creditors to mention a few. For example customers of Tesco use the accounting information to assess the stability of the company. The main objective of Tesco is to increase volatility performance. This is because the company is facing stiff competition in the market and this is the major challenge they have at hand. One of the secondary objectives which Tesco prioritize in the report 2014/2015 is to strengthen and protect their financial statement so that they can invest in flexible environment which is favourable for customers References Dictionary.cambridge.org. (2014). investment ratio noun - definition in the Business English Dictionary - Cambridge Dictionaries Online. [online] Available at: http://dictionary.cambridge.org/dictionary/business-english/investment-ratio [Accessed: 28 Mar 2014]. Elvis Picardo, C. (2014). Ratio Analysis Definition | Investopedia. [online] Available at: http://www.investopedia.com/terms/r/ratioanalysis.asp (Accessed: 28 Mar 2014). Gil-Lafuente, Anna Maria. Fuzzy Logic In Financial Analysis. Springer, 2005. Employee.heartland.edu. (2014). Chapter 1 - Introduction to Accounting. 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