To Show Their Profit Accounting Essay

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As the name suggests, an annual report is a report produced annually by companies to show their profit and loss statement, the statement of financial position and other relevant statements such as the statement of cash flow

Although an annual report can be used for several purposes, it is very important to understand the importance of annual report for different groups in order to really grasp the usefulness of the annual report

(Thomas and Ward, 2009, p37) stresses that enterprise are accountable to a number of different groups (employees, the public, etc) and that the function of annual report is to provide each of them with information.

To apprehend this clearly, I will look at Tesco's annual report for 2009 and how it tackles the needs of its users by explaining the functions and importance of its annual report. I will also look at the information included in the annual report, who might use it and why.

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Finally, from the perspective of these users, I will discuss the usefulness and limitations of the annual report presented while considering the qualitative characteristics of the financial information

Tesco plc is a UK-based international grocery and general merchandising retail chain. It is the largest British retailer by both global sales and domestic market share, with profits exceeding £3billion.

ANON., 2009. Tesco. Wikipedia [online]. Available at http://en.wikipedia.org/wiki/Tesco [accessed 9 December 2009]

At the end of each accounting year, Tesco, been a public limited company is required by law (the Companies Act 2006) to produce and send their annual report to every member of the company and every share and debenture holder. This gives them the opportunity to accomplish one of the main functions of their annual report which is to make known the financial status of the company to shareholders. Since Tesco is a public limited company, one of its key objectives is to make shares available to the public through share exchanges therefore it is the function of the annual report to provide shareholders and investors enough financial information in helping them decide whether they should invest in the company or not

Another function of Tesco's annual report is that it can be used to provide users with other non-financial information, for example the shareholder information page provides several information such as the financial calendar, the registrar and shareholder enquiry, consolidated tax vouchers, security reminder, and other information that would be useful to shareholders.

The annual report also serves as a decision making tool. Managers of Tesco will use the annual report to make long term decisions. In the interview with sir Lerry Leahy who is the chairman of Tesco, it was stated by Lerry that "Long-term decision making helps adjust the business while discount product makes it impossible to shop cheaper anywhere else, also adjusting prices in promotional strategies and ranges is the right thing for the medium and long term" this is done using the income statement

Another function of the annual report is that it can be used to calculate the company's income tax. Tesco has to pay the corporation tax since they are separate legal entity therefore the income statement is used to determine how much tax they have to pay.

The explanations above has described the annual report in relation to its functions, however in order to fully understand why Tesco's annual report is produced, it is important to also look at the annual report in relation to it's importance to the company.

Tesco has to produce annual report according to the company Act 2006. Therefore it is very important that they produce the annual report if they don't want to be prosecuted by the law. Also the government and their agencies need information about Tesco so that they can determine suitable tax policies for them; furthermore HM revenue and customs also need the annual report to calculate their income tax

Looking at the importance of Tesco's annual report it is obvious that it is the most importance report they produce. This is because Tesco's ownership is split into shares and the annual report is the only device that helps the investors makes effective decisions because it contains all the information they need. It shows how much shares an investment can hold, for example Tesco's major shareholder as at 2009 is legal and general assurance with investment of 359,118,000 holding 4.5 percent of the company.

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The annual report is also very important to the manager when making long term decisions. Evaluate the performance.

"All entities have to produce a document periodically (usually yearly), which details what has been made in the period (profit or loss) and the entity's financial position" (Thomas and Ward, 2009, p4)

I will now look at the key financial statements in the annual report and the information they present. In most companies annual report there are three key financial statements that must be included and they are the income statement, the statement of financial position and the statement of cash flow.

"The Profit and Loss account shows Tesco's performance in the financial period. It also shows the amounts allocated for distribution to shareholders as dividends, to be paid as taxation on profit, and to be retained in the business to help fund further growth."

(Tesco, 2009 annual report. Financial glossary. [Online] Available at http://www.tescoplc.com/plc/ir/financials/fin_glossary/#17 [accessed 10 December 2009].

The income statement shows Tesco's profit or loss for the preceding year. Tesco's income statement shows the sales revenue, the gross profit, the operating profit, profit before tax and the profit for the year.

The gross profit is the profit earned after deducting the cost of sales from the sales revenue. The operating profit is the profit that was made from their normal business operations; this is calculated by deducting administration and marketing cost from the gross profit.

The profit before tax looks at the profit earned before deducting tax. It is calculated by deducting other expenses such as finance cost and interest expenses but leaving out the tax. And finally the profit for the year is the profit earned after deducting tax

Tesco's income statement also shows the amount attributed to equity holders of the parent and the minority interests and the earnings per share.

Another key financial statement included in the annual report is the statement of financial position.

As the name suggests, the statement of financial position is used to value the company financially. It compares the financial position of the company with the year before. The statement of financial position is used to value the assets of the company. An asset is something that a company owns that will be used to generate income for the company in the future. A current asset is used to generate profit within a course of a year while non current asset is used to generate income for more than one year. Tesco's current asset on their balance sheet includes things like trade and other receivables, inventories, cash and cash equivalent, current tax assets and derivation financial instruments.

The statement of financial position also lists the liabilities of the company, also there are current liabilities and non current liabilities, Tesco's current liabilities include things like borrowings, trade and other payables, provisions etc. The non current assets include non current payables, financial liabilities, also provisions etc. Tesco's net asset shows the value of their assets after deducting the liabilities.

Under Uk GAAP (general accepted accounting principles) the statement of financial position is known as the balance sheet.

Another key financial statement of Tesco's annual report is the statement of cash flow. As the name suggests, the statement of cash flow shows the inward and outward flow of cash.

"The Group Cash Flow Statement shows the cash received and spent during the financial period. It highlights net cash inflow or outflow and analyses the changes in financing during the period"

(Tesco, 2009 annual report. Financial glossary. [Online] Available at http://www.tescoplc.com/plc/ir/financials/fin_glossary/#17 [accessed 10 December 2009].

It contains the inward and outward flow of cash from operating activities, investing activities and financial activities.

Tesco's cash flow from operating activities is the inward and outward from of cash from their normal business operations, it shows the cash generated from operations, the interest paid and the corporation tax paid which are both deducted from the operations cash flow to determine the net cash from operating activities.

The second category of the cash flow statement is the cash flow from investing activities. Investing activities is when a company invest some of its money into financial markets such as the stock market. It is also the buying and selling of non current asset. Tesco's cash flow from investing activities include things like purchase of property, plant and equipment and investing property, purchase of intangible asset, investments in short term investments, dividends received and interest received.

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The third category in the cash flow statement is the cash flow from financing activities.

I will now identify three key users of the annual report and they information they need.

Investors need information that would help them to decide whether to buy, sell or hold their shares. In order to do this they need information such as the profit and loss account (income statement), the statement of financial position and some part of the director's report.

"Investors are defined in the framework as providers of risk capital" (Thomas and Ward, 2009. p38).

Investors can use Tesco's income statement to workout it's performance so that we can decided whether to invest in the company or not. The income statement

The statement of financial position is used to check their status financially and economic stability. If they are financially stable then there is less probability that they would go into liquidation. The statement of financial position can also be used

Another key user of Tesco's annual statement is the government and their agencies. The annual report allows the government and their agencies to determine suitable tax policies for Tesco; furthermore HM revenue and customs also need the annual report to calculate their income tax. The Government agencies want to know how Tesco is allocating it's resources