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This report deals with the analysis that shows the effects that economic recession had on Sainsbury financial market and performance over the years of 2008 and 2009. This report also explains the various financial terms and aspects that are used to evaluated financial condition of any organisation.
The report will be divided into three main areas. Firstly, an analysis and of accounting conventions and generally accepted accounting principles used in J Sainsbury annual report of 2009. Also in this some of the accounting policies with respect to financial aspect of Sainsbury are defined. Further in second part of the report, ratios analysis is calculated for the company using the financial values acquired from its financial statements. A trend analysis is done comparing to the Tesco values that is acquired from Tesco financial report and also from the ratios that are calculated from its financial figure. In the third part of the report, the purpose of the Primary financial statements is explained. The audit committee and it purpose is also explained in third part with respect to Sainsbury. The internal control and interdependent of the audit is elaborated in the report.
Final part of the report consists of the conclusion and recommendations are made with respect to further financial growth of the company.
Table of Content
Accounting conventions & Accounting Principles:
The management of a company when prepares and reports the financial statements follows the principles, rules and procedures and consistently is known as accounting policies (Business Dictionary.com, 2010, Available on: http://www.businessdictionary.com/definition/accounting-policies.html).
Basis of Preparation:
The creation of the financial statement in agreement with the IFRSs requires the use of verdict approximation and assumptions that affect the listed amount of assets and liabilities till the time of the financial statement and recorded amount of revenues and expenses during the defined period. The financial statements have prepared under the historical cost convention, expert or derivatives financial instruments, investment properties and available for sale financial assets that have been measures for the failure value (Sainsbury Annual Report, 2009, Page 49).
When the considerable risk rewards of the services and products have been passed to the customer and can be calculated reliably, revenue is recognised. Sales excluding the value added tax and through the retail outlets are included in the revenue. Fees and commission earned that are not connected to the yield are recognised in the income statement by the Sainsbury Bank as and when the service is provided. Commission is recognised in the revenue based on the terms of the contract. (Sainsbury Annual Report, 2009, Page 49).
A tangible piece of property for a long term that a firm owns and make use of it in its production to make an income and that cannot be consumed or changed into cash earlier in one year's period.
Land & Building:
Land and building are started at cost less accumulated depreciation and any impairment cost.
Fixtures, Equipments and Vehicles:
These are held at the cost less accumulated depreciation and any recognised impairment cost.
In order to write down the cost of the assets to their residual values depreciation helps in doing that, which uses the straight line methods as follows:
Free hold buildings are leasehold properties - 50 years or lease term is shorter.
Fixtures, equipments and vehicles - 3 to 15 years.
Freehold and is not depreciated.
Assets that are under construction and not current assets id not depreciated.
Inventories at warehouse are valued on a FIFO basis. Cost includes all direct spending and other suitable cost acquired in bringing inventories to their present spot and condition.
Provisions have been made for heavy rents, reformation and discarded costs. These provisions are calculated approximately and the real costs and timing of upcoming cash flows are dependent on prospected events. Any difference between prospected and the actual future liability will be accounted for in the period when such determination is made.
We can get operating profit after charging the total expenses from the total turnover. Following factors are considered to calculate Sainsbury operating profit:
Operating lease rentals
Foreign exchange gains
Investment ratios are the ratios that are primarily of interest to prospective investors (Dyson J, 2001 Page No 180-181).
Dividend cover is the second useful investment ratio. The number of times the ordinary dividend is paid from the current earning is shown in this. Comparatively Tesco is covering more dividends of 3.95 comparing to Sainsbury 2.12 percent.
Earnings per shares:
This investment ratio is mostly looked at from the aspect of ordinary shareholders point of view. It helps us in put the profit into context, and makes us to look at it in a complex manner. This ratio also makes comparison between one year's earning and the other by relating them to something tangible; i.e. the number of shares in issue.
This ratio shows the profitability of the business and also is the measure of the overall performance.
Return on capital employed ratio:
The percentage return on the funds invested in the business is known as ROCE. Is the ratio that measures how effectively company uses its capital? (Available on: http://tutor2u.net/business/presentations/accounts/profitabilityratios/default.html). Comparing to Tesco Sainsbury ROCE is less (Sainsbury=7.10 & Tesco=17.9) but mainly because of income attained from property disposal, used to finance largely operations.
Gross Profit Ratio:
Gross profit is the profit that is calculated before indirect expenses is taken into account. It measure the how much profit has been made in relation to amount of sales has been made (Dyson J, 2001 Page No 174-175). Gross profit is less as 5.6 and Tesco 7.6 but still have sales growth.
Mark up ratio:
The amount of the profit added to the cost of goods sold is measured in this mark up ratio. To simulate extra sales unit mark up can be reduced.
Net Profit ratio:
The comparison of net profit with sales revenue on owners demand can be expressed in the form of net profit ratio (Dyson J, 2001). It's not an easy task to compare net profit ratios for various entities. Sainsbury is 2.9 < Tesco is 5.9 in net profit due to the consumer's growth for Tesco is high.
Liquidity and working capital:
The measurement that shows up to which extend assets can be quickly converted into cash (Dyson J, 2001, Page 176).
Current Asset Ratio:
The company's ability to pay back its short-term liabilities with its short-term assets is mainly calculated with this ratio (Investopedia, 2010, Available on: http://www.investopedia.com/terms/c/currentratio.asp).
Acid Test Ratio:
The liquid and the quick ratio is the second term from the acid ratio. The stocks are sometimes a difficulty because they can be not easy to sell or use so that can be managed by this acid ratio. That is, even though a supermarket has the huge volume of the customer walking to their doors every day, but there are some amount of items on the their racks that don't sell as early as super market want. Similarly, there is some stuff that will sell very well. This is well balanced by acid ratio (Available on: http://www.bized.co.uk/compfact/ratios/liquid5.htm).
Capital Structure and Gearing:
Working capital ratio and real ratio is another term for the current ratio that is use to measure the business financial health. (Value Based Management. Net, 2010, Available on: http://www.valuebasedmanagement.net/methods_current_ratio.html). Sainsbury is equally strong as Tesco both have same value 0.61
The skill to meet its short-term obligations with its most liquid assets by the company is measured by quick ratio. The higher the quick ratio, the better position of the company is based on how higher quick ratio (Investopedia, 2010, Available on: http://www.investopedia.com/terms/q/quickratio.asp). Quick ratios of both companies are almost same 0.35 and 0.37 as per the growth point of view.
Stock days make things it easier to see how changes in stock days, debtor days and creditor days unite to change the operational capital ratio so it is useful number largely. (Graeme Pietersz, 2006-2009, Available on: http://moneyterms.co.uk/stock_to/). Sainsbury stock days are less 15 days than Tesco 20 days means it has less power on inventory.
This ratio is commonly is calculated as (Graeme Pietersz, 2006-2009).
(Debtors ÷ sales) Ã- 365
This ratio is calculated as (Graeme Pietersz, 2006-2009).
(Creditors ÷ annual purchases) Ã- 365
The part of the company's total capital that is lent is calculated by the gearing ratio, (Available on: http://www.bized.co.uk/learn/business/accounting/busaccounts/notes/ipay-th.htm)
How easily the company can pay its interest out of its profit is calculated in this ratio.
With references to the above calculation for both the companies it has been observed that Sainsbury has economic downturn in the economic market in last two years 2008 & 2009 in respect to Tesco in various modes of financial aspects. That has been shown as follows.
In 2008, Sainsbury experienced a slower sales growth when compared to past trends. The effects of the downturn caused Sainsbury to put measures in place to increase profitability in 2009. Even if the ratios give the clear picture of the financial status of the company but it is difficult to true overview of the company in the recession. The ratios can supply some information to Sainsbury performance or financial position but when used alone, it is difficult to understand the concert was good or poor.
Conclusion and Recommendation:
Sainsbury can work more on the prices of their items in order to match the common man reach. This may growth the demand of their products and that may increase the overall profit of the company. Sainsbury operates in very high competition in UK market where it have strong competitor like Tesco and other. The industry are far saturated with the competitors that rapid growth my difficult for the Sainsbury, so they more concentrate on their stock availability on time and satisfaction of the current customer that may help in improving their revenue. Sainsbury try to dominate the areas where there is more resident locality with its stores. Advertising may help them more in awareness of its unacknowledged items in people. They must carry out some social responsibility towards the society that may attract people to convert them in their customers. Good relationship with debtors and creditors help them in maintaining their good financial records.
Primary Financial Statement:
Financial statements provide an outline of a business or person's economic condition in both short and long term. All the significant financial information of a business undertaking presented in an ordered manner and in a form this is easy to understand is called the financial statements. There are four basic financial statements such as (Available on: http://en.wikipedia.org/wiki/Financial_statements)
Statement of retained earnings
Cash Flow Statement
The statement which describes the financial position of a business and also that positions the assets, liabilities, and owners' equity at a particular aim in time is known as balance sheet. It is calculated as: Assets = Liabilities + Equity. The Balance Sheet is divided into these three sections. (Susan Ward Available on: http://sbinfocanada.about.com/cs/accounting/g/balancesheet.htm). Balance sheet helps in providing the numbers for number of financial ratios from it such as gearing, the current assets ratio and the quick assets ratio. The ratios based on the profit and cash flow is very vital for accessing company's finance stability (Graeme Pietersz 2006-2009, Available on: http://moneyterms.co.uk/balance_sheet/).
Income Statement (Profit & Loss Statement):
P&L statements are also known as income statement. Income statement merely deals with the income less expense. Net profit is only declared if your income is more than expense. And the net loss is calculated if, expense more than income. (Maire Loughran, 2010, Available on: http://artsandcrafts.about.com/od/accountingandpricing/tp/finstmt.htm).
The purpose of profit and loss statement is to:
To understand if business has made profit or loss over financial year
Describe how the profit or loss came, e.g. categorising between "cost of sale" and "operating cost"
Cash Flow Statement:
Cash flow statement previously was also known as fund flow statement and now it is also called as statement of cash flow in financial accounting. Cash flow statement generally keeps the track of transaction of cash in and cash out of business. The statement of cash flows is an analytical tool that is useful in determining the short-term viability of a company, mainly its ability to pay bills (Available on: http://en.wikipedia.org/wiki/Statement_of_cash_flows).
People and groups concerned with statement of cash flow are:
Accounting people, who need to know whether the business will be able to cover payroll and other direct charge
Potential lenders or creditors, who are concerned about the company capability to repay
Potential investors, who need to know company is financially strong
Potential workers or contractors, who need to know whether the company will be able to have the funds for compensation
The audit committee has become the integral part of the corporate framework to fulfil the board of directors' stewardship accountability to its outside constituencies. The work of audit committee is active since the accounting and auditing process are focus to modify (Louis Braiotta, 2004, page 94).
The audit committee is selected by board to (Louis Braiotta, 2004, page 49):
Assist the board in monitoring
The reliability of the financial reporting process, systems of internal controls and financial statements and reports of Company
To measure the company's internal audit functions
The compliances by the Company the legal and dictatorial needs
Be directly responsible for appointment reimbursement and supervision of the company's independent auditor employed by the company for the purpose of preparing and issuing an audit report or related
The overall accountability for the system of internal control, which is fully implanted into the risk management and operation of the company, is of the board. Till the date of approval of the Annual report and Financial Statement, the internal control of the system has been placed throughout the year. All the controls such as operational, financial and compliances control also risk procedure of risk management id covered by it. The effectiveness of the internal control system is ongoing process and is accessed by the internal process and also it enables the cumulative assessment to be made.