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As the development of the global accounting standards, the International Financial Reporting Standards is widely recognized over 100 countries Bloomer, 2005. It is very important for an international firm to use the global financial standards to presenting its accounting information for its investors. So, more and more companies present their financial information in the International Financial Reporting Standards to their internal and external users.
As one of the largest retailers in the world, Tesco has its business over 14 countries and employed almost 520,000 peoples (Tesco plc, 2012). It is very interesting to see how its accounting information supports its operations.
This assignment will concentrate on four issues of accounting information based on a case study of Tesco plc. during year 2011 to 2012. Firstly, it will focus on three internal and external users of Tesco financial information to determine their needs and requirements of accounting information and the reason why they use it. Next is the discussion of primary and secondary objectives of Tesco plc. The third section of this assignment is the ratio analyses of Tesco’s two-year financial statements from year 2011 to 2012. At last, it will provide evidence that how the cash management and capital budgeting important to Tesco plc.
2. Analyses of users of accounting information in Tesco
To show how the business is running, the accounting information are provided to all users as managers, customers, suppliers, associations, and government (Sirbulescu et al., 2010). Tesco plc. is not an exception. As a retailer, it is very important for Tesco plc. to provide a positive financial statement to its accounting information users. In this section, it will focus on three internal users and three external users of Tesco’s accounting information to identify their needs, requirements and how these financial information affect their decision-making.
In general, the internal users of accounting information are including management, employees, trade unions, shareholders and internal auditors (Caillouet and Lapyre,1992). In this assignment, it will discuss management at all levels, employees and shareholders related to Tesco plc.
The financial informational of Tesco plc. is the basis for the management team in the company. First of all, the managers need these accounting information to examine the process of their previous decision in Tesco plc., such as, how the position of the decision, is it increase the profit in Tesco plc. if the management team get some evidence from the financial information that shows any negative effects of previous decision, the management team will raise another policy to fix it. Besides that, Tesco plc., which is a global retailer, the management team can get the overall and specific financial information of its global business. So they can easily to get the position of its branch business activities all over the world. For example, the financial information shows that a drastically increase in profit in Chinese market. So for the management team, they may plan for an increasing investment in the Chinese market. Final, the management team also uses financial information to determine the appropriate financial structure and maintain the financial stability to its shareholders. The management team of Tesco plc. will decide the how much to pay to the shareholder according to its financial statements.
In a word, the management team in Tesco plc. need the accounting information to plan, control and improve the business activities and then help the company to make more profits.
The employees of Tesco plc. are the users of the accounting information as well, because the employees should make sure the stability of their employment and the salary level. A positive growth in the financial statement of Tesco plc. should give the employees the confidence of their employment and job security, and also give them the chance to get more motivation from the job in Tesco plc. So the accounting information gives the opportunity for the employees to know more about the business and activities in Tesco plc. and then have a negotiation to the company about their motivations and future opportunities.
The next internal user of accounting information is the shareholder of Tesco plc. The accounting information showed the annual financial performance of Tesco plc., which provide the information for shareholders about their investment activities. With these financial information, the shareholders can measure the risk and return of investment in Tesco plc. and make a further investment decision, buy more shares or sell the existing shares. For example, if Tesco plc. increased its profit and earnings per share from year 2011 tp 2012, the shareholders may invest more on Tesco plc. in the following year.
In this part, it will discuss how customers, supplier and government use the accounting information of Tesco plc. in details.
The customers of Tesco plc. is not only the clients shopping in stores and also the operations that doing business with Tesco plc. The customers need the accounting information to see the how Tesco plc. to meet their need of products and services and what financial issues will impact on the quality of the products and services provided by Tesco plc. If the financial information shows that Tesco plc. doing well and increase in their services, the customer could keep their loyalty to shop in Tesco plc. and get more benefit with the Clubcards.
The accounting information is very important for the suppliers of Tesco plc. The accounting information can not only help the suppliers know the business and financial performance of Tesco plc., but also informed the suppliers Tesco’s creditability. The suppliers can get the valuable information that of keep to supply Tesco or not. Besides that, based on future development trend of Tesco plc. showed in the financial information, the suppliers should improve themselves to maintain the cooperation with Tesco plc. and offer Tesco plc. the most suitable payment period in credit.
The government also need the accounting information of Tesco plc. As a policy maker, the government will interested in the profits, sales and employment of Tesco plc. The government needs to determine the tax rate and other financial rates based on a huge amount of corporate annual financial statements, which is including Tesco plc. as well. Besides that, the government can also see the taxation and employment distribution that made by Tesco plc. For example, the more stabile and increasing employment that Tesco plc. had will decrease the unemployment pressure of the government. Thus, the government will do more to improve to their other service to the public.
Besides these internal and external users mentioned above, there are other users that will need Tesco’s accounting information to make their decisions, such as the competitors of Tesco, the auditors and investors etc.
3. Objectives of Tesco plc.
For every organization, the primary objective is to maximize the shareholders’ wealth (Chan, 2011). Tesco plc. is also have this objective. In order to maximize the shareholders’ wealth, Tesco need to increase its sales and profits. All the business activities that done by Tesco plc. are all around this objectives, which means this is long-term objectives for the company. In some degree, Tesco is doing well in this objective. Comparing the last two years annual report of Tesco plc., it shows that the net profit increased £143m, which is a more than 5% growth in profits. As well as the profits, the earning per share was also increased from last two years.
The objective of increasing owners’ wealth is not only one objective of Tesco, it has other objectives to keep the business running as well. As a retailer company, stability is very important for Tesco. The stability is not only for the stable supply chain, but also to maintain the loyalty of the customers. Stable supply chain can help Tesco continuing to provide the good and cheaper products to its customers and meanwhile help the Tesco to maintain the older customers and bring new ones. Tesco plc. is a food producer as well, they have its own product line and material suppliers. Some of the suppliers are only cooperated with Tesco. Besides that, Tesco is keeping the stability in their business activities as well, stable growth all over the world.
Next objective of Tesco is growth, both in the quality and quantity. In the financial aspects, Tesco is seeking to the growth in the profits to meet the primary objective. In the products and services aspects, Tesco is try to provide better products and more convenient services to its customers. In the business aspects, Tesco want to set up business all over the world. In year 2012, Tesco has its business over 14 countries and a 7.4% sales increasing to £72 billion, which showed a well performance of Tesco plc.
Using the smallest cost to make the biggest profit is the rule for all the business. Cost control is another objective for Tesco. The main cost of Tesco is cost of sales. In year 2012, the cost of sales was increase around £4,000m along with a growth of revenue, which is a reasonable increase in the cost. Besides that, as one of the largest retailers in the world, Tesco has over 6000 stores in the world. The administration cost is also a large amount of the business cost of Tesco. Although there seems to be a significant negative increase in administration cost, Tesco keep the amount almost the same than last year. In addition, there is a 14% decrease in the financial cost from year 2011 to 2012. In general, Tesco plc. has a tight cost control system to maximize its profitability.
Satisfy is also an objective of Tesco. In order to satisfy its shareholders, Tesco should take activities to increase its profits; in order to satisfy its customers, Tesco should provides high quality products and services. Besides that, Tesco should based on the different traditions and cultures to diversify its product chain to meet varies needs of different customers. The financial statement of 2012 shows the results how well Tesco satisfied its both internal and external customers. An increase in profits could be the best evidence.
4. Ratio analyses of Tesco in year 2011 and 2012
The able blew show the comparisons of profitability, efficiency ratio, financial ratio and investment ratios to discuss the performance of financial statements of Tesco plc. in 2011 and 2012.
The profitability ratio in 2011 and 2012 are generally decreased. The ROCE ratio dropped down 0.2%, while gross profit margin and net profit margin are decreased 0.33% and 0.06% from year 2011 to 2012. The decrease of gross profit margin could be the results of the different amount changes in gross profit and revenue. From year 2011 to 2012, the gross profit almost the same, but the revenue increased over £4,000m from £60,455m to £64,539m. So there is a decrease in the gross profit margin. The similar situation can also explain the other profitability ratios. The net profit increased by 5.35% from £2,672m to £2,814m, but the gap between revenue is over £4,000m. so there is still decline in net profit margin.
The stock turnover ratio measure how long the stock is held before it being sold. However, the stock turnover period is about 1.5 days longer from 2011 to 2012, which is a reason of the increase amount of stock being held for the 2012 financial year. It is not a good sign for Tesco plc., and if the situation went worse, there could be a significant loss to Tesco. The Debtor days is 14 days in 2011 and 15 days in 2012, which means that it took one more day for Tesco to get back the payment form debtors. For the creditor days, it is almost the same level during the two years. Tesco plc. get an average of 63 creditor days to pay its suppliers. In general, the efficiency ratio in Tesco is just on the average level, neither very impressive nor very poor. In other words, Tesco can improve its efficiency ratio by selling more stocks, building up a friendly relationship with its business partners.
Ratio Analyses of Tesco PLC. For year 2011 and 2012
The gearing ratio is calculated by the debt divided by the total equity. The gearing ratio in 2011 is 40.80%, while it is 38.49% in year 2012. The gearing ratio in Tesco is continued to decrease over last four years. The continued decline reflected the stable debt position despite increasing in assets investment. The interest cover is about a 15.8% from 6.35 in 2011 to 7.42 in 2012. Interest cover ratio measures the ability of pay interest on outstanding debt. The higher the ratio, the less Tesco is burdened by the debt expenses. So from year 2011 to 2012, it became easier for Tesco to pay the debt expenses.
The earnings per share raised from 33.10p in 2011 to 34.95p in 2012, whereas the return on equity is also have a slight increase from 12.24% to 12.50%. These could be another results of the growth of profit. More profit gives the market the faith of Tesco’s shares. Thus, there will be more investors that will interested in Tesco.
In summary, Tesco plc. perform well in year 2011 and 2012. However, there is still have some issues existing. In the future, Tesco should focus on the improvement of its efficiency and profitability. Thus, Tesco will meet its business objectives.
5. Cash management and Budgeting in Tesco
Tesco as a retail company, it is very important to manage the cash, because Tesco can get a huge amount of cash form its retail customers everyday in its 6000 stores. In this situation, the management team in Tesco should draw a picture of how to use these cash. As a part of Tesco’s business, the Tesco bank service is more suitable in this situation, using these cash to make more money for the Group.
Budgeting is as important as the cash management. The budget is like a future guideline for Tesco. It shows how to run the business in Tesco for a set period of time, including the objectives, activities, available resources and goals of the plan. it is also a measurement of the progress of the future planning.
Budgeting is a future planning of Tesco. This could be a strategic planning, which could finish within 3 to 10 years, a project planning and a short-term planning. For example, Tesco can expand its business to a new emerging market. Before entry the new market, Tesco will plan for it and do some research about market. And then, there could be a communication made by the management team to exchange opinions and ideas about the entry of the new market. Next is to set up specific budgetary goals, what Tesco want from the new market, when Tesco want to entry the market etc. After the budgetary goals, the management team should make these goals more detailed to a single task for a specific person to take the responsibility to it and tell them what is the resource of this. Then the budget is set, the management team should still take control of the budgeting to watch the progress of the plans. Finally, when the budget plan is finish, the management team should compare the budgeted results to actual results and doing the analyses, such as the plan is to entry the emerging market in 2 years, but in fact it takes two and half years. The management team should figure out why it takes more half years to entry the market.
A master budget will fit the Tesco’s primary and secondary goals. It will help Tesco provide better products and services to customers. It will help to control the cost and maintain the growth of Tesco.
However, there is some problem that the management team will face in the budgets. Sometimes the budgets are too complicated and detailed, which could be hard when doing the actions. Besides that, the budgetary goals are often defeat the basic objectives and corporate objectives.
In this assignment, it uses Tesco plc. as a case study to make a discussion. Both the internal and external users of Tesco’s accounting information are based on these information to make their own business decisions. Maximizing shareholders” wealth is Tesco’s primary objectives as well as cost control, corporate growth, stability and satisfaction. According to ratio analyses, Tesco plc. can take the actions to improve the profitability and efficiency in its financial statements. As well as the better financial performance, the budgeting management is also very important for Tesco plc. to have a sustained development.
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