Accounting: Financial Statements and Tesco Profit Margin Essay

Submitted By ollief16
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Pages: 7

Accounting for Managers

It is the purpose of this report to demonstrate an understanding of key areas of accounting for managers. It will be looking at accounting processes such as producing financial statements and auditing, reviewing and comparing supermarket accounts and producing budgets and explaining the processes and finally looking at the supermarkets future growth potential
1.
Published finance statements
Published finance statements are statements which are produced and provided by a company or organisation for anybody wishing to view in relation to accounts and finances of the company. Finance statements can also be produced for management decision making purposes which don’t have to become open to the public.
Limited companies, which are owned by shareholders, are required by law to produce finance statements on a yearly basis. It also allows the shareholders and others that have interest in the statements to look at the performance and strategy of the company. The three main finance statements that are offered are the balance sheet, profit and loss account and the cash flow statement.
The financial statements must be checked by an external audit, this is where the company hires a firm of accountants to verify that it provides a true and fair record and complies with legal requirements. ‘The exact statutory requirements for limited companies to prepare and publish accounts are laid down for limited companies through the Companies Act 1985, regulated by Companies House, and for publicly listed companies through European law, the Listings Rules, regulated by Financial Services Authority (FSA).’ (Reference 1).
2. The 2011 Tesco financial statements for Tesco stores indicate an increase in turnover for the year 2011 in comparison to the previous year 2010. The profit for the year 2011 shows a figure of £2,671m pounds in comparison to the previous year’s 2,336 million pound profit figure. That is a 14.34% increase in profit from the previous year. The 2011 financial report also shows that in comparison to 2010 figures Tesco stores spent a further £3,568m on sales costs.
The 2011 return on capital employment from Tesco stores is 23% which is a slight fall from the 2010 figure of 23.5%, this shows that 2010 produced a less profitable year with a higher return on capital employment although the cost of sales was smaller in the previous year. In comparison to the return on capital employment from Sainsbury’s 2011 accounts which were at a smaller 20%. However Tesco’s cost of sales was far greater at £55,871m than the spend of Sainsbury’s at a smaller £19,942m.
The Tesco profit margin was a average of 6.25% in year end 2011 which is a higher profit margin the the competition store Sainsbury’s which sat at an average of only 4.03% for the year ending 2011. The previous year (2010) Tesco stores operated a slightly reduced average profit margin of 6.07%. Tesco have managed to increase their profit margin from 2010 to 2011 by not only adding small increases to sales but by spending less on liabilities and expenses, for example, yearend 2010 Tesco spent £579m on finance costs but in yearend 2011 that finance cost was reduced to £483m. By spending less money on other areas of the business Tesco have managed to increase their profit margin by almost ½%. There are other things Tesco have done along with reduce costs to increase profit margins for yearend 2011 in comparison to yearend 2010, these include increased turnover, grater profit on property related items, reduced borrowings, increased customer deposits and increased provisions. By completing these management decisions Tesco stores were able to produce a yearly profit gain of roughly 15%.
The current ratio for Tesco stores is 0.67:1, which is a fairly poor financial position generally, a current ratio of a stable business is generally between 1.5 and 3. Clearly Tesco does not achieve this based on the specific industry which is fast turnover, this means that they…