Accounts and Published Performance Information for Two Companies - Essay Example

?Practical Analysis In order to analyse how information is useful to different parties to financial ments, this paper makes use of two companiesoperating in the UK retail sector. These include Marks and Spencer Plc and Tesco Plc. According to Accounting Theory, financial statements are useful to a number of parties who can be subdivided into internal and external parties. Shareholders require information on the company’s profitability. Shareholders are compensated through dividends and share price growth. The more profitable a company, the more will be its potential dividends and share price growth. During the accounting period ending 2012, Marks and Spencer performed very well and created enough value for its shareholders. Despite a tough market, Marks and Spencer was able to make progress on a number of fronts. Sales rose by 2%. These results were in line with the strategic goals of the company. Significant improvements were made in Marks and Spencer’s U.K business in that the company was able to enhance its stores and products. In addition, Marks and Spencer was able to strengthen its brand name (Marks and Spencer, 2012). The multichannel business outperformed the rest of the market with double digit growth recorded in its priority international markets. During the year 2012, Marks and Spencer was committed to delivering consistent returns to its shareholders. The company plans to pay a final dividend of 10.8 per share which is in line with the dividend policy put in place last year (Marks and Spencer, 2012). Marks and Spencer made a profit of ?486.9million in 2012. This is as opposed to ?598.6million the previous year. Shareholders are interested in profit because the overall objective of the company is to maximise the value of shareholders because they are the ones who provide capital for the business. Marks and Spencer reported this information in its annual report and account as a means of communicating to the shareholders that it is working in line with their objectives. The annual report also enables shareholders to decide whether to sell their shares in the company or continue to hold them. Given that Marks and Spencer has proven that it can meet their objective of generating profit, shareholders are unlikely to withdraw their capital from the company. Tesco Plc’s financial statements include the Statement of Financial Position, the Consolidated Income Statement, the Consolidated Cash flow Statement and the Consolidated Statement of Changes in Owner’s Equity. Shareholders are interested in the information contained in these financial Statements. Tesco Plc made a profit of ?2,814million in 2012 compared with a profit of ?2,671million in 2011. Tesco Plc reported these figures in its Income statement for the year ended 2012 as a means of telling shareholders that it is creating value for them. Tesco Plc also reported the earnings per share figures for 2011 and 2012. The respective figures were 34.43p and 36.75p. Tesco Plc had equities totalling ?17,801million and ?16,623million for 2012 and 2011, respectively. This figure is reported to enable shareholders understand the financial risk that is being faced by the company. Shareholers interprete a high debt to equity ratio as a indicating a high degree of financial risk. This enables them to determine the required rate of return on their investment in the company. In addition to shareholders, another interested party to the financial statements of a company are debt holders. Debt holders are interested in the level of profit that the company is making. As such the profitability figures reported by Marks and Spencer and Tesco Plc enable debtholders to determine whether the companies can generate enough profit to cover the payment of interest and principal. This information enables debt holders to determine whether to buy the companies’ bonds or not. The cash flow statement is also of significant importance to debt holders. The cash flow statement reports three types of cash flows. Cash flows from operating activities, cash flows from investing activities and the cash flows from financing activities. The cash flows from operating activities show how much cash the company generates from its operations. In order to determine whether the company has enough cash flow to pay dividends, free cash flows are often used which are calculated by subtracting cash flows from investing activities from cash flows from operating activities. During the years ending 2011 and 2012, Tesco Plc had cash flows from operating activities of ?5,688million and ?5,613million. The corresponding cash flows used in investing activities were ?3,183million and ?1,873 for 2012 and 2011 respectively. This shows that in each of the years ending 2011 and 2012, Tesco Plc had a positive free cash flow. This means that the company had excess cash to meet its dividend payments and also pay off some of its outstanding debts. By reporting this information in the cash flow statement, both shareholders and debtholders can determine the liquidity of the company and make decisions on whether to invest in the company or not. This information is also necessary for determine the financial risk and thus the required rate of return. Another interested party in the financial statements of a company is the tax authority. Tax authorities require financial information to be able to assess the corporation tax liability of a company during the financial year. The profit figures reported by Marks and Spencer and Tesco Plc as well as detailed information about expenses and revenues will enable the Inland Revenue to determine how much tax each of the companies has to pay. The information reported in the financial statements of Tesco Plc and Marks and Spencer Plc is also important to employees. Directors for example have their earnings tied to the profitability of the company. By reporting the information, Directors can determine whether they have met their performance targets and thus determine their bonuses. The information is also relevant to credit rating agencies. Credit rating agencies are particularly interested in the financial and liquidity position of the company. Credit rating agencies can determine the liquidity and financial risk of Tesco and Marks and Spencer Plc to determine how to rate their bonds. In summary, Tesco Plc and Marks and Spencer Plc have reported a wide range of financial information that is relevant to a wide range of users including shareholders (the main users) debt holders, credit rating agencies, employees, and tax authorities. Read More