Tesco Company Annual Report - Coursework Example

Tesco company Annual report Introduction Tesco Company was started in the year 1919 from a market stall in East End England by Jack Cohen. The company experience growth and expansion to the Tesco known today, which operates in 12 countries in the world with a number of stores in these countries. It deals with a variety of products including household goods, freshly baked products and groceries. The company also has a share in the service industry through Tesco bank. The diverse products and services contribute positively to the success of the company through diversifying investments so that when one sector is not performing very well another sector is making up for the difference. With a worldwide market through its various branches, Tesco has grown to be the leading retail outlet in the world. Relevant non-financial information in the report Not all information in a financial report of every company is financial; there are some theory and explanations giving an overview of the company without using the financial figures. Key performance indicators divert the attention from the profit earned and focus on the firm’s performance in terms of meeting their goals and objectives (Hall 2010, p. 1). These indicators measure the success of the firm and the potential of the firm to grow in future, thus is very important to an investor interested in investing in the firm. They include customer satisfaction that is reflected through repeat purchases and referral of new customers to the store. Tesco is not an exception to this and it has measured the key performance indicators of the firm and availed the information in the annual financial report. Tesco has managed to retain 70% of their loyal customers from the previous year, while acquiring 29.1% of the loyal customers in the previous year as new loyal customers (Tesco 2014 p. 16). 59.7% of the loyal customers have shopped through various channels, indicating customer loyalty to the firm and the importance of the various channels to customers. Demand for branded Tesco products is also increasing with 64.3% of the loyal customers shop for Tesco branded products. In general, all these clients show love for the firm indicating the bright future of the firm with a good customer base in currently and in the future. Important happenings since publication of annual report Tesco Company was recently involved in a serious financial crisis involving serious accounting irregularities in the financial report. The profit of the company was overstated with the company admitting overstating the profit by £263 m (Binham 2014 p. 1). This is a serious offense due to the misleading information given to the public and the investors are not silent about it. Several investors are teaming up to file a lawsuit against the company for falsifying the profit of the firm giving them an impression of a very profitable company which may not be the case. This comes with many implications for the management and the chains at large. The chairman of Tesco, Sir Richard Broadbent has said that he will step down even as eight senior managers are suspended to pave way for investigation. This has seriously affected the share price of the firm with the share price of Tesco declining over the past 12 months as shown in the graph below. Accessed from: http://www.bbc.com/news/business-29821061 Though the management has been suspended, the firm states that there is no evidence of personal gain by individuals from the overstatement (Gompertz 2014, p. 2). Meaning of the 2014 audit report for investors The auditor has to be allowed access to the firm’s confidential financial information for them to make an informed examination of the firm (Public Company Accounting Oversight Board 2014, p. 1). The auditors were able to audit the group balance sheet, income statement, changes in equity and cash flow statement as well as a summary of significant accounting policies (Tesco 2014, p. 68). According to the auditors, the group’s statement gives a true fair view of the state of group’s affair and has been prepared in accordance with IFRS. With this, it gives investors confidence in the report as it complies with international standards, thus can be referred to when making investment decisions. The group statement has been prepared in pound sterling with the figures rounded off to the nearest million. The preparation on historical cost basis uses the assumption of similar costs currently and in the past. Thus, financial statements are not free from estimates and assumptions. Difference between profit and cash from operations While profit is the residue of sales less expenses, cash from operations is the total cash inflow resulting from business activities (Peavler 2014, p. 1). The profit represents the total income of the firm after subtracting all its operating expenses thus this is the earnings of the firm. On the other hand, cash from operation simply represents the cash inflow to the firm which may not be necessarily profit and may include the sale of items that do not generate income for the firm; for example sale of an asset will increase the cash flow from operations but it is not a profit to the firm. Tesco’s statement of financial position The balance sheet shows the firm’s financial position and the provision of the 2013 and 2014 figures on the balance sheet help to compare the financial positions of the two years. The assets are what the company uses and owns, including debts, cash and buildings while the liabilities are the debts payable by the firm. The total assets should be equal to the sum total of liabilities, equity and retained earnings. The excess of the asset over the equity and liabilities represent a profit to the firm, while a shortage of the asset over liability and equity indicate a loss to the firm. Thus the balance sheet shows the exact financial position of the firm. The working capital is the amount of capital available for the firm to run its current activities and is included in the asset side of the balance sheet. A good working capital should be able to meet the firm’s current liabilities for the firm to continue its operations smoothly. Limitation of Tesco annual report The annual report has been able to present the general financial position of the firm without going into details of the exact operations. This is a weakness since the investors are not able to look at the statement in detail of the various activities of the firm. Inclusion of financial ratios in the report would have improved the benefit of the statement to investors. Financial ratios highlight the strength and weaknesses of a firm (Laidre 2014, p. 1). With the financial ratios, investors are able to predict the performance of the firm in terms of meeting its current obligations, payments by debtors and profitability of the firm among other things. Therefore the statement should have included financial ratios. Conclusion The company has shown growth in its profitability as reflected in the financial statements prepared February 2014. However, this is disputable due to the overstatement of the firms profit by a large figure thus contradicting the profit claimed by the firm. With the crisis, the firm has experienced a downward slope in investments resulting from the fraudulent report. The share price of the firm has also been decreasing over the past year. Therefore, Tesco is not the best investment destination as it is showing a downward trend and investment may lead to losses. Bibliography Binham C 2014, SFO probe Tesco accounting irregularities. Available from: http://www.ft.com/intl/cms/s/0/b5f1279e-5f66-11e4-a882-00144feabdc0.html#axzz3Iw4cKXDz [12 November 2014] Gompertz S 2014, Serious Fraud Office starts Tesco criminal investigation, BBC News. Available from: http://www.bbc.com/news/business-29821061 [12 November 2014] Hall J 2010, key performance indicators-measuring the success of your business. Available from: http://www.simplybusiness.co.uk/knowledge/articles/2010/07/2010-07-26-key-performance-indicators-measuring-the-success-of-your-business/ [12 November 2014] Laidre A 2014, The Importance of Financial Ratios. Available from: http://www.iplanner.net/business-financial/online/how-to-articles.aspx?article_id=financial-ratios [12 November 2014] Peavler R 2014, Are a Firm's Cash Flow and Profit Different? Available from: http://bizfinance.about.com/od/yourfinancialposition/f/Cash_Flow_vs_Profit.htm [12 November 2014] Public Company Accounting Oversight Board 2014, Audit Documentation: Auditing Interpretations of Section 339. Available from: http://pcaobus.org/Standards/Auditing/Pages/AU9339b.aspx [12 November 2014] Tesco PLC 2014, annual report and financial statement 2014. Available from: http://www.tescoplc.com/index.asp?pageid=548 [12 November 2014] Tesco PLC 2014, history. Available from : http://www.tescoplc.com/index.asp?pageid=11 [12 November 2014] Read More