Accounting Ratio Analysis: Doc

FINANCIAL
ACCOUNTING
ANALYSIS

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 2............................................................................................................................................1
Accounting Ratio Analysis.........................................................................................................1
Financial factors affecting the performance of organisation are as follows:-.............................7
Non financial factors affecting the performance of organisation................................................7
TASK 3............................................................................................................................................7
Sustainability reporting of the two companies ...........................................................................7
Potential weaknesses of Ratio Analysis .....................................................................................8
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9
.........................................................................................................................................................9

INTRODUCTION
Financial Accounting is the process of recording, summarizing and reporting financial
statements (Bryer, 2013). It will use by companies to present their financial position and
performance to external peoples who are connected with company in direct and indirect way
such as investors, creditors, customers and suppliers. For financial accounting analysis company
has applied different types of analysis like Dupont analysis, fundamental analysis, horizontal and
vertical analysis and the use of financial ratios. In the presenting report selecting company Tesco
and Morrison's. Tesco is a British multinational groceries and general merchandise retailer which
was founded in 1919 by Jack Cohen. Morrisons is the largest supermarket in the United kingdom
which was founded in 1899 by William Morrison. In the report consist of two parts, in part one
calculate appropriate accounting ratios and interpreted that. In part second, report on
sustainability report of two companies and analysis of potential weaknesses of ratio analysis.
TASK 2
Accounting Ratio Analysis
Ratio Analysis is a kind of financial statement analysis, which is analysed with the help
of quantitative method of gaining and obtain quick indication of a firm's financial performance in
various key areas. These ratios are divided into different terms like short-term solvency ratios,
asset management ratios, debt management ratios, market value ratios and profitability ratios.
There is analysing of ratio of two companies to compare for evaluate financial performance and
status (Callen, 2015).
Ratio Analysis of Tesco PLC
Liquidity Ratio
Current Ratio = Current Assets / Current Liabilities
Liquidity Ratio 2017 2018
Current Assets 15417 13726
Current Liabilities 19405 19238
Current Ratio 0.79 0.71
Interpretation – Liquidity ratio is described about the liquidity of a business to know cash
flow in the company. In liquidity ratio, included current ratio that is ideal ratio of a company is
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2:1. The current ratio of the company calculated through current assets and current liabilities.
The ratio indicates that how much current assets and current liabilities generate to paying off
their liabilities. There has been identified in 2018 current assets lesser than to 2017 so it was
showing impact on current ratio. So current ratio of the company in 2018 lesser than to 2017.
Quick Ratio = Quick assets / Current Liabilities
Liquidity Ratio 2017 2018
Quick Assets 13116 11463
Current Liabilities 19405 19238
Quick Ratio 0.68 0.60
Interpretation – Quick ratio through identify those assets which is helpful in repayment of
creditors of a company. With the help of this ratio know above ability of a company and their
ideal ratio is 1:1. As per the above calculation it is getting that in 2017 quick assets more than to
2018 but their quick ratio cannot touch to ideal ratio.
Profitability Ratio
Net Profit ratio - Net profit / Sales*100
Profitability Ratio 2017 2018
Net Profit (40) 1206
Sales 55917 57491
Net Profit Ratio 0.071% 2.09%
Description – Net profit ratio calculate by company to know about actual position of a
company and it will present to investors to attract for investment. It can indicate profitability of a
company. However, there is in 2017 the company has faced net loss due to increase expenses but
it is reduce in 2018 and company earn net profit. Therefore, it was showing impact on net profit
ratio and it will increase in 2018 in compare to 2017.
Gross Profit Ratio = Gross profit / Sales*100
Profitability Ratio 2017 2018
Gross Profit 2902 3350
Sales 55917 57491
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Gross Profit Ratio 5.19% 5.82%
Interpretation – Gross profit ratio is the profitability ratio can show relationship between
gross profit and total sales revenues. It is famous tool for determinate the operational
performance of the business. The ratio is computed by dividing the gross profit figures by net
sales after then multiply by 100. From the above table it has been analysed that the gross profit
ratio 5.82 in 2018 which is more than to 2017 is 5.19.
Return on Equity = Profit after tax / Net worth
Profitability Ratio 2017 2018
Profit after tax 58 992
Net worth 6438 10480
Return on Equity 0.90% 9.46%
Interpretation – As per the above calculation it has been getting that profit after tax of the
company is very low which is shows impact on return on equity ratio. In 2017, it is very low and
in 2018, it is increased suddenly more than to 2017. It can show good position and increment of a
business.
Return on Assets = Net Income / Average total assets
Efficiency Ratio 2017 2018
Net Income (40) 1206
Average total assets 22927 22431
Return on Assets 0.17% 5.38%
Description – From the above table it has been analysed that return on assets is an
indicator, which can relative to total assets. It gives a manager, analyst and investor an idea to
how efficient a company's management is at using its assets to generate earnings. It is presenting
in percentage. In 2017, the company have too much low return on assets but it was increasing in
2018, as it is 5.38%.
Fixed assets Turnover Ratio = Net Sales / Fixed assets – Accumulated Depreciation
Efficiency Ratio 2017 2018
Net Sales 55917 57491
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Fixed assets 14374 14065
Fixed Assets Turnover 3.89 4.09
Interpretation – Fixed assets turnover ratio related to sales and value of the fixed assets,
which can show in balance sheet. It can point out how well the business apply their fixed assets
to generate sales. If the ratio is declining so it shows that the business is over invested in plant,
equipment or other fixed assets and it is not good for a company.
Inventory Turnover Ratio = Cost of Goods sold / Average Inventory
Efficiency Ratio 2017 2018
Cost of Goods sold 53015 54141
Average Inventory 1151 1118
Inventory Turnover 46.06 48.42
Interpretation – Inventory turn over ratio indicate about inflow and outflow of inventory
in company and it has been helping to know usage and wastage inventories. There is calculated
through cost of goods sold and average inventory. It is mainly shows in days when the ratio is
divided by 365. It is increasing in 2018 compare to 2017 due to increasing cost of goods sold.
Debt to Equity Ratio = Total debt / Total Equity
Gearing Ratio 2017 2018
Total debt 20010 15144
Total Equity 12462 12272
Debt to Equity ratio 1.61 1.23
Description – company to know total liabilities and their shareholder equity calculates
Debt to equity ratio. These numbers are getting from balance sheet from the financial statement
of a company. It is used to get financial advantage and there is getting that in 2017 is higher than
to 2018.
Ratio Analysis of Morrison supermarket Plc
Current Ratio = Current Assets / Current Liabilities
Liquidity Ratio 2017 2018
Current Assets 1176 1278
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Current Liabilities 2864 3081
Current Ratio 0.41 0.42
Interpretation- From above solved numerical, it has been analysed that current ratio is
more than previous year. This ratio determinates the relation between current assets and
liabilities. Company's condition is almost equal in both years.
Quick Ratio = Quick assets / Current Liabilities
Liquidity Ratio 2017 2018
Quick Assets 562 592
Current Liabilities 2864 3081
Quick Ratio 0.20 0.19
Interpretation- As per above solved ratio, it has been analysed that quick ratio in 2017, is
of 0.20 and in 2018, it is of 0.19. Company's condition is better in 2017 because they have fewer
liabilities to pay.
Net Profit ratio - Net profit / Sales*100
Profitability Ratio 2017 2018
Net Profit 305 311
Sales 16317 17262
Net Profit Ratio 1.87 1.80
Interpretation- From above solved numerical, it has been analysed that net profit in 2017
is more than 2018. In addition, company is in better condition in 2017 because they have higher
ratio.
Gross Profit Ratio = Gross profit / Sales*100
Profitability Ratio 2017 2018
Gross Profit 604 633
Sales 16317 17262
Gross Profit Ratio 3.70 3.67
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Interpretation- As per the above solved numerical, it has been getting that gross profit is
more in 2017 in compare to 2018. High gross profit indicates better financial condition of
company and company is in more profitable in 2017 in compare to 2018.
Return on Equity = Profit after tax / Net worth*100
Profitability Ratio 2017 2018
Profit after tax 305 311
Net worth 4063 4545
Return on Equity 7.51 6.84
Interpretation- Solved ratio presents that company is getting higher return in 2017 in
compare to 2018. Company is getting 7.51 return on equity, which indicates that they are getting
good return in 2017.
Return on Assets = Net Income / Average total assets*100
Efficiency Ratio 2017 2018
Net Income 305 311
Average total assets 4623 4832
Return on Assets 6.60 6.44
Interpretation- From above solved ratio, it has been analysed that company is getting
higher return of 6.60 in 2017, which is more than 2018. Therefore, it can be analysed that
company is earning good return in 2017 in compare to 2018.
Fixed assets Turnover Ratio = Net Sales / Fixed assets – Accumulated Depreciation
Efficiency Ratio 2017 2018
Net Sales 17262 16317
Fixed assets 7276 7260
Fixed Assets Turnover 2.37 2.25
From the above calculation, it has been analysed that fixed assets turnover ratio can
calculated through net sales divided by fixed assets and from fixed assets less accumulated
depreciation. There is fixed assets turnover ratio 2.37 in 2017 in compare to 2018 is more that
because in 2018 it is 2.25.
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Inventory Turnover Ratio = Cost of Goods sold / Average Inventory
Efficiency Ratio 2017 2018
Cost of Goods sold 15713 16629
Average Inventory 307 343
Inventory Turnover 51.18 48.48
Interpretation- From above solved that inventory turn ratio is calculated by cost of goods
sold from average inventory. In 2017, it is of 51.18 and in 2018, it is of 48.48. So company is in
better position in 2017.
Debt to equity Ratio = Total Debt / Total Equity
Gearing Ratio 2017 2018
Total debt 2319 2041
Total Equity 4063 4545
Debt to Equity ratio 0.57 0.45
Interpretation- From above solved numerical it has been analysed that debt to equity ratio
is more in 2017. Company is in favourable condition in year of 2018 because they have less
liabilities and more equity that is beneficial.
Analysis
From the above calculation of both companies ratio, it has been analysed that Tesco plc is
better than to Morrison supermarket plc because there is liquidity ratio of Tesco is around to
ideal ratio and net profit, gross profit ratio is also down from Morrison supermarket plc.
Comparison in both companies regarding to financial performance
Ratio Comparison
Current Ratio From the analysis of both companies it is getting that current
ratio of Tesco near about to ideal ratio but Morrison company
ratio did not reach to ideal ratio it means Tesco plc good in
liquidity and early pay to their debts.
Quick Ratio From the quick ratio Quick assets increased from 2017 to 2018
so it will affect to quick ratio while Morrison company ratio
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did not decrease which is 0.20 in 2017, 0.19 in 2018.
Net Profit Ratio Net profit ratio of Tesco plc in 2017 was going in negative,
company did not get much more profit but in 2018 it was
increasing in compare to 2017 and it shows in positive way due
to decrease expenses. On the other hand, the net profit of
Morrison company is showing good financial performance of
company and sales also increasing so according to this
Morrison company get much more profit on their sales.
Gross Profit Ratio It is getting that from the ratio it can increasing in 2018 in
compare to 2017 due to increase sales of tesco plc. The ratio of
a company in 2017 was 5.19% but it was in 2018, 5.82%.
Furthermore, Morrison company gross profit in 2017, 3.705 but
in 2018, 3.67%. It can show that tesco plc better than to
Morrison.
Return On equity Profit after tax of tesco is much more lesser in 2017 while it
will increase in 2018 so it will affect to return on equity ratio as
increasing way. In the context of Morrison company it was also
increase in 2018 as compare to 2017.
Return On assets According to this ratio Tesco plc has face critical situation in
2017 but in 2018 they can manage their business activities and
overcome from their financial crisis so there is ratio of
company 0.17% in 2017 and 5.38% in 2018. In Morrison the
ration decreased by 0.14% as compare of 2017 from 2018.
Fixed Assets turn over In the ratio net sales of tesco plc is increasing in 2018 in
compare to 2017 so it will show affect to turn over ratio. On
the other hand of Morrison company has analysed that it is
decreased due to decrease in net sales of company.
Inventory Turn over Inventories of a Tesco out flow much more during 2018 as
compare to 2017 so there is calculated cost of goods sold.
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Inventory turn over ratio decrease of Morrison company low
flow of inventories. It is 51.18% in 2017 but 8.48% in 2018.
Debt to equity Ratio Total debt of Tesco lesser in 2018 in compare with 2017 which
is shows good position of a company and do not take much
more money from outsider so in 2017, 1.61 and in 2018, 1.23.
The Morrison company has reduce their debt and use their
equity as compare to external sources.
So from all the above comparison it is getting that Tesco Plc financial performance better
than to Morrison company.
Financial factors affecting the performance of organisation are as follows:-
 Income- As there are different factors that affects the performance of organisation,
income is the main source of company's survival it is directly impact the business. More
revenues ensures financial stability to invest in prospective alternatives.
 Cost of goods sold- This aspect is associated with company's expenditure. These are the
expenses incurred on the production and sales of goods.
 Profit margin- It refers to the difference between the cost and revenue. Higher the
difference ensures high profitability of business (Caria and Rodrigues, 2014).
Non-financial factors affecting the performance of organisation
 Employees- These are crucial to performance of business. Policies should be adopted to
maintain the working of employees and measures should be taken to motivate them.
 Market- customers changing taste and preferences affect organisation. Satisfying their
demands requires managers to develop effective pricing policies.
TASK 3
Sustainability reporting of the two companies
Sustainability report is an organization report, which can provide information about
economics, environmental, governance and social performance. From the Sustainability report of
both companies, it is getting that Tesco face on people, product and place while Morrison
focused on British farmers; reduce general carbon waste (Ray, 2012). The strategy of Morrison
to reduce use of plastic bags and in Tesco to deliver healthy products to their customers and
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approach of the company to deliver little help plan and in Morrison consistent approach across
UK and take learnings from successful reduction in countries. The report is matter to Morrison
because of it is about right thing for our customers, colleagues, suppliers, society and the
environment. In the report of Tesco people succeed to provide Sustainability flexibility skills and
get reward and in products includes sourcing, health, food waste and packaging.
Potential weaknesses of Ratio Analysis
There is mentioned weaknesses of ratio analysis of both companies which is affected to
performance and growth of the company -
 Historical – The weakness of ratio analysis is derived from actual historical results it does
not mean that the same results will carry forward into future but both companies are
analysis of ratio because of past activities. It is not necessary it will happen in future may
be any different barriers and risks are coming in future so there is need too future
predication (Lawrence, 2013).
 Operational Changes – Many companies are changing its underlying operational structure
to extent that a ratio to calculated of various years. After then it will compare to the same
ratio in current time, which is misleading of conclusion.
 Accounting Policies – Different companies have different policies so it will create
problem when ration analysis from another company. In the report when analysis of
Tesco plc and Morrison plc's ratio so both are applied different policies so it will create
problem to understand.
 Company Strategy – It can be dangerous to conduct a ratio analysis in comparison to two
firms that are pursuing on different strategies. For example – if Tesco plc is considering
on high customer services and Morrison focus on product quality so it is showing
changes in revenues levels (Lutz, 2012).
CONCLUSION
From the above discussion, it has been concluded that financial accounting analysis is
important part of any organisation and it can shows actual performance of a company in order to
attract investors to invest in their company. There is analysis ratio of both companies to know
which company is better according to investment purpose so there is getting that Tesco plc better
than to Morrison supermarket. Ratio analysis is part of financial accounting analysis because it
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will help to present position and fluctuation of both companies. There is analysing sustainability
report of both companies to know which type of products provided by company and know about
their strategy.
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