Financial Statement Analysis and Valuation

The provided report is an assignment on financial statement analysis and valuation. It discusses the importance of financial statements in a company's business operations and ability to generate profits in the long run. The report also summarizes different types of ratios for comparing the company's financial performance over two years, utilizing references from various academic sources.

FINANCIAL DECISION
MAKING

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
Role of Accounting & Finance with in an organisation..............................................................3
TASK 2............................................................................................................................................9
Calculation of different ratios.....................................................................................................9
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Financial Decision Making is a process through which managers of organisations
evaluate different type of opportunities by analysing their financial statements such as Balance
Sheet, Income Statement and Cash Flow Statements. Financial Decision Making also enables
companies in making decisions by analysing risk & returns in different alternatives which further
helps in achieving long tern sustainable growth. Organisation prepare financial statements to find
out efficiency & profitability of their business performance. The below report explain role of
Accounting & Finance Function with in an organisation. After that, this report calculate various
types of ratios to check efficiency of financial performance of Alpha Limited by comparing and
evaluating ratios of two financial years.
TASK 1
Role of Accounting & Finance with in an organisation
Accounting
Accounting is an activity in which business organisations analyse, evaluate and interpret
their overall financial transactions. Companies prepare & maintain books of accounts to record
their financial transaction under accounting process. Every organisation complete the process of
accounting with the purpose of finding out their financial efficiency and profitability. Further,
companies prepare and maintain books of accounts to disclose its financial information so that its
external & internal user can make various decisions such as Investment Decisions, Production
Decisions and Pricing Decisions. Thus, Accounting plays a vital role in decision making.
Accountant of Tesco also maintain books of accounts to check performance of its all
stores. As Tesco is a multinational UK based company and offering variety of groceries and
other general products & services across the globe. Tesco offer its products & services through
departmental stores, Super Markets and Malls. Company make investment in establishment of its
stores in new countries for expansion for this company needs to check its financial soundness
and it is not without Accounting(Minnis and Sutherland, 2017).
Finance
Finance is process of maintaining and managing funds of companies so that they can use
them in an efficient manner. It also helps company in raising new funds with the use of different

sources. Chief Financial Officer of Tesco manage companies funds which in turn help company
in making its future financial plan and decision making.
Thus, Accounting & Finance both benefits firm in maximising profits, market share and
brand image. Further, both the function plays a crucial role in evaluating and analysing Financial
Health of Tesco(Vanauken, Ascigil and Carraher, 2016).
Role of Accounting
Two types of accounting is done with in an organisation Financial Accounting &
Management Accounting. Management Accounting plays a role in providing companies
financial information to its manager so that they can make future decisions whereas Financial
Accounting helps firm in achieving future goals and provide sufficient liquidity so that
companies can smoothly run their business.
According to the view point of (Berger, Minnis and Sutherland, 2017), Accounting
Function plays a significant role in resolving various problems by evaluating & analysing
different situations occurring in Tesco during its business process. Further, Different roles of
played by Accounting in Tesco are discussed below-
Cost Analysis- Cost Accounting Function of Accounting plays an important role in
analysing and evaluating cost each products & services offered by companies. Accountant of
Tesco use this function with the purpose of enhancing profits & sales volume by eliminating
extra cost. By recording cost of products accountant of Tesco can set its profit margin and can
achieve future sales target.
For Example- Accountant of Tesco wants to establish a new hyper store in a new country
with an objective of its business expansion. Than with cost accounting function accountant can
evaluate Cost required in construction of store such as cost of land, cost of furniture & interior
and various other facilities like air conditioning, staff members salary & marketing expenses.
Thus, Cost Accounting Function of accounting benefits Tesco in examining cost of
establishment of its stores with this company can achieve its future goals and profits(Lakis and
Masiulevičius, 2017).
Decision Making- Managers of Tesco makes various decisions so that company can run
its operations smoothly. All the decisions related to business operations cannot be run without

detailed information or financials of company. Managers of company makes decisions related to
expansion, diversification for this managers require information of Assets, Liabilities and cash
inflows & outflows of company. All this information is disclosed to managers with the help of
management accounting function.
Further, Management Accounting function is also used by company with the purpose of
policy formulation and it also helps managers in improving working condition. For Example-
Mangers of Tesco wants to increase their coverage in international market by reducing
competition for which they are thinking to formulate and effective marketing programme in
different languages. For the development of marketing strategy funds are required and for which
managers need detailed information of companies profits and cash availability. Which is possible
only if company is having a record of its financial information. Thus, Management Accounting
Function of Accounting plays a vital role in future decision making(Rouxelin, Wongsunwai and
Yehuda, 2017).
Accounting Function also enables companies mangers in deciding & evaluating different
investment alternatives so that they can use an alternative which gives higher profits and return.
Governmental Regulations- For running organisations operations in an ethical manner
companies are required to follow all the legal laws and provisions formulated by government. As
Tesco is a well recognised brand it is essential for company to pay its Taxes on time. Because, it
directly affects Brand Image of company. Accountant of company is required to assess accurate
income earned by company so that company can pay its Tax Liability. For assessment of actual
income earned from all outlets of organisation Auditing Function of Accounting is used.
According to Auditing Function auditor of company helps accountant in eliminating
errors in books of accounts of firm which helps company in evaluating its actual profits. This
function also helps Tesco in identifying applicability of different types of Taxes on business
activities of company. It also enable company in filling return on time(Moroney and Trotman,
2016).
Discloser of Financial Information- It is mandatory for every organisation to disclose
their financial performance to their internal & external users such as stakeholders (Customers,
Suppliers, Competitors, Government and Shareholders). Disclosing of financial information to
internal user helps managers in decision making related to production, marketing and pricing. As

Internal Users of company includes Managers, Employees and Board of Directors. Accountant of
Tesco is required to maintain books of accounts to asses amount of salaries given to employees.
For Example- if managers of company has to decide salary for staff members of each of its store
than company need to disclose their profits to managers and Board of Directors as Board of
Directors are also require to make decision related to Dividend Distribution.
Accounting function also play an essential role in disclosing amount of dividend Tesco is
distributing to its shareholders which further helps company in enhancing its brand image,
number of shareholders and profitability. As if company is offering high dividend than
shareholders will get attracted. Tesco is also able to know amount of retained earnings is
available which in turn helps managers in making expansion decisions(O'Hare, 2016).
Accounting in Making Budget- Budget is prepared by companies to achieve their future
goals & objectives. Preparation of Budget also requires cost & time but if company is having
detailed information of their past years financial data than it is easy for firm to prepare a future
financial plan. Budget of Tesco includes future information related to income & expenses of
company and that requires accounting details so, accounting also has a role in Budget
Preparation.
Accounting Function also benefits Tesco in calculating ratios. Current Ratio is calculated
by company to check its liquidity and for that details of current liabilities and assets are required.
Further, details of sales are creditors are required to calculate creditors ration and sales ratio.
Thus, Accounting Function also play a role in Calculation & Analysis of Ratios and comparing
ratios of two years.
Role of finance
Finance function play a crucial role in Tesco as it provides liquidity in firm and with this
function Finance Manager of Tesco can make various decisions such as Investment Decision,
Expansion Decision, Acquisition Decisions, Budgeting Decision and Various other decisions
related to fund management. Finance play a crucial role in business operation of Tesco, Which
are discussed below-
Financial Planning- Tesco does its future financial planning by preparing different types
of budgets such as cash budget, production budget and sales budget. This budgets are prepared

by company on the basis availability of funds with it. For Example- If company is having enough
cash & profits than only it is able to project its future financials. Thus, finance function plays a
vital role in planning.
Further, various strategies are formulated by managers of Tesco to achieve its future
goals & objectives. Company can formulate this strategies if its managers knows where company
is investing its funds and from which types of resources it is raising capital. Thus, this function
also play a role in future business planning. Finance Function also has a role in projecting cash
position of Tesco(McInnis, Yu and Yust, 2018).
Money Management- Finance function helps Chief Financial Officer of Tesco in
evaluating different investment alternatives and it also helps company in analysing returns from
different alternatives. This analysis further helps company in making best investment decision.
This finance function is known as Investment Function. Investment Function enable company in
managing its cash. Thus, this function also benefits firm in reducing unnecessary cost and invest
that money in productive business operations of company. Thus, Investment Function of Finance
also helps company in investing its resources in productive activities so that Tesco can achieve
higher profits.
For Example- Tesco wants to raise funds for establishment of new stores and for that
company either can issue shares through initial public offering or can take loan from financial
institutions. With the help of investment function CFO of Tesco can check returns from both the
alternatives and select an alternative which is giving higher return. This function also benefits
company in analysing its cash inflows and out flows. Further, if company is having excess cash
than that cash is utilised in making future expansion which leads to profit maximisation and also
improves performance of company(The Role of Accounting in Business. 2016).
Risk Management- Financial function is having an essential role in minimising risk of
business organisations. Managers of Tesco analyse financial reports of firm such as Balance
Sheet, Income Statement, Cash Flow Statements and other financial reports. With this Financial
Analysis organisation is able to monitor and control affect of different types of risk. These risk
includes Interest Rate Risk, Change in Tax Rates, Changes in demand & supply and change in
exchange rate. By controlling all these risk Tesco makes various decisions so that it can gain
profits in adverse situations also.

Tesco is offering its products & services in various countries across the globe company
is facing through Exchange Rate Risk and Risk of changing customers preferences as customers
of different countries are having different choices which indirectly affects demand of products
and services of Tesco. Thus, Finance Function is beneficial for company to operate its business
in different geographical locations. As these function manages different types risk it also
improves performance & operational efficiency of Tesco.
Financial Forecasting- Various finance functions such Dividend Function and
Investment Function helps Tesco in its future financial forecasting and with this organisation is
able to achieve its future goals and modify its goals & objectives according to changes made in
business environment of organisations. As Tesco is a retailer its forecasting is done by evaluating
sales volume and amount of various operating & non operating expenses(Camin and et.al.,
2016).
For Example- Manager of Tesco wants to make an estimation of its future sales volume
than company is able to forecast that only if it knows how much funds are available for
production.
Finance Function also play a role in controlling and managing all the available financial
resources of Tesco. Further, Finance function is a sources of Financial Management thus, with
this company is able to maximise its profitability and performance. This function also enable
firm in acquiring & utilising financial resources in the most effective manner so that company
can achieve its objectives. As this function helps company in allocating all its resources in
different departments. Further, Tesco is a international company so it is necessary for company
to allocate resources equally in all of its departments.
Finance Functions also has a significant role in developing financial framework of
organisation. Money is a crucial element in operating business of each & every organisation and
without it a company is not able to expand and diversify its business which in turn degraded
brand image of company. This function manages liquidity in the firm.
Finance Function also plays an important role in managing working capital of company
as it provides effective utilisation of resources. If companies working capital is managed than it
maximises production capacity which in turn enhances profits and market share of
company(Easton and Sommers, 2018).

Finance Function also includes Dividend Function through which Tesco is able to
disclose and set amount of dividend distributed by company to its shareholders. Which in turn
attracts customers and enhances market share of company.
TASK 2
Calculation of different ratios
Return on capital employed (ROCE)
Return on Capital Investment is a Profitability Ratio which assess companies ability to
generate profits with the available amount of Capital Investment. This ratio is calculated for
checking efficiency of companies financial performance. Thus, it is also known as Financial
Ratio. This ratio helps investors of shareholders of Alpha Limited in making Investment
Decisions.
Formula
Return on capital employed= (Earning Before Interest & Taxes/Capital Employed)*100
Here, Capital Employed is calculated by subtracting Current Liabilities of company from its
Total Assets.
Particulars 2017 2018
Earning Before Interest & Taxes(EBIT) 375 412.5
Capital Employed
(2235-
322.50)=1912.5
(4,035-
1110)=2925
Ratio:Return on capital employed (ROCE) 19.60% 14.10%
By comparing ROCE Ratio of last two years it is interpreted that companies efficiency of
earning profit is decreased as in the year 2017 Alpha Limited has ROCE of 19.60% while in the
year 2018 it is decreased to 14.10% which shows companies profits are minimised(Robinson,
and et.al., 2015).
Net Profit Margin Ratio

Net Profit Margin is also a profitability ratio which measure amount of profit generated
by company from its revenue. This ratio gives net amount of revenue earned by a business
company after deducting all the operating and non operating expenses such as Interest, Tax and
Dividend.
Formula
Net Profit Margin = (Net Profit/ Sales)*100
Particulars 2017 2018
Sales 2400 3000
Net Profit 300 262.5
Ratio: Net profit margin 12.50% 8.75%
By calculating Net Profit Ratio of Alpha Limited it is evaluated that company earned
12.50% profit from its sales after deducting all the expenses while in the year 2018 companies
net profit is reduced to 8.75%. Which shows companies business is not much profitable in the
year 2018(Kogadeeva and Zamboni, 2016).
Current Ratio
Current Ratio is a Liquidity Ratio which helps company in checking its ability to pay
short term liabilities. This Ratio shows that company is having enough cash to pay its short term
obligations or not. If Current Ratio is high than it is good for company. 2:1 is an idle current
ratio.
Formula
Current Ratio= (Current Asset/Current Liability)
Particulars 2017 2018
Current Assets 757.5 1035
Current Liabilities 322.5 1110

Ratio:Current Ratio 2.34 0.93
From the above table it is analysed that company is having sufficient resources in 2017 to
pay its current liabilities. As companies current assets are double from its current liabilities. Its
current ration in 2017 is 2.34 times of its current liabilities. But, in 2018 this ratio is 0.93 which
means company is not able to pay all its liabilities on time. This further show a reduction in
working capital of company.
Debtor Collection Period
Debtor collection period is calculated by company to find out how much time is to be
taken by its debtors to pay trade debts. If collection period is higher that means debtors are taking
much time in paying trade debts and that further reduces working capital requirements of
company. Debtors are individuals to whom company sales products on credit.
Formula
Debtor Collection Period = (Average Account Receivable/ Net
Sales)*365
Particulars 2017 2018
Net Sales 2400 3000
Average Account Receivable 450 600
Ratio: Debtors Payment Period 68 days 73 days
By analysing the above table it is concluded that debtor collection period is increased to
by 5 days in year 2018 which apparently has an affect on working capital of Alpha Limited.
Companies production process is also gets affected as cash inflows of company is reduced.
Creditors Payment Period
Creditors payment ratio is calculated for measuring solvency of company. This ratio
shows how much time Alpha Limited is taking to pay its debts to trade suppliers. If this period is
high than that show companies financial position is not strong as it is not able to pay its credits
on time(Edwards, Schwab and Shevlin, 2015).

Formula
Creditors Payment Period= (Trade Payables/ Cost of
Sales)*365
Particulars 2017 2018
Cost of Sales 1350 2400
Trade Payable 285 1050
Ratio:Creditors Payment Period 77 days 159 days
After comparing credit payment period of 2017 & 2018 it is outlined that company is
facing problem in paying its trade debts as its credit period is increased to 159 days in 2018. This
also shows that Alpha Limited is operating its business with amount of credit available to it.
CONCLUSION
This report outlined role & purpose of Accounting Function and Finance Function in
Tesco. Through which it is evaluated that these functions helps company in operating its
business smoothly and with these functions company is able to generate profits in long run.
Further, this report summarises different type of ratios so that Alpha Limited is able to compare
its financial performance of last two years.

REFERENCES
Books and Journals
Minnis, M. and Sutherland, A., 2017. Financial statements as monitoring mechanisms: Evidence
from small commercial loans. Journal of Accounting Research. 55(1). pp.197-233.
Vanauken, H.E., Ascigil, S. and Carraher, S., 2016. Turkish SMEs’ use of financial statements
for decision making. The Journal of Entrepreneurial Finance. 19(1). p.6.
Berger, P.G., Minnis, M. and Sutherland, A., 2017. Commercial lending concentration and bank
expertise: Evidence from borrower financial statements. Journal of Accounting and
Economics. 64(2-3). pp.253-277.
Lakis, V. and Masiulevičius, A., 2017. ACCEPTABLE AUDIT MATERIALITY FOR USERS
OF FINANCIAL STATEMENTS. Journal of Management. 2(31).
Rouxelin, F., Wongsunwai, W. and Yehuda, N., 2017. Aggregate cost stickiness in GAAP
financial statements and future unemployment rate. The Accounting Review. 93(3).
pp.299-325.
Moroney, R. and Trotman, K.T., 2016. Differences in auditors' materiality assessments when
auditing financial statements and sustainability reports. Contemporary Accounting
Research. 33(2). pp.551-575.
O'Hare, J., 2016. Analysing financial statements for non-specialists. Routledge.
McInnis, J.M., Yu, Y. and Yust, C.G., 2018. Does Fair Value Accounting Provide More Useful
Financial Statements than Current GAAP for Banks?. The Accounting Review. 93(6).
pp.257-279.
Kogadeeva, M. and Zamboni, N., 2016. SUMOFLUX: a generalized method for targeted 13C
metabolic flux ratio analysis. PLoS computational biology. 12(9). p.e1005109.
Camin, F., and et.al., 2016. Stable isotope ratio analysis for assessing the authenticity of food of
animal origin. Comprehensive Reviews in Food Science and Food Safety. 15(5). pp.868-
877.
Easton, M. and Sommers, Z., 2018. Financial Statement Analysis & Valuation, 5e.

Robinson, T.R., and et.al., 2015. International financial statement analysis. John Wiley & Sons.
Edwards, A., Schwab, C. and Shevlin, T., 2015. Financial constraints and cash tax savings. The
Accounting Review. 91(3). pp.859-881.
Online
The Role of Accounting in Business, 2016. [Online] Available through:
<https://smallbusiness.chron.com/role-accounting-business-459.html>