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(Doc) Decision Making Process Assignment

   

Added on  2019-12-03

31 Pages9080 Words409 Views
Research ProjectEffectiveness of Ratio Analysisin business decision makingprocess: Study on TESCO

TABLE OF CONTENTS1 INTRODUCTION........................................................................................................................11.1 Background of the research...................................................................................................11.2 Background of the organization.............................................................................................21.3 Statement of problem.............................................................................................................21.4 Aims & Objectives of the research........................................................................................31.5 Importance of the study.........................................................................................................32 LITERATURE REVIEW.............................................................................................................32.1 Introduction............................................................................................................................32.2 Financial statement analysis..................................................................................................42.3 Users of the financial information.........................................................................................42.4 IMPORTANCE RATIO ANALYSIS.....................................................................................52.5 Limitations of ratio analysis..................................................................................................62.6 Different types of ratios in ratio analysis...............................................................................73 RESEARCH APPROACHES & METHODS............................................................................113.1 Introduction..........................................................................................................................113.2 Research approaches............................................................................................................114 DATA FINDINGS......................................................................................................................154.1 Introduction..........................................................................................................................154.2 Ratio Calculation.................................................................................................................154.3 Ratio Analysis......................................................................................................................164.4 Findings from the questionnaire..........................................................................................19RESULTS AND DISCUSSION....................................................................................................23LIMITATIONS OF THE RESEARCH & AREAS OF FURTHER CONSIDERATION............24CONCLUSION..............................................................................................................................24

REFERENCES..............................................................................................................................26

1 INTRODUCTION 1.1 Background of the research Every kind of business whether it is small or big makes efforts to attain profitability andsolvency. Profitability is the situation which describes the ability of the company to make profits.On the other side, solvency is the potential of the business to pay its debts as they come due(Palepu and Healy, 2007). However it is not easy to attain these objectives. It requires efficientmanagement of business resources through forecasting, budgeting, planning, control anddecision making. Further there is a need to identify strength and weakness of the company andthen take corrective actions. Accounting offers that information which facilitates the abovefunctions (Ahrendsen and Katchova, 2012). Generally the accounting records and evaluateseconomic information which is required for decision making. The information is derived fromthree financial `statement produced by a company. These include balance sheet, incomestatement and cash flow statement. The income statement reflects the profitability andoperational performance of the business and the balance sheet discloses the solvency position(Argouslidis, 2008). In order to judge the financial performance, profits related to various items in statementsare used as the basis. It helps in obtaining meaningful and useful information for decisionmaking. It is to be noted that due to the summarized nature of these documents, a lot of facts arestill undiscovered (Bennouna and Marchant, 2010). Hence for that purpose they are analyzed andinterpreted through the technique of ratio analysis. It enables the users to understand the meaningof absolute amounts and to make informed business decisions. The business statements areenclosed with lots of financial details which are hidden in the figures (Bourne, franco, andWilkes, 2006). These figures become more useful when they are related to each other or to someother relevant financial data. Hence the users need to go further in order to establish relationshipamong the data in the statements. Ratio analysis is a tool which measures the company’s performance and contributestowards making of many important business decisions. Ratios play an important role in thebusiness world (Cole, Branson and Breesch, 2012). It can be defined as a proportion or fractionor percentage which expresses the relationship between different items in the financial statement.The ratios are the most powerful tool which is used in evaluation and interpretation ofstatements. 1

According to Ittelson, (2009), decision making is a conscious process of making choicesout of one or more alternatives with the purpose of moving towards some desired state of affairs.The choices are related to the allocation and it ensures use of business resources to achieveobjectives. It is to be noted that decision making requires appropriate information (Siano,Kitchen and Confetto, 2010). Managers require appropriate data so that they can make outsomething meaningful and productive. Proper use of the data has to be ensured so that sounddecisions can be made. Decisions related to investment or disinvestment, make or buy, expansionor contraction, etc. cannot be made without the use of financial ratios (Tracy, 2012). It gives anidea about the financial strengths and weaknesses of a particular business and also highlights theaspects which need further investigation. This research study is being performed to reflect how tool of ratio analysis can helpshareholders, investors, suppliers, creditors, employees, managers and other stakeholder inmaking their respective decisions. The decisions are taken about the past performance, presentcondition and future potential of the company. 1.2 Background of the organization Tesco PLC is a British Multinational grocery and general merchandise retailer. It isheadquartered in Cheshnut, Hertforshire in England. It is the third largest retailer across theworld in terms of profits. It holds the largest share in the retail market (Moyer, McGuigan andRao, 2011). It is greatest in terms of number of employees and number of stores. It is a leadingbrand in the retail sector and that is the reason every investor keeps an eye on the share prices ofthe company. Change in the share prices of Tesco affects investing decisions of several investors.This research report identifies how technique of ratio analysis can be useful in taking of differenttypes of decisions. It will calculate the financial ratios for the Tesco and evaluates its businessperformance. For this research, Tesco has been selected because it will be interesting to knowhow decisions can be made within such big organization on the basis of ratio analysis. Further itcan be identified that, this tool is a good reflector of financial performance or not. 1.3 Statement of problem Hence it is clear now that financial information offered in the statements is very useful intaking business decisions. They act as a mean to achieve end and not an end in themselves. It is2

evident that information is presented in summarized statements, so it needs to be interpreted byusing a suitable technique. It enables the management and stakeholder to understand and to makewell informed decisions. Further many users of these documents are not intellectual about theaccounting ratios and also do not know how they are applied. Despite of several advantages,there are also many limitations associated with the use of ratio analysis. Hence this research isundertaken to ensure that how this tool can be used in appropriate manner. 1.4 Aims & Objectives of the research The major aim of the study is to identify the effectiveness of Ratio Analysis in businessdecision making process. Following objectives have been framed:To discover the importance of Ratio Analysis in decision making processTo identify the drawbacks of the Ratio Analysis for the business To provide suggestions for improvements Research questionWhy business managers should rely on financial ratios for decision making?1.5 Importance of the study Every research has its own significance. This research will be carried out in order to findout whether ratio analysis is an effective tool for decision making or not. The management of anorganization depends on the accounting information for taking various types of strategicdecisions (Palepu and Healy, 2007). This information is generated by analyzing and interpretingthe financial statements. A sustainable company like Tesco needs effective planning and goodfinancial management. This research will compute the accounting ratios for Tesco and then showhow decisions are made. Along with that it will also talk about the benefits and drawbacks ofusing ratio analysis for decision making. 2 LITERATURE REVIEW 2.1 Introduction Recording and summarising of the financial data are essential part of the accountinginformation system. The financial statements are required to be analyzed and interpreted so that3

truths hidden behind the information can be unveiled. Interestingly such analysis can be done onthe basis of ratio analysis and comparisons. Literature Review will reveal the theories andconcepts related to the analysis. 2.2 Financial statement analysis According to Sabău, (2013), financial statement analysis consists of application ofanalysis tools and technique so that meaningful information can be derived. The main purpose isto establish relationship between various items contained in the statements. In this way variousconclusions are drawn about the past performance, existing position and future potential of thecompany (Evans, and Porter, 2010). The analysis is done find out where the business is lackingand how the improvements can be done. Most importantly it identifies the strengths andweaknesses of the firm. Business decision making is a difficult process as it requires consideration of differenttypes of factors. The decisions are taken after making some evaluations. It is considered as themost important element in management of all the activities (Ainsworth and Deines, 2008).Financial performance of the company is measured in order to find out how the business isperforming. There are different types of techniques for measuring the performance and ratioanalysis is one of them. Ratio Analysis is a quantitative analysis of information which iscontained in the company’s financial statements. It records the performance of the business interms of liquidity, profitability, solvency etc (Broadbent and Cullen, 2012). It applies differenttypes of ratios for the comparison of similar variables. It manipulates the figures in systematicmanner in order to produce information which is used in investment decision making process.The trend of these ratios over time is studied in order to check whether they are improving ordeteriorating (Cadle and et.al., 2010). The analysis is regarded as the cornerstone of fundamentalanalysis. This research is about investigating the effectiveness of ratio analysis in the businessdecision making process within the context of Tesco.2.3 Users of the financial informationThe users of the financial information can be divided into two categories that is internalusers and external users (Ainsworth, and Deines, 2008). Their need can be described in thefollowing manner:4

Management and Employees – The data helps the management and employees inidentifying the financial position, operating results and future potential of the company.Employees can take decisions related to their career and growth opportunities (Broadbentand Cullen, 2012)Shareholders - It helps the shareholder to know about the return on their investments.They can also ascertain the profitability of the company (Cadle, and et.all., 2010)Investors & Creditors – Investors are interested in knowing the return on investmentswithin the business of the company. Creditors want to have a check on the paymentmaking ability of the organization (Dey, 2002). Financial information helps the creditorsto know about the liquidity of the firm to pay its debts when they fall due.Debenture holders – The people who lend the money to the company would be interestedin knowing whether it is capable of repaying the both the interests and the principal onmaturity charged on the loan (Giacomello, 2008) Financial analysts – These people need financial information so that they can offerprofessional advice to the clients regarding the investments. Tax authorities – These bodies makes sure that company fulfils the legal and regulatoryrequirements related to the business (Harrison, and Horngren 2007). They want to makesure that business is paying it taxes in timely manner. Government – Government keeps an eye watch on the business practices of the firm.Government expects that it does not indulge into wrong practices and activities. 2.4 IMPORTANCE RATIO ANALYSIS Following are the advantages derived from the technique of ratio analysis:Analysing the Financial Statements – The ratios are very useful in understanding thefinancial position of the business. Different types of stakeholders such as management,bankers, creditors etc make use of ratio analysis in order to fulfil their respective financialobjectives (Moyer, McGuigan and Rao, 2011). Judging efficiency – It is a very effective tool in judging the efficiency of theorganization in terms of operations and management. It shows the ability of the businessrelated to utilization of assets and earning of profits (Palepu and Healy, 2007).5

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