Financial Accounting Ratios and Annual Reports: A Case Study of Tesco PLC

This report analyzes the financial performance of Tesco PLC using accounting ratios and annual reports. It also highlights the limitations of using accounting ratios and includes the movement in the company's share price. The report concludes with suggestions for improvement.

AC4052QA FINANCIAL
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Explaining liquidity & financial structure of by using accounting ratios and annual reports.....1
Explaining 5 limitations in use of accounting ratios found in analysis and including movement
in company's share price.........................................................................................................3
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Financial accounting is concerned with documenting, summarizing and reporting
business transaction that are arising due to operational practices of firm. It helps the organization
to get the accurate outcomes of business transaction so that proper decision can be taken. In the
current era, there is higher level of competition which need to be overcome by applying
accurate financial problems to gain competitive advantages. The current report is based on
TESCO PLC which operates in retail industry by offering consumer goods & services through
utilizing multiple channel. Present will comprise comparison of ratios and interpretation in
order to assess organizational performance. Current report will involve five limitations of using
accounting ratios for analyzing & evaluation of company's performance.
MAIN BODY
Explaining liquidity & financial structure of by using accounting ratios and annual reports
From the evaluation of profitability statement it can be articulated that from the year
2017 to 2020 is fluctuating. Return on capital employed in the 2017 to 2018 & 2019 it has in
increased which is positive sign but declined in current year 2020 that require major changes. In
the case of gross profitability the outcome for the specified ratio is continuously increasing. The
ideal gross profit ratio is considered to be 10% which is higher than current performance of
TESCO PLC. Return on shareholders fund play significant role in making company capable of
attracting larger investors for accomplishing objectives of higher return. In the year 2017 it was
2.25% which has enhanced in the year 2020 to 9.91 but faced downward sloping growth as
compared to 2018 & 2019. On the basis of profitability part of TESCO it can be identified that
TESCO PLC should pay attention to make larger improvements.
Operational ratio is used to asses the efficiency of company so that optimum utilization
of resources exerted by company or not can be assessed. Net & fixed assets turnover ratio for
the specified years in fluctuating situation. (Pratt and Peters, 2017). Stock turnover ratio
provides assistance in attaining information regarding TESCO's effectiveness in replacing its
inventory by making sale. As compared to the year 2017 inventory turnover is increasing from
24.30 to 26.62 times which is reflecting stable liquidity position of enterprise. Debtors collection
period provides assistance in the evaluating that how company is collecting payments from its
customers who have purchased goods on credit. On the basis of derived outcome it can be stated
that has declined in 2020 as per the performance of 2017 which is favorable indicator of
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organizational growth. From the overall operational ratios it can be articulated that TESCO PLC
is having good efficiency to maintain stability position in sector.
Financial structure can be viewed by analyzing these ratios to make proper evaluation to
judge organizational growth & development. (Schroeder, Clark and Cathey,2019). The standard
bench marking for current ratio of TESCO PLC is changing its direction of growth and reached
to 0.73 which is lesser than 1.2 -1.5 times. There is need to make improvement to overcome its
short term liabilities by utilizing current assets. TESCO's liquidity ratio can aid in
understanding the availability of monetary components to meet requirements. For the period
2020 the liquidity ratio is 0.6 which is higher than 2018 and 2019 that is indicating that how
effectively enterprise can maintain availability of cash & equivalents to meet organizational
objectives. Profit per employee helps in making proper assessment that how much staff of
TESCO's efforts are contributing to organizational growth. In addition to this, gearing ratio can
be taken to ascertain associated risk with operational practices. In the period of 2017the derived
outcome is 454.71 and in 2018 result is 233.35 which has reduced. For the duration 2020, the
achieved outcome is 222.91 which is reflecting that TESCO has taken certain efforts to decline
risk but as per standards of industry need to execute changes for attaining success.
From the evaluation of annual report of TESCO's cash flow statement it can be
articulated that from the year 2017 to 2020 the results are -4142008, -227714, 96800 and
2701000 respectively. On the basis of this, this can be recognized that TESCO's financial
performance has been improved by comparing it with previous years. The overall performance
of organization obtained from taking several financial statement into consideration it can be said
that in the current period is good but required few alternations in certain areas so that leading
position in sector can be achieved. To achieve deeper knowledge various types of stakeholders
pay attention on reviewing these statements so that accurate and reliable decision can be made
(Weygandt, Kimmel and Kieso, 2018). The reason behind such performance of can be
implemented that company is having lacking areas in certain functional parts which need to be
eliminated to attain greater profitability. In absence of improvement firm may face several
challenges to get stable position in industry. On the basis of this, it can be interpreted that
organization require to make certain crucial changes to have proper functioning.
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Explaining 5 limitations in use of accounting ratios found in analysis and including movement
in company's share price
There are several limitations of utilizing ratios for assessing financial performance of
company. This need to be highlighted to take appropriate decision by considering weakness
areas (Limitations of ratios, 2021). From the above annual report it can be articulated that
organization need to highly give emphasis on drawbacks o that fair decision can be formulated.
 The one of the biggest limitation which Is identified throughout the evaluation is
concerned with paying attention on utilization of historical data set. There is higher
concentration is given on using previous based data for assessing the organizational
trend. In the current performance evaluation there is much emphasis is provided on
comparing the current outcome with previous. It diverts the attention of firm from
getting higher performance as per the industrial standards whereasit focuses on
comparing with earlier duration. It may result in lack effectiveness to operate in
competitive environment.
 There is avoidance of considering external factors to make judgment of financial
performance of company (Monsen, 2021). It does not permit firm to get appropriate
knowledge regarding uncontrollable factors which contribute in boosting & hindering
organizational growth. From the ratio metrics assessment it can be said that only
internal elements are considered by entity to ascertain monetary performance of
company. It makes the overall decision irrelevant as does not comply with changing
circumstances of business environment. This is crucial limitation which TESCO need to
be focused for taking essential practices which are voided by not concentrating on
external actions.
 Change sin accounting policies & procedures contribute in influencing financial
reporting which is pen of the major issue utilized in ratio metric key financial metric
taken into consideration by ratio analysis are modified. In addition to this, the changed
pattern of calculating ratios are not concentrated while making comparison with
previous performance. On the basis of this, it can be articulated that firm tends to avoid
accounting policies changes in ratio analysis.
 Business condition & strategy as well serve as limitation while conducting ratio.
Changing business situations are not taken into consideration by the TESCO. The ratio
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analysis should be conducted with the proper emphasis on company's changing business
terms and condition with suppliers and debtors. In case of ratios calculation and
comparison with two companies is not relevant for the purpose of taking decision.
 There is lack of adequate standards which is as well play important role as con of ratio
analysis as every industry has different kinds of criteria for judging. In addition to this,
there are various limitation but not having proper predetermined objective is one of the
drawback which is required to taken by organization so while conducting ratio analysis.
This type of evaluation does not give relevant information for taking strategic decision.
 From the above assessment it can be interpreted that firm's performance determination
and interpretation can be biased which does not give proper signal of organizational
growth. There are various stakeholders who have different perspective for making
decision. Ratios may be interpreted different by distinct kinds of users which may
serve negative influence on overall organizational growth & productivity. The reason
behind considering these as limitations is that company may not get accurate
conclusion for taking strategic decision.
Share price of TESCO for the year 2017 is 50.31 USD, in the 2018 price increased to
70.4. From making the comparison it can be articulated that 58.94 price of 2019 reached to
180.20 in the 2020 which is inclining directional growth. The ratio analysis is indicating
improvement whereas per the marketing situation it can u is performing well.
CONCLUSION
From the above report it can be concluded that financial accounting is
important for accomplishing organizational objectives. The current report has involved
interpretation of ratios for assessing financial performance of specified organization which
indicates company is having poor monetary health. The limitations identified from the
assessment includes historical data, changing accounting policies, lack of adequate standards,
avoiding of external factors and bias perspective which provide inappropriate results.
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REFERENCES
Books and Journals
Monsen, B., 2021. The determinants and consequences of Big 4 lobbying positions on proposed
financial accounting standards. Available at SSRN 3812600.
Pratt, J. and Peters, M. F., 2017. Financial accounting in an economic context. John Wiley &
Sons.
Schroeder, R. G., Clark, M. W. and Cathey, J. M., 2019. Financial accounting theory and
analysis: text and cases. John Wiley & Sons.
Weygandt, J. J ., Kimmel, P. D. and Kieso, D. E., 2018. Financial Accounting with International
Financial Reporting Standards. John Wiley & Sons.
Yu, T., Lin, Z. and Tang, Q., 2018. Blockchain: the introduction and its application in financial
accounting. Journal of Corporate Accounting & Finance. 29(4). pp.37-47.
Online
Limitations of ratios. 2021. [Online]. Available through:
<https://corporatefinanceinstitute.com/resources/knowledge/finance/limitations-ratio-
analysis/>
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