Financial Statements Assignment (Doc)

FINANCIAL STATEMENTS

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
Role of Accounting & Finance with in an organisation..............................................................3
TASK 2............................................................................................................................................8
a. calculation of five different ratios of Alpha Ltd. For each of the two years...........................8
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Financial Statement consists of various written reports such as balance sheet, Income
statement and Cash Flow Statements. This reports are prepared by every organisation for
maintaining their financial performance and evaluating effectiveness of their business operations.
Financial Statements are essential as it helps in checking accuracy of tax and making investment
decisions. The below report explains role of Accounting Function and Finance Function in
operating business of an organisation. Further, this report calculate different types Ratios to
analyse, evaluate and compare financial performance of Alpha Limited of two financial years.
TASK 1
Role of Accounting & Finance with in an organisation
Accounting is a process of recording & analysing overall financial transactions of a
company. Every organisation maintain & prepare their books of accounts with and objective of
disclosing their financial information to investors, customers, managers and creditors. So, that
they can make investment decisions. Tesco is a UK based multinational retail brand which offer
groceries and other general merchandise in many country across the globe. Company also keep
record of all of its financials to manage its profits, enhance its customer base and market share.
Accountant of company collect all necessary financial information and present this information
through different types of financial statements. Further, this information is transferred to public
through Annual Report and it is also published on official website of firm. Thus, Accounting
plays an important role in managing and analysing business performance of Tesco.
Finance Function is also used by Tesco for maintaining companies existing funds and it
is also beneficial in preparing future budget related to expenses(O'Hare, 2016).
Two types of accounting is used by companies Management Accounting and Financial
Accounting. Management Accounting is an activity of presenting business information to
managers so that they can make business decisions such as Production Decisions and Pricing
Decisions. Whereas, Financial Accounting helps in running functions of business.

Role of Accounting
According to (Minnis and Sutherland, 2017), Accounting also helps accountant is
evaluating various business situations of Tesco and helps in resolving problems so that profits of
company gets maximised. Various roles of accounting function in Tesco are discussed below-
Decision Making- Function of Accounting plays a role in making important decisions
and formulating rules and regulations of company. Decisions related to expansion and
modification of business operation of Tesco can be done only when all the necessary information
of company such as assets, Liabilities, Cash Inflows & Outflows and profits is available. For
Example- Tesco is offering its products & services in many countries and for making decisions
related to shipment of products in each country is based on demand of products & services in
each country which can be evaluated if company keep an accurate record of its accounting data.
Thus, Accounting plays a role in making decisions related demand of products & services.
Further, if company wants to make decision as to investment is done in improvement of
its existing facilities or in establishment of new store. Each of these two alternatives will give
different returns thus, accounting also plays a role in evaluating different alternatives and helps
in making profitable decisions.
Accounting for Governmental Regulations- Tesco is a multinational company and earn
huge profits thus, it is necessary for company to pay taxes on time. Further, it is also essential for
company to operate its business in accordance with rules and regulations formulated by
government. For determining accurate amount of all types of taxes such as Income Tax, Services
Tax and Social Taxes company is require to maintain Accounts. According to (Vanauken,
Ascigil and Carraher, 2016), Accounting Function play a role in filling return and accurate
assessment of Income.
For Example- If due date of filling Income Tax return of company is 30 June and
managers of company is not able to calculate actual amount of income so, they file a return with
an inaccurate amount than company is liable to pay penalties.
Accounting in Making Budget- Accounting manager of Tesco use Traditional
Budgeting Method in its business according to which company prepare its current years budget
on the basis of past years budget and that becomes possible only if company has a record of its

past accounting data. So, Accounting Function also plays a significant role in preparation of
budget of company. Budget helps company in achieving its future goals and with accounting
managers can prepared different types of budget such as Overhead Expenses Plan and Projection
of Cash Flow.
Accounting in Costing- For gaining more profits and sales volume it is necessary for
managers of Tesco to evaluate cost of each of its products and offer its products at a price which
gives satisfaction to customers. It is possible only if company uses Cost Accounting in its
business. Thus, Accounting function plays a role in identifying different type of cost included in
a product and it also helps in setting profit margin.
Like Tesco wants to establish a new superstore than Accounting Function helps in
identifying cost of staff members, Cost of furniture & interior and various other facilities after
determining cost accountant of company is able to determine its profit margin for that store.
Once cost is determined than it is easy for company to monitor and control its cost and
company also helps company in eliminating unnecessary cost. Thus, Cost Accounting Function
of accounting is essential for Tesco.
Planning- Managers of Tesco formulate various strategies and plans to achieve success
and organisational goals. For Example- Tesco wants to maximise its sales volume & customer
base by 20% in this year than for achieving this objective company is require to make a plans on
its Sales strategies and Marketing Strategies. These strategies can be easily formulated if
company have record of its past accounting data. Thus, Accounting function also play a vital role
in planning. AS per the view of (Berger, Minnis and Sutherland, 2017), Accounting further
important in projecting cash flow position and Inventory Level of Tesco.
Ratio Analysis- Ratios are calculated on the basis of data provided by companies
accounts. Foe Example- For Calculating Current Assets Ratio of Tesco Information related to
Current Assets and Liabilities of company is required which is disclosed in Balance Sheet of
company. Thus, Accounting Function has a significant role in analysing & calculating ratios of
company. Different ratio helps Tesco in analysing liquidity, Profit Margins, Leverage and Credit
Worthiness of company.

By calculating Ratios, Accounting Function also helps Tesco in evaluating its financial
performance in different ways with this company can improve its business operations and win
over its competitors.
Discloser of Information to External Users- If company disclose all its information to
External User such as Customers, Managers, Shareholder, Employees and Government Agencies
than it attracts customers and investors. Accounting Plays a role in providing details of profits
and amount of dividend distributed by company to its shareholders which encourage investors in
making more investment in company. Thus, Accounting Function helps Tesco in enhancing its
customer base and market share.
Accounting Function has a significant role in making strategies by using “What-If” idea.
For Example- If managers of Tesco wants to improve their profitability Ratio by reducing
salaries of its employees than accuracy of this decision can be checked through “What-If”
analysis. Accuracy of this strategy is can be checked by an evaluation of accounting data and
projection of financial Reports. Thus, According to (Lakis and Masiulevičius, 2017), Accounting
has a role in evaluating different type of alternatives.
Accounting Function is also important in preparation of internal reports which helps
managers of Tesco in making various important decisions. This reports are prepared for
managers of company and it includes Account Payable & Receivable Reports and Inventory
Records.
According to (Rouxelin, Wongsunwai and Yehuda, 2017), Accounting play a role in
evaluating effectiveness of companies operation. On the other hand, as per the view of (Moroney
and Trotman, 2016), Finance is a Function which is used by organisation so that its operations
can run smoothly and finance is essential in providing & operating each business activity. Thus,
Finance Function is essential for Tesco without it company cannot expand its business.
Finance has a role in making many decisions in Tesco such as decisions related to
budgeting, Planning Decisions and managing cash flows of company. Chief Financial Officer of
Tesco make decisions related to finance operations and decisions. Different role of Finance
Function in operation of Tesco are discussed below-

Money Management- Money Management is a technique through company can
eliminate its extra cost and invest that in other productive activities so that profits can get
maximised. By analysing different financial functions CFO of Tesco can evaluate that what types
of finance function is valuable for company according to which funds are managed. Thus,
Finance plays a role in managing money and also helps in utilising money in productive
resources.
It also play a role in managing cash inflows and cash outflows of company. For
Example- After analysing financials of Tesco it is find out that company has sufficient cash after
paying all its liabilities than finance executive can invest extra cash in other activities which
maximises companies revenue in future.
Financial Planning- Future Financial Planning of Tesco is done by preparing future
budgets and an effective budget is prepared on the basis of financial projection of company. So,
Finance also plays a role in preparation of different types of budget such as cash budget,
operating budget and capital budget. Without Finance function company is not able to plan its
financials and that apparently minimises its revenue.
Risk Management- Different types of risk such as interest rate risk, price fluctuation,
change in demand, change in exchange rate and credit risk are managed through finance
function. Managers of Tesco control and monitor all these risk by analysing financials reports of
company. Further, with finance company can analyse affect of these risk on its business
operations and make decisions so that company can gain profits in adverse situations also. Thus,
finance is important in Tesco for reducing impact of all type of risk(O'Hare, 2016).
As Tesco is operating its business in many countries financial analysis is beneficial for
company in managing risk related to international market and it also helps company in offering
its products & services according to demand of customers of different countries.
Financial Forecasting- Finance Function plays a significant role in Financial
Forecasting of Tesco. Financial Forecasting is important for Tesco as it helps in determining
future goals & objectives of company. Financial Forecasting of Tesco is done on the basis of
sales volume, various capital expenses and resources which becomes possible only with Finance
Function.

Finance also helps company in determining companies financial framework which
further helps in allocation of resources. Finance is an essential element for each business
organisation as without it a company cannot run its operation business owner are not able to
make investment decisions which directly reduces profits and brand image of company. All the
investment decisions of Tesco is made on the basis of financial analysis of company thus, this
function is beneficial for it.
Finance also has a significant role in providing funding and allocating funds in different
departments of company. It also helps in making decisions related to funding. For Example- If
Finance Executive of Tesco wants to raise its capital than company need to chose between
Equity or Loan. This funding decision is taken on the basis of financial analysis.
Finance function is also important for Tesco in making financial strategies which further
helps company in meeting its mission and objective. Finance provides funds to company and
without funds company cannot offer its products & services in market. So, it is the most
important function used by organisations(McInnis, Yu and Yust, 2018).
TASK 2
a. calculation of five different ratios of Alpha Ltd. For each of the two years
HEADS 2017(£) 2018(£)
Operating profit 375 412.5
Total assets 2235 4035
Current assets 757.5 1035
Current liabilities 322.5 1110
Net profit 300 262.5
Sales 2400 3000
Receivables 450 600
Payables 285 1050
Purchases 1350 2400
Return on capital employed
Return on capital employed is the financial ratio which measures the company's
profitability and the efficiency they can generate the profits from capital employed by them by

comparing the net operating profit(Dizkirici, Topal and Yaghi, 2016. ). Mostly the capital
employed refers to the total assets of the company less all the current liabilities. It is considered
to be the useful measure for comparing the relative profitability of the companies after taking the
capital employed into the consideration.
Ratio Head: 2017 2018
Return on capital employed=Operating profit/total assets- current
liabilities*100 19.60% 14.10%
From the above ratio it can be interpreted that in the year 2017 company has 19.60% of
return on capital employed by them whereas in year 2018 they have 14.10% of return which is
comparatively less than the previous year which clearly indicating that company not generating
the profits efficiently from the capital employed by them in 2018 compared to previous year
and for improving and increasing the return on capital employees company needs to improve
their operating profit and profit margin by effectively utilising their resources and decreasing the
cost of production.
Net profit margin
Net profit margin is basically equals to the net income or profit which is generated as
percentage of the total revenue .it is the percentage of the revenue which is left after all the
expenses have been deducted from the sales(Hasan, 2017.). It is the percentage of the revenue
remains after all the operating expenses, interests and taxes and also the preferred stock
dividends which have been deducted from the company's total revenue. For calculation the net
profit margin sales revenue is divided by the net income so to ascertain the net profit margin
earned by the company.
Ratio Head: 2017 2018
Net profit margin=Net profit/ sales*100 12.5% 8.75%
The above table depicts that Alpha Ltd. Showing the decreasing Net profit margin in the
year 2018 compared to 2017 as company ear 8.75% of net profit margin in 2018 which is much
less than 12.5% of 2017. from the given income statement of the company it can be interpreted
that company has increased their sales revenue in 2018 but this also increase their cost with
higher ratio which ultimately leads to fall in their profit margin.

Current ratio
Current ratio is the liquidity ratio which measures the company's ability to pay its short
term debts and obligations by using its current assets and resources available to them. Current
ratio also shows the ability of the company to pay off their bills by using their current
assets(Tamulevičienė, 2016.). It represents that company having enough resources or not to pay
off their dues, it leads the company to compare the current assets with its current liabilities. It is
the indication of the firm's liquidity(Laitinen,, 2017).
Ratio Head: 2017 2018
current ratio= current assets/ current liabilities 2.34 0.93
From the above ratio it is clearly identifying that company showing the decreasing ratio
from the year 2017 to the year 2018 which showing their in 2017 company uses its resources
more efficiently to pay off their liabilities and dues compared to 2018 in which they nit having
enough current assets available to pay off their dues. Alpha Ltd. Current liabilities are exceeding
their current assets in the year 2018 which can be ascertained by the ratio which is less than 1
that is in 2018 the company having current ratio is equals to .93.
Debtor collection period
Debtor collection period is the average time taken by the company to collect their trade
debts. It is basically the average time taken by the business to receive payments owed by them in
terms of account retrievable(Pastusiak and et.al., 2016.). It helps the Alpha Ltd in comparing the
real collection period with granted credit period.
Ratio Head: 2017 2018
debtor collection period=receivables/ sales*365 68 73
From the above ratio it cab be depicts that in 2017 company take less time that is 68 days
to collect their receivables compared to 2018 where they take more time of 73 days to collect
their dues from debtors. The lower number of days reflecting the efficiency of the company in
collecting the payment from their debtors. from above interpretation it can be recommend that

company needs to use its resources effectively and efficiently in order to effectively collect their
payment made due to debtors.
Creditors payment period
Creditor payment period shows the average number of days the company takes to pay to
its suppliers. It can be calculated by dividing the trade payables by the average daily purchases
for a set period. This gives an insight into the Whether the business sis taking full benefit and
advantages of the trade credits available to them(Rahman, 2017.). Creditors payment period
estimates that average time the business takes to settle down its debts with the trade suppliers.
Ratio Head: 2017 2018
Creditors payment period= Payables/ purchases*365 77 159.7
From the above calculated ratio it can clearly indicate that in 2018 company take more
time to pay to the suppliers for the amount of purchase by them on the credit compared to 2017
in which they take less number of days to pay their dues to the suppliers. The lower the number
of days shows the efficiency and ability of company to use their resources to pay the dues so that
they can get benefit in future from those suppliers if they pay dues on time.
CONCLUSION
Above report outlined role & importance of Accounting Function and Finance Function
in Tesco. Through which it is concluded that Accounting & Finance are essential element
without them a company is not able to gain profit and run its operations. Further, this report
summarises different type of of ratios which helps companies in comparing their finanacial
performance.

REFERENCES
Books and Journals
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.
Dizkirici, A. S., Topal, B. and Yaghi, H., 2016. Analyzing The Relationship Between
Profitability and Traditional Ratios: Major Airline Companies Sample (Karlilik ve
Geleneksel Oranlar Arasindaki Iliskinin Incelenmesi: Büyük Havayolu Sirketleri Örnegi)
1. Journal of Accounting, Finance and Auditing Studies. 2(2). p.96.
Hasan, T., 2017. A STUDY OF THE RELATIONSHIP BETWEEN PROFITABILITY AND
LIQUIDITY IN ISLAMIC BANKING INDUSTRY IN THE CONTEXT OF
BANGLADESH. Skyline Business Journal. 13(1).
Laitinen, E. K., 2017. Profitability ratios in the early stages of a startup. The Journal of
Entrepreneurial Finance. 19(2). pp.1-28.
Lakis, V. and Masiulevičius, A., 2017. ACCEPTABLE AUDIT MATERIALITY FOR USERS
OF FINANCIAL STATEMENTS. Journal of Management. 2(31).
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.
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.
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.
Pastusiak, R and et.al., 2016. Company Profitability Before and After IPO. Is it a Windows
Dressing or Equity Dilution Effect?,„. Prague Economic Papers. 25(1). pp.112-124.

Rahman, A. A. A. A., 2017. The Relationship between Solvency Ratios and Profitability Ratios:
Analytical Study in Food Industrial Companies listed in Amman Bursa. International
Journal of Economics and Financial Issues. 7(2). pp.86-93.
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.
Tamulevičienė, D., 2016. Methodology of complex analysis of companies’
profitability. Entrepreneurship and sustainability issues. 4. pp.53-63.
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.
Online
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