Interpreting Financial Statements to Build Trust among Stakeholders

The assignment content discusses the financial statements of Sainsbury's and performs ratio analysis to evaluate their financial performance. The ratios used include profitability, liquidity, efficiency, and solvency ratios. The results show that while Sainsbury's profitability increased in 2014, its liquidity position decreased. The company needs to control expenses and improve asset utilization. On the other hand, Sainsbury's solvency position is good, with a declining debt-to-equity ratio. Overall, the assignment highlights the importance of financial planning and analysis for businesses, including NGOs and institutions that work for the welfare of others.

MFRD
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Table of Contents
INTRODUCTION ...............................................................................................................................3
TASK 1.................................................................................................................................................3
1.1Identifying the sources of finance available to the business unit ..............................................3
1.2 Impact of varied sources of finance...........................................................................................4
1.3 Selection suitable sources of finance for business organization................................................4
2.1 Analyzing the cost of above sources of finance.........................................................................4
2.2 Stating the importance of financial planning ............................................................................4
2.3 Assessing the information needs of the internal and external decision makers.........................5
2.4 Describing the impact of sources of finance on financial statements .......................................6
3.1 Preparing and analyzing budget for the purpose of effective decision making ........................6
3.2 Stating the calculation of unit cost which helps in making pricing decisions...........................7
3.3 Use of investment appraisal technique in the selection of project ............................................7
TASK 4.................................................................................................................................................9
4.1 Presenting the main financial statements of the organization ...................................................9
4.2 Comparison of the format of the final accounts of different business unit ...............................9
4.3 Interpreting the financial statements of Sainsbury ................................................................10
CONCLUSION ..................................................................................................................................11
References..........................................................................................................................................12
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INTRODUCTION
In the present scenario, the need of finance and its management is continuously increasing.
Moreover, due to high competition it is vital for the business organization to take strategic move on
time. In this, finance manager has accountability to frame strong financial plan which facilitates
optimum use of the monetary resources to the large extent. Financial plan provides high level of
assistance in making control over the expenses. In this report government places emphasis on the
encouraging the small and business enterprise by offering the monetary support to them. The
present report will describe the cost and implication of the several internal and external sources of
finance. Further, it will also depicts the extent to which financial plan helps in getting the desired
outcome. It will also furnishes information regarding the financial health and performance of
Sainsbury via ratio analysis.
TASK 1
1.1Identifying the sources of finance available to the business unit
On the basis of the growth and success of food and restaurant entrepreneur has decided to
starting a new restaurant. As per the cited case scenario entrepreneur has only £20000 to invest in
the restaurant business. Moreover, business entity also requires £10000 for establishing a
restaurant. Thus, entrepreneur can undertake several internal and external sources of
finance which are available to him are as follows:
Internal sources
 Friends and family members (F&F): Finance can easily be raised by the
entrepreneur by taking money from the friend and family members.
 Sale of assets: Entrepreneur can start the new venture by selling the assets which
have no use for him (Anderson and Coleman, 2000). Through this, business entity
can fulfil its financial needs to the large extent.
External sources
 Bank loan: Business entity can fulfil their financial requirements by taking
monetary assistance from bank. Thus, by approaching bank for the loan on the basis
of collateral security entrepreneur can easily execute its business plan (Brigham and
Houston, 2009).
 Leasing: it is also the most effectual source which assists business entity in meeting
their financial need. Leasing offers opportunity to the entrepreneur to make use of
assets such as land for the predetermined time period on rental basis.
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1.2 Impact of varied sources of finance
Both the above mentioned sources of finance place varied impact on the profitability aspect
of XYZ restaurant. In loan, financial institution has right to cease the asset if business unit makes
default in the repayment of loan. Besides this, business entity is also obliged to make payment of
loan within the predetermined time frame. It is the highly suitable source which enhance the
profitability of firm by offering the tax advantages (Hayre, 2013). Whereas, in leasing business unit
has to make payment to the real owner of asset which also imposes cost in front of the restaurant.
Nevertheless, leasing give opportunity to make use of asset and return back it to the real owner if
they require asset for the limited time period. Along with the external, internal sources also place
high impact on the organization. When company sales their assets then it closely influence the
financial position of the firm. Further, in F&F restaurant requires to give shares and voting right to
the person from whom the financial assistance is taken by the business entity.
1.3 Selection suitable sources of finance for business organization
From the above mentioned internal and external sources XYZ restaurant needs to take
financial assistance from bank. This source of finance will offer high level of tax benefits to the
business entity. Besides this, in bank loan restaurant has to repay the amount in the periodical
instalments which also offers high level of convenience to the business organization. In addition to
this, bank loan also reduces financial burden of the business entity (Ismail and Mohsin, 2013). In
addition to this, business entity of XYZ can also take financial help from the friend and family
members. Moreover, people are ready to provide help to their loved ones. In return of the amount,
entrepreneur requires to give shares to the members of their friend & family. Thus, it can be said
that both the sources of finance helps entrepreneur in raising the fund at cost effective rates.
2.1 Analyzing the cost of above sources of finance
Sources of finance impose both financial and opportunity cost in front of XYZ restaurant. In
loan, restaurant needs to make payment of interest to the financial institution. Further, company
also has to make payment of loan in terms of instalments. This aspect clearly states that bank loan
imposes high monetary cost in front of the firm (Pike and Neale, 2006). Besides this, in F&F
assistance restaurant requires to give shares to them. In this condition, family members are able to
make inference in the decision making aspect of the firm because they have voting rights. In this,
business entity is not able to execute his financial plan in an appropriate manner. Thus, F&F source
impose opportunity cost on XYZ restaurant.
2.2 Stating the importance of financial planning
Financial planning may be served as a continuous process which helps business organization
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in investing money in the right direction. In the present scenario, corporation prefers to make
financial plan which facilitates optimum use of fund to the large extent. XYZ Ltd restaurant prepare
financial plan which helps them, in co-ordinating the activities of different departments namely
production, marketing etc. Further, by preparing financial plan manager can assess the fund which
they have for the related project (Rajasekaran, 2011). Besides this, it also provides deeper insight
about the fund which restaurant needs to raise from the other sources of finance. It is also the most
effectual tool which helps business organization in evaluating the success of their financial
strategies and policies. Thus, by comparing the actual performance with the standard one restaurant
can easily analyze the deviations which occur in their financial aspects. On the basis of this aspect,
business enterprise is become able to undertake the corrective measures within the suitable time
frame. Hence, it can be stated that financial planning helps business unit in achieving success in the
strategic business arena.
2.3 Assessing the information needs of the internal and external decision makers
Users of the final accounts who have different needs are enumerated below:
Internal users Owner and managers: Both the entities make use of all the financial statements to assess
the level to which business has attained success in achieving their goals. On the basis of this
aspect they can frame the policies which helps in improving their financial health and
performance.
 Employees: Personnel of the firm are usually concerned related to their job security and
growth if they work with the existing firm for the longer period. In order to satisfy this
information need employees of XYZ restaurant undertakes income statement. On the basis
of profitability aspects human resources can predict the fringe and other monetary benefits
which will be earned by them in the near future.
External users Shareholders: In order to develop the relationship between the risk and return investors do
ratio analysis by taking into consideration all the financial statements (Schroeder Clark and
Cathey, 2011). Ratio analysis technique provides assistance to the shareholders in making
effective decisions that whether they should make further investment in the securities or not.
 Financial institution: bank and other lending institutions make evaluation of balance sheet
to assess the extent to which restaurant is able to repay the loan amount within the suitable
timer frame. By taking into consideration this aspect bank can decide that whether they need
to grant more loan to the firm or not.
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2.4 Describing the impact of sources of finance on financial statements
Bank loan and financial assistance which are taken by the entrepreneur from the friends &
family members have varied impact on the financial statements of restaurant which are as follows:
Income statement
Particulars Amount ( £) Particulars Amount ( £)
Interest on loan xxx
Dividend to the
shareholders
xxx
Balance Sheet
Liabilities Amount ( £) Assets Amount ( £)
Shareholders equity xxx Cash (bank loan +
amount received from
friends & family)
xxx
Bank loan xxx
3.1 Preparing and analyzing budget for the purpose of effective decision making
Cash budget may be defined as a financial estimation which reflects the revenue which will
be generated by the restaurant during the period of 6 months (Zimmerman and Yahya-Zadeh, 2011).
In addition to this, it also presents the expenditure which firm needs to incur for performing the
business activities.
Cash budget of XYZ restaurant for the period of 6 months are as follows:
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The above mentioned cash budget shows that cash inflow of the restaurant is greater than the
outflow. Revenue of the firm is continuously increasing because large number of customers prefer
to make use of the dinning services of XYZ. In addition to this, material, labour and other expenses
are also increasing on a a continuous basis. Besides this, selling and distribution expenses of the
firm is also increasing. Thus, business unit needs to make control over their expenses which helps
them in enhance their profit. In this, finance manager needs to employ competent strategies which
makes contribution in the attainment of organizational goals and objectives.
3.2 Stating the calculation of unit cost which helps in making pricing decisions
Unit cost includes money which is incurred by the firm for manufacturing, promoting,
selling and distribution the per unit of the product or services (Malmi and Granlund, 2009). Thus, in
order to perform the business operations and functions XYZ restaurant has to incur several direct
and indirect expenditure. Direct cost refers to those which are closely associated with the
production or services such as raw material, labor etc. Besides this, indirect expenses include both
fixed and variable which business unit has to incur for performing the business activities such as
electricity, salary of the employees etc.
For instance: Direct cost = £15000
Indirect cost: Fixed cost = £8000
Variable cost = £7000
Total units = 200
Unit cost = Total cost / number of units
= 30000 / 200
` = £150
Price: Unit is the input which helps business organization in setting the suitable price for the
dinning services. Price includes the profit which restaurant wants to earn from each customers.
For instance: Restaurant wants to earn 20% profit from each customer by offering the dinning
facility to them.
Selling price (per unit) = cost + (cost * profit%)
= 150 +(150*20%)
= 150 +30
= £180
On the basis of this aspect it can be said that XYZ restaurant needs to charge £180 from per
customer to £30 as a profit.
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3.3 Use of investment appraisal technique in the selection of project
Investment appraisal techniques include payback, NPV, ARR and IRR method which helps
business unit is making most suitable business decisions (Investment appraisal techniques, 2016).
Manager of restaurant undertakes capital budgeting tools for the appraisal of two projects which are
available to them are as follows:
Payback period
Year Project A
Cumulative cash
inflow Project B
Cumulative
cash inflow
1 65000 65000 67000 67000
2 73000 138000 75000 142000
3 68000 206000 69000 211000
4 75000 281000 77000 288000
5 79000 360000 84000 372000
Project A: 2+ 12000 / 68000
= 2.18 years
Project B: 2+ 8000/69000
= 2.12years
Net present value, Average rate of return and internal rate of return
Year Project A
PV factor
@10%
Discounted
cash inflow
(DCF) Project B
PV factor
@10%
Discounted
cash inflow
Initial
investment 150000 150000
1 65000 0.909 59085 67000 0.909 60903
2 73000 0.826 60298 75000 0.826 61950
3 68000 0.751 51068 69000 0.751 51819
4 75000 0.683 51225 77000 0.683 52591
5 79000 0.621 49059 84000 0.621 52164
Total DCF 270735 279427
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NPV (DCF –
initial
investment) 120735 129427
ARR 47.37% 51.67%
IRR 37.16% 38.82%
On the basis of above mentioned analysis it has been identifying that manager XYZ
restaurant needs to choose project B over the project A. Moreover, restaurant will get back their
initial amount within the less time if they invest money in project B. Besides this, NPV, ARR and
IRR of the project B is also higher as compared to others. Thus, project will enhance the
profitability of the firm to the large extent.
TASK 4
4.1 Presenting the main financial statements of the organization
Every organization including Sainsbury plc prepares the following financial statements in
order to assess their monetary position and performance are as under:
Financial statements User and purpose of the statement Information
Profitability statement Finance manager of the firm makes
use of income statement with the aim
to assess the growth trend of profit
margin. By taking into account this
aspect manager can frame competent
framework for the near future.
This statements renders
information the profit which is
generated by the organization
over the expenses.
Cash flow statements Manager of Sainsbury undertakes cash
flow statements to assess their
liquidity aspects. On the basis of the
cash position finance personnel is
become able to make suitable
investment decision (Romano,
Tanewski and Smyrnios, 2001).
Cash flow statement contains
information about the operating,
investing and financing activities.
Balance sheet Board of directors make evaluation of
the financial statement to evaluate the
liquidity and solvency position of the
It serves information about the
fixed and current assets of the
business unit. Besides this,
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corporation. balance sheer also provides
information about the
shareholders equity as well as
long term and current liabilities.
4.2 Comparison of the format of the final accounts of different business unit
Structure, content and format of the financial statements of the different types of business of
business organizations vary in the following manner:
Sole trader or entrepreneur: The owner of individual business unit prepares profit & loss
account. Moreover, sole traders are highly concerned with the profitability aspects which is earned
by them during the accounting year. In this, income satisfied their needs to the full extent by
providing the information about income and expenditure.
Public and private Ltd organizations: Theses firms frame income and cash flow statement as
well as balance sheet to evaluate their profitability, liquidity & solvency aspect (Mangan, Hughes
and Slack, 2010). Sainsbury is also public limited organization who prepares and publish the
financial statements to build trust among the stakeholders.
Non-profit making firms: It includes NGO and other institutions who works for the welfare
of others. Thus, they only prepare receipt and payment account which gives information regarding
the financial activities of the institution.
4.3 Interpreting the financial statements of Sainsbury
Ratio analysis may be defined as a financial tool which helps in evaluating the annual
accounts of the firm in an effectual manner.
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Ratio analysis of Sainsbury for the period of 2013 and 2014 are enumerated below:
Profitability ratios: From ratio analysis it has been identifying that gross profitability was
inclined in the period of 2014 from 5.48% to 5.75%. Besides this, net profitability of Sainsbury
increased in 2014 as compared to 2013. Thus, it can be said that profitability aspect of the company
in continuously increasing which is good sign for the firm.
Liquidity ratios: Current and quick ratio of Sainsbury decreased in 2014 in comparison to
2013. Both the ratios are very far from the ideal ratio which shows that during the period of 2014
liquidity position of the company is not sound. Thus, business enterprise needs to exert control on
the expenses.
Efficiency ratios: Total asset turnover ratio of Sainsbury decreased in the year of 2014 from
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1.84 to 1.45. This aspect reflects that business organization fails to make optimum use of assets for
generating the sales. Further, inventory turnover ratio of the corporation also decreased. Thus,
Sainsbury needs to employ competent strategies which helps them in raising sales to the significant
level.
Solvency ratio: In 2013 debt equity ratio was .46:1, whereas in 2014 this ratio of the
declined such as .37:1. It reflects that Sainsbury had made redemption of debenture which may may
cause of decreasing liquidity in the year of 2014. Thus, it can be said that solvency position of the d
firm is good.
CONCLUSION
From this report, it can be concluded that XYZ restaurant needs to undertake both internal
and external sources to meet their financial requirements. Besides this, it can be inferred that
monetary planning aid in growth and profitability aspect of the firm to the great extent. It can be
articulated that capital budgeting tool and techniques provides high level of assistance in the
selection of suitable project. Further, it can be stated that profitability and solvency aspect of
Sainsbury is sound in the accounting year 2014 as compared to 2013. Thus, investors will get high
return by investing money in shares and securities of Sainsbury.
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