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Introduction

For this assignment, I have been asked to carry out an investigation into one medium-
sized or large business organisation. I will write an analytical report analysing &
evaluating the effects of financial information to make business decisions it has on the
short and long term on the organisation, which I have chosen. The organisation, which
I have decided to investigate, is Tesco PLC at Gillingham in Kent is because they
have a large set of financial data, especially because it is an established organisation,
which has been in its market for a long time. I will investigate the different procedures
Tesco operates and will give advice to Tesco on their financial future.

Tesco’s Background Information

The organisation that I am studying is TESCO PLC at Gillingham in Kent. Tesco is a

public limited company. There are very few companies in the world are as large as
Tesco. As the first company the name of Tesco, the use of the 1920's the middle of
this group has evolved in different arrangements, different sector and market.The
principal activity of the group is food retailing, with over 2,500 stores worldwide.
Tesco has a long-term strategy for growth, based on four key parts: growth in the
Core UK business, to expand by growing internationally, to be as strong in non-food
as in food and to follow customers into new retailing services.[9]

Tesco is a private sector business, and is owned as a PLC company (Public Limited
Company). PLC’s have Limited Liability, which means that they are no liable for
items such as a property and vehicle if the business goes bankrupt, only money that
has been put into the organization can be retained. A limited company is a separate
legal entity. Most large organizations are limited by shares and must include “limited”
or “plc” as appropriate in their name. A limited company is classes as private (LTD)
unless the association informs all included representatives that is a public limited
company (PLC). As Tesco is a Public Limited Company it can raise finances by
selling shares on the stock market. By ensuring that they are regenerated and there is a
certain level which remains in Tesco’s name. [8]
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Financial Statement of TESCO:

Tesco PLC has to deal with a lot of money coming in and out of the organisation. I'll
explain all the financial sources used by Tesco and find out how they are effective. It
is necessary to analyse the use of Tesco's finance and what they would do if they
collect more money to invest in shares or shops. [2]

Tesco PLC balance sheet-2008-2009

2009 2008
£m £m

Non-current assets 32,008 23,864

Current assets 14,045 6,300
Current liabilities 18,040 10,263
Net current liabilities 3,995 3,963
Total assets less current liabilities 28,013 19,901
Non-current liabilities 15,618 7,999
Net assets 12,995 11,902
Equity attributable to equity holders of the parent 12,938 11,815
Inventory 7,590 6,390
Minority interests 57 87
Total owner equity 12,995 11,902

[http://www.tescoplc.com/annualreport09/financialstatements/summary_financial_stat
ement/group_balance_sheet/]

Current Ratio: This ratio is obtained by dividing the 'Total Current Assets' of a
company by its 'Total Current Liabilities'. The ratio is regarded as a test of liquidity
for a company. It expresses the 'working capital' relationship of current assets
available to meet the company's current obligations.

The formula:
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Current Ratio = Total Current Assets/ Total Current Liabilities

Current Ratio = £m14,045 / £m3995

Current Ratio = 3.52

Quick Ratio: This ratio is obtained by dividing the 'Total Quick Assets' of a company
by its 'Total Current Liabilities'. Sometimes a company could be carrying heavy
inventory as part of its current assets, which might be obsolete or slow moving. Thus
eliminating inventory from current assets and then doing the liquidity test is measured
by this ratio. The ratio is regarded as an acid test of liquidity for a company. It
expresses the true 'working capital' relationship of its cash, accounts receivables,
prepaids and notes receivables available to meet the company's current obligations.

The formula:

Quick Ratio = Total Quick Assets/ Total Current Liabilities

Quick Assets = Total Current Assets (minus) Inventory

Quick Ratio = £m14,045- £m7,590 / £m3995

Quick Ratio = £m6455 / £m3995

Quick Ratio = 1.62

Debt to Equity Ratio: Total Liabilities or a risk alias net shareholder value" is the
percentage of companies. How about to measure the percentage of lump sum and
contractors of your loan. If the net worth of interest on the debt For owners part of the
plaintiff.

The formula:

Equity Ratio = Net Liabilities / total owners’ equity

Debt to Equity Ratio = £m28,013 / £m12995

Debt to Equity Ratio = 2.15

Tesco PLC

Income Statement-2008-2009
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2009 2008
£m £m
Continuing operations Revenue (sales excluding VAT) 54,327 47,298
Cost of sales (50,109) (43,668)
Gross profit (after interest or tax) 4,218 3,630
Administrative expenses (1,248) (1,027)
Profit arising on property-related items 236 188
Operating profit 3,206 2,791
Share of post-tax profits of joint ventures and associates 110 75
Finance income 116 187
Finance costs (478) (250)
Profit before tax 2,954 2,803
Taxation (788) (673)
Profit for the year 2,166 2,130
Equity holders of the parent 2,161 2,124
Minority interests 2,166 2,130

[http://www.tescoplc.com/annualreport09/financialstatements/summary_financial_stat
ement/summary_group_income_statement/]

Profitability ratio analysis:

Return on Sales or Profit Margin (%): The Profit Margin of a company determines
its ability to withstand competition and adverse conditions like rising costs, falling
prices or declining sales in the future. The ratio measures the percentage of profits
earned per dollar of sales and thus is a measure of efficiency of the company.

The formula:

Return on Sales or Profit Margin = (Net Profit / Net Sales) x 100

Total Net Profit after Interest and Taxes = £m4218

Net Sales = £m54327

Return on Sales = [ £m4218 / £m54327] x 100

Return on Sales or Profit Margin = 7.76%

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Return on Assets: Return on asset yield is determined by the enterprise actually used
to get a good return on utitize possible. Solvency measures the share of profit for
every dollar, and therefore its assets to produce profits, is a measure, it is possible for
the company.

The formula:

Return on Assets = (Net Profit / Total Assets) x 100

Total Net Profit after Interest and Taxes = £m4218

Total Assets = £m12995

Return on Assets = [ £m4218 / £m12995] x 100

Return on Assets = 32.4%

Return on Equity or Net Worth: The company is able to return on equity to owners
of investment rules to generate sufficient revenue measures. Normally, reimbursement
of 10% is desirable for the owners of capital would dividends of the company for
continued growth.

The formula:

Return on Equity or Net Worth = (Net Profit / Net Worth or Owners Equity) x 100

Net Worth or Owners Equity = Total Assets (minus) Total Liability

Total Net Profit after Interest and Taxes = £m3206

Net Worth = £m12995

Return on Net Worth = [ £m3206 / £m12995] x 100

Return on Equity or Return on Net Worth = 24.6%

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Efficiency Ratios:

Inventory Turnover ratio: The efficiency ratio is the percentage of the balance sheet
and profit and loss, and dynamic reports, receipts and a weakening of the declaration,
including the economy. Percentage of stock turnover, assets, debts or obligations, it is
important to evaluate the business potential.

The formula:

Inventory Turnover Ratio = Net Sales / Inventory

Net Sales = £m54327

Total Inventory = £m7590

Inventory Turnover Ratio = £m54327/ £m7590

Inventory Turnover = 7.15 times

[Q2] Variance analysis and performance evaluation:

Concrete results are the difference and the difference between the expected results.
The process by which the difference between the actual yield and quality of analysis
called analysis of the total variance. When the actual results better than expected, we
have a positive gap (F). If on the other hand, actual results are worse than expected
results, we need the bad (A).

Standard cost of Product £

Materials (5kgs x £10 per kg) 50
Labour (4hrs x £5 per hr) 20
Variable o/hds (4 hrs x £2 per hr) 8
Fixed o/hds (4 hrs x £6 per hr) 24
102
Budgeted results ACTUAL Results
Production: 1,200 units Production: 1,000 units
Sales: 1,000 units Sales: 900 units
Selling price: £150 per unit Materials: 4,850 kgs, £46,075
Labour: 4,200 hrs, £21,210
Variable o/hds: £9,450
Fixed o/hds: £25,000
Selling price: £140 per unit
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The sampling result of TESCO according to management

Variable cost variances

Direct material variances

The direct material total variance is the difference between what the output actually
cost and what it should have cost, in terms of material.

From the example above the material total variance is given by:

£
1,000 units should have cost (x £50) 50,000
But did cost 46,075
Direct material total variance 3, 925 (F)

It can be divided into two sub-variances

The direct material price variance

This is the difference between what the actual quantity of material used did cost and
what it should have cost.

£
4,850 kgs should have cost (x £10) 48,500
But did cost 46,075
Direct material price variance 2,425 (F)

The direct material usage variance

This is the difference between how much material should have been used for the
number of units actually produced and how much material was used, valued at
standard cost

1,000 units should have used (x 5 kgs) 5,000 kgs

But did use 4,850 kgs
Variance in kgs 150 kgs (F)
Valued at standard cost per kg x £10
Direct material usage variance in £1,500 (F)

The direct material price variance is calculated on material purchases in the period if
closing stocks of raw materials are valued at standard cost or material used if closing
stocks of raw materials are valued at actual cost.
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Direct labour total variance

The direct labour total variance is the difference between what the output should have
cost and what it did cost, in terms of labour.

£
1,000 units should have cost (x £20) 20,000
But did cost 21,210
Direct material price variance 1,210 (A)

Direct labour rate variance

This is the difference between what the actual number of hours worked should have
cost and what it did cost.

4200hrs should have cost (4200hrs x £5) £21000

But did cost £21210
Direct labour rate variance £210(A)

The direct labour efficiency variance

The is the difference between how many hours should have been worked for the
number of units actually produced and how many hours were worked, valued at the
standard rate per hour.

£
1,000 units should have taken (x 4 hrs) 4,000 hrs
But did take 4,200 hrs
Variance in hrs 200 hrs
Valued at standard rate per hour x £5
Direct labour efficiency variance £1,000 (A)

The variable production overhead efficiency variance

This is the same as the direct labour efficiency variance in hours, valued at the
variable production overhead rate per hour.

Labour efficiency variance in hours 200 hrs (A)

Valued @ standard rate per hour x £2
Variable production o/hd efficiency variance £400 (A)

[Q3] Activity based costing system:

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Activity costs and the cost method for other strategic decisions that managers' ability
to provide information to allocate the costs they are intended. reports on the cost of
operation of special treatment applies to the manufacturing costs. This system usually
costs more often used to complement the company. system of public disclosure of the
costs of external and internal decision-making and management, which are used in
activities that are used is based on the cost of production - Tesco ABC system costs as
well as systems.

Traditional systems of cost accounting, pricing and the target generally accepted
accounting principles (GAAP) in accordance with external financial reports of the
sale of goods. Researcher used for cost and profitability of products and customers to
understand and manage air base. With different objectives that are "best practice"
systems activity cost accounting differs from the traditional in many respects.
In activity based costing:

• A non-construction and function. Some production costs, production costs are

needed.
• Overheads used in many swimming pools, all costs of goods and other items
used to work in their own way to allocate.
• Allocation bases often differ from those used in traditional systems cost.
• Cost rate or rates of the company's performance on the level of financial
activity.

Departmental Overhead Rates:

Otherwise, the predetermined overhead, many companies, a system where each

department indirect costs themselves (pre overhead) was created. Type of work done
in each department of the Ministry to decide who will form the basis for the form of
grant. For example, the department overall processing cost in terms of hours devoted
to the machine in the department to allocate. Conversely, the collection of direct fixed
costs per unit of additional work by the department to allocate.

For example, the highly competitive industry, providing Tesco Stores. Following the
ABC study, Tesco executives knew the company in direct labor to produce more of
existing products more time to devote to the introduction of new products. product
development costs and address, up to 10% of the cost of direct labor only 9%. Of
course, the last direct labor costs in the system focus is on the labor market lower
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direct cost. Product development and overhead costs applied to host launch products
based on direct labor rates are mixed. Tesco executives have begun to direct
production of major attacks have a chance to reduce costs.

Advantages of Activity Based Costing System:

To introduce the activity based Costing System we will get the following system:

1. More accurate costing of products/services, customers, SKUs, distribution

channels.
2. Better understanding overhead.
3. Easier to understand for everyone.
4. Utilizes unit cost rather than just total cost.
5. Integrates well with Six Sigma and other continuous improvement programs.

[Q4] Zero based budgeting:

The term ‘zero based budgeting’ is sometimes used in the personal finance to describe
the practice of budgeting every dollar of income received, and then adjusting some
part of the budget downward for every other part that needs to be adjusted upward’

Zero Based Budgeting is a technique that sets all budgets to nil at the beginning of the
year or period and requires from the departments that they justify all of their
expenditures, not just those exceeding the budget. Money is allocated to the
departments based on merit and not based on the previous year budget plus or minus
some percentage such as in many traditional budgeting systems.

Aim of Zero base budgeting:

Its aim is to achieve is an optimal allocation of resources that incremental and other
budgeting systems cannot achieve. Managers are asked to identify and justify their
areas of work in terms of decision packages prior to starting the work.

The batter approach of zero based budgeting than conventional budgeting:

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Zero-based budgeting is cost in terms of managerial time; it takes a considerable

amount of time to go through the process of reviewing operations in enough detail to
justify costs each budget cycle without relying on past expenditures.
For the following ways it is better than conventional budgeting:
• The huge amount of work involved.
• May lead to micro management, offering less time and energy for the things
that really matter.
• Difficult to define decision units and decision packages, as it is time-
consuming and exhaustive.
• Forced to justify every detail related to expenditure. The R&D department is
threatened whereas the production department benefits.
• Necessary to train managers. Zero-based budgeting must be clearly understood
by managers at various levels to be successfully implemented. Difficult to
administer and communicate the budgeting because more managers are
involved in the process.
• In a large organization, the volume of forms may be so large that no one
person could read it all. Compressing the information down to a usable size
might remove critically important details.
• Honesty of the managers must be reliable and uniform. Any manager that
exaggerates skews the results.

Conclusion:

To help me analyse the financial analysis I have referred to financial reports of Tesco
plc. More specifically I have looked at their group balance sheet, cash flow statement
and profit and loss account. I have aimed to look firstly at who the “wide range of
users” of the information are and from there I can judge their information needs.
After this I have looked at how well these accounts of Tesco plc report of the financial
performance and position for each of the different users and then finally I have
concluded my findings.
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The financial reports themselves may not provide key performance ratios such as
Gearing ratios, Return on Capital Employed, Acid test, Net profit Margin etc,
however these can all be worked out from the figures within the reports, so
stewardship of the entity’s management could be assessed for making economic
decisions quite easily.

Overall I believe Tesco’s financial reports to provide suitably detailed information for
a wide range of users to assess the stewardship and make economic decisions from it,
therefore I believe Tesco’s financial reports to very adequately meet the objective
outline at the start.

References:

[1] Bender. R and Ward. K, (1993). Corporate Financial Strategy. Oxford.

[2] Brealy.et al, (2004). Fundamentals of Corporate Finance. McGraw-Hill.

[3] Cole. B, (2002). Managing Financial Resources, Kingston University.

[4] Ellis. J and Williams. D, (1993). Corporate Strategy and Financial analysis,
London.

[5] Ogier. et al, (2004). The Real Cost of Capital. Prentice Hall, London.

[6] Weston. F and Copeland. Thomas. (1979). Managerial Finance. CBS College,
New York.

[7] Hubbard, Douglas (2009). The Failure of Risk Management: Why It's
Broken and How to Fix It. John Wiley & Sons. p. 46.
[8] ISO/IEC Guide 73:2009 (2009). Risk management — Vocabulary.
International Organization
for Standardization.
http://www.iso.org/iso/iso_catalogue/catalogue_ics/catalogue_detail_ics.htm?
csnumber=44651.

[9] ISO/DIS 31000 (2009). Risk management — Principles and guidelines on

implementation.