Research Paper on "Managing Accounting of Tesco"

Research Paper 7 pages (2647 words) Sources: 10

[EXCERPT] . . . .

71

CR = 13,081/17,595

= 0.74

Quick Ratio

(Current Assets -- Inventory) / Current Liabilities)

QR = (11,392-2,729)/16,015

= 0.54

QR = (13,081-2,669)/17,595

= 0.59

Current Ratio is a representation of the organization's capability to meet creditor's demands by offsetting accumulated debts. The table shows that Tesco's CR is 0.71 meaning that for every $1 the firm owes its creditors, it has to repay $0.71. On the other hand, Quick Ratio (QR) is company's ability to clear its current liabilities. Tesco's QR as outlined above is 0.54 meaning the firm is capable of paying off 54% of its current liabilities. In this case, Tesco's assets have gradually risen just like the liabilities. According to this, the company's current assets are incapable of meeting short-term liabilities and the debt / capital ratio stands at 40.24%.

Efficiency Ratios

Ratio

Tesco (£ million)

2009-2010

2008-2009

Net Asset Turnover

(Sales/Net Assets)

NAT = 56,910/14,681

= 3.88

NAT = 53,898/12,906

= 4.18

Net Operating Asset Turnover

(Sales/Capital Employed)

CE = (34,258+11,765) -- (16,015)

= 30,008

NOAT = 56,910/30,008

= 1.90

CE = (32,085+13,479) -- (17,595)

= 27,969

NOAT = 53,898/27,969

= 1.93

Receivables collection period

(Receivables / Sales) * 365

RCP = (1,888/56,910) * 365

= 12.11 days

RCP = (1,820/53,898) * 365

= 12.33 days

Payables Payment period

(Payables / Cost of sales) * 365

PPP = (9,442/52,303) * 365

= 65.9 days

PPP = (8665/49,713) * 365

= 63.62 days

Inventory Holding period

(Inventory / Cost of sales) * 365

IHP = (2,729/52,303) * 365

= 19.05 days

IHP = (2,669/49,713) * 365

= 19.6 days

The Receivables Collection Period (RCP) of Tesco is 12.11 days. In this regard, the time Tesco's customer's take to pay for their services is slightly higher. In addition, Tesco's Payables Payment Period (PPP) is given as 66 days in 2010. This high PPP is good for the company but the firm has to ensure the relationships with suppliers are not put to test. As is the case with Tesco, wrangles with suppliers may occur since Tesco takes more than 2 months to pay them (Potter, 2011). Moreover, the Inventory Holding Period of Tesco is low and efficient at only 19 days. This shows that Tesco only keeps stock for 19 days efficiently rotating accumulated inventory.

Operating Profit and Net Cash Balance

£ million

£ million

Operating Profit

3,457

Net effect of Others including decrease in loans, increase in working capital

1,106

Depreciation and amortisation

1,384

Income from continuing operations after tax

5,947

Interest Paid

(690)

Corporation Tax

(512)

Net cash from operating activities

4,745

Net cash used in financial activities

(3,607)

Net cash used in investing activities

(1,877)

Effect of exchange rates on cash and equivalents

49

Net increase (decrease) in cash and equivalents

4,745 -- 3,607 -- 1,877 + 49

= (690)

Cash and equivalents at beginning of year

3,509

Cash and equivalents at end of year

2,819

Tesco's 2010 operating profit is £3.457 billion, which is £300 million more than during 2009. In line with this, the firm could have had higher operating profit if it efficiently minimized the cost of sales. Tesco's cost of sales increased by £2.26 billion while sales revenue increased by £3.01 billion. In addition, the company's cash reserve dropped by £690 million following adjustments of exchange rates (Tesco PLC, 2010). Furthermore, the firm paid £900 million more than in 2009 to settle borrowings. Besides, Tesco invested approximately £700 million more in short-term investments than in 2009 and sold £1.820 billion worth of property, plant and equipment in 2010, a substantial increase from 2009. The increased operating profit attracted more investors into the company while the repayment of short-term borrowings augured well with the firm's lenders. Outlined below is Tesco's turnover from the year 2007 through 2010 which stakeholders may also critically analyze.

Turnover (£m)

Profit before tax (£m)

Profit for year (£m)

Earnings per Share

27 February 2010

62,537

3,176

2,336

31.66

28 February 2009

54,300

3,128

2,166

28.92

23 February 2008

47,298

2,803

2,130

26.95

24 February 2007

46,600

2,653

1,899

22.36

The firm's dividends per share are steadily increasing from 2007 and are expected to increase to higher values. In line with this, the firm proposed increase in diluted earnings per share. Therefore, investors are assured of higher dividends given the company's increasing income. Based on current fiscal indicators, dividend payments by Tesco are improbable to fall in coming years.

Morrisons

Capital Expenditure

During the year ended 2009, Morrisons capital expenditure peaked at £592 million. In this, the company invested in more stores but it was low due to tight cost controls. Besides, the firm initiated 15 new stores, extended 15 stores and refurbished about 12 stores.

At 31 January 2010

New stores

Store extensions

At 30 January 2011

Total number of trading stores

14

Total area in square feet ('000)

11,867

69

12,261

Number of petrol filling stations

3

In addition, during this time, the company acquired a vegetable facility and a cooked-meat production plant. Both acquisitions were taken as 100% subsidiaries for accounting purposes, creating £7m of goodwill. Moreover, the cash outflow and acquired debt was £3m and £4m respectively, with a deferred payment in 2013 of up to £13m (Morrisons Supermarket PLC, 2011). Based on these results, Morrisons has attracted more potential investors and employees are satisfied with their input in the company.

Liquidity Ratios

2008

2009

2010

Morrison

Liquidity Ratios

Current Ratio

0.49

0.53

0.51

Acid test Ratio

0.25

0.28

0.24

Morrisons' current ratio has been gradually rising from 2008 to 2010. According to the current ratio, Morrisons is able to pay its short-term liabilities from its short-term assets. Additionally, the firm operates entirely on cash and carry business approach and adopts aggressive selling approach therefore little inventory is left-over. The dwindling acid test ratio is linked to increasing financial liabilities from £1 m in 2009 to £213 m in 2010. This increase in bank lending was due to extensive expanding strategy of Morrison by opening 19 new stores in the 2010.

Profitability Ratios

2008

2009

2010

Morrison

Profitability Ratios

Return on capital employed (ROCE)

13.98%

14.85%

18.33%

Gross Profit Margin

6.31%

6.28%

6.89%

Net Profit Margin

4.72%

4.62%

5.89%

The firm's ROCE has increased from 2008 to 2010 from 13.98% to 18.33%. The ROCE indicates the percentage of profit made on capital invested; hence a higher value of ROCE indicates efficient use of capital (Morrisons Supermarkets PLC, 2012). Morrisons improving ROCE is good for both existing and potential shareholders. On the other hand, the gross profit margin has been on a smooth climb over time. This is an indicator the firm adopted strict cost control mechanism, while maintaining profitability altogether.

Efficiency Ratios

2008

2009

2010

Morrison

Efficiency Ratios

Receivable turnover (times)

65.17

59.30

76.67

Receivable collection period (days)

5.60

6.16

4.76

Inventory turnover times

29.34

29.41

26.71… READ MORE

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