Essay on "Financial and Management Accounting"

Essay 5 pages (1399 words) Sources: 1

[EXCERPT] . . . .

Tesco Financial Statements

Financial statements like the ones Tesco publishes in its annual report are provided by companies to the public and to regulators by law. There are four main financial statements, and each one serves a unique purpose. Understanding how to read financial statements will allow anybody to understand a firm's financial position. The Securities and Exchange Commission (SEC) in the U.S. has published a guide to reading financial statements that outlines some of the basics.

There are three main financial statements produced by Tesco: the group income statement, the group balance sheet and the group cash flow statement. These three statements discuss the company's revenue and earnings, its assets and liabilities and the organization's cash position.

For publicly traded companies -- companies traded on stock exchanges -- the financial statements must meet a certain format. In the UK, this format is governed by the Generally Accepted Accounting Principles (GAAP), although there is a transition underway to move towards the International Financial Reporting Standards in use already in over 100 countries (Grant Thornton, 2011). The use of accounting standards means that financial statements for public companies are produced according to the same rules. This allows investors, creditors and other stakeholders to be able to analyze the statements both in context of the firm's past statements but also against other firms as well. This consistency allows for better information to investors, which in turn encourages more robust capital markets.

Internal stakeholders like customers and staff have less use for the financial statements, but there are instances where they can be affected by financial statements. For example, they can gauge the direction o the company, and the financial statements play a role in building transparency so as to avoid accounting scandals. Some staff may receive stock options as part of their pay packet, or may have company stock in their retirement portfolios. In such situations, the financial statements are valuable, as are the financial summaries that the company publishes on its website. The information in the financial statements can help explain the stock price, something that is important for all stakeholders.

Investors need the statements in order to make good investment decisions. In order to make these decisions, they need information about the firm regarding its liquidity, gearing, margins and other aspects of the firm's finances. For the investor, a rigorous breakdown of the financial statements is required, because investors are often seeking companies with strong operating performance in order to make good investment decisions. This can be contrasted, however, with the efficient market hypothesis that states all publicly available information has already been incorporated into stock prices (Investopedia, 2011). If this is true, then investors may not find the financial statements to be as useful, as they are just historical records documenting past performance.

Tesco's financial statements are produced according to GAAP. This means that these statements are useful to investors and other stakeholders. The financial statements are reliable, with the information used to produce those statements consistent with past statements and compiled according to British law. Each of the three statements can also be compared to the statements from Tesco's publicly-traded competitors. In addition to the statements, there is a wealth of information provided in the notes that accompany the statements. Indeed, it may be difficult to properly evaluate the firm's financial position without reading the notes to the statements.

On Tesco's annual report website, it also provides information beyond the financial statements. The company provides financial highlights, which are essentially the headline numbers for the company. These are not meant for serious analysis, but rather just to give a quick overview for those stakeholders who are not interested in reading the full financial statements. The company provides some key metrics that it uses to measure its results, and also a five-year summary as another format for the most important data points.

The statement of income provides information on the company's revenues, costs and income. If one were to analyze the financial statements, then there is plenty of information contained in the income statement to help learn about the company. One would normally look for trends in the figures. There are different ways to analyze an income statement,… READ MORE

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