2016

Business Accounting

Created By- Fahmid Anam Chowdhury

Tesco PLC| London School of Commerce

Page No. TABLE OF CONTENTS

2 Introduction

3 Company Overview

5 The Three major

financial statements

7 The Five non-

management external
users

Qualitative
11 characteristics of
accounting
information

13 Conclusion

14 Reference List

16 Appendix

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 INTRODUCTION
The whole report is mainly about relating the financial information with
the needs of five non-management external users. Financial accounting
is specialized in keeping record of financial transactions of a company,
using accounting guidelines established globally. Recording of
transaction, summarizing and presenting this report in financial
statement such as statement of comprehensive income and statement
of financial position which is balance sheet. Financial reports are
established yearly, these reports are created in a purpose to provide
outside people of the company so that they may interpret and take
decisions according to the report. These reports are required to be
prepared accordance with (IASB) and (IFRS).

Scope: Almost every research has some drawbacks that make work
complex and critical to complete it. Information’s are extended that
determines the level of scope and in this research qualitative
information’s are rarely available.

Methodology: It is a system of study or activity that is used in a

particular area. In here we are going to deal with the five non-
management external users that require financial report so to meet
their needs and uses. These are secondary sources of information
which are extracted from secondary data.

Purpose: The purpose of financial statement is to provide information

about the financial changes that take place in a trading year. This
information’s are created so that outside management may observe
and interpret them. The purpose of financial statement is also to make
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decisions regarding the allocation of resources and to predict the funds
that can be utilized in the future.

Aim: The basic aim of financial statement is to assist in their decisions

by providing them similar and efficient financial information. This
report targets to identify the needs of the five external users.

COMPANY OVERVIEW

Tesco PLC is one of the most reputed and perhaps the biggest British
multinational retailers established in England, UK. It is the third largest
retailer in the world after Wal-Mart in terms of profit and the fifth
largest in the world in terms of its revenues. Tesco’s turnover for the
year 2006 was £42.6 billion. Tesco has stores in more than 14 countries.
Over 30% of the grocery market in the UK is controlled by Tesco. Tesco

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almost sells everything including books, flowers, household appliances,
household tools ETC. Tesco makes huge profit from their online sales
site Tesco.com. Tesco had launched their first online grocery store in
Central Europe, also launched Everyday Value Range which is basically
focused on three major areas, quality, hygienic products and better
packaging which will help the customers to use the products easily.

Tesco started life in 1919 when Jack Cohen the founder of Tesco started
selling surplus goods from a small stall in London. Mr. Cohen made a
profit of £1 from sales of £4 on his first day. In 1924 the name Tesco
first appeared and the first store was opened in 1931. Mr. Cohen’s
business rapidly expanded and has over 100 stores throughout the
country.

Tesco has divided their market area into four different categories and
they are Tesco Metro, Express, Extra and Superstore. The company’s
main motive is to increase the number of customers, providing hygienic
food so that their customers stay healthy and reducing the wastage of
food.

The company is related with Retailing, Banking and Financial services.

They also own petrol stations which are under the Tesco Express and
provides insurance and general insurance like home, car, loans, and
many more.

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 The Three Major Financial Statements
Income Statement: The income statement is one of the major
financial statements worked by the entrepreneurs and accountants.
Income statement is also referred as profit and loss account by which
owners can assess their company’s financial position and performance.
The income statement is also important for the shareholders and the
investors because it shows the profitability of the company through
which the shareholders can decide whether they will keep the
company’s shares or not and the investors will further invest on the
company or not. Bankers, creditors and lenders also pay attention on a
company’s financial statement for many reasons. For example, if a
reputed company like Tesco is not able to make profit than the bankers,
creditors and the lenders will hesitate to provide more credit to the
company but if Tesco is able to make profit than the company can
utilize the borrowed funds in a prosperous manner, however the
bankers, creditors and lenders will also further lend them. Tesco PLC
revenue fell from £56.93 billion to £54.43 billion, though they managed
to overcome their loss and grew net income from £5.74 billion loss to a
gain of £138.00 million. Below figure 1 is the Tesco’s annual income
statement.

Balance Sheet: Balance sheet also known as Statement of financial

position is one of the major financial statements worked by the
entrepreneurs and accountants. Balance sheets most common use is
for ratio analysis and to diagnose the liquidity of the business. Balance
sheet is also important for the bank, investors and creditors to know
the financial position of the business at the moment. The balance sheet
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is very valuable to the bankers and creditors because they can
determine whether or not to addition the credit and loan on the basis
of the income and the performance of the company. It is also very
valuable for the investors because on the basis of the company’s
financial position investors can invest more to get a good amount in
return. For example, Tesco is the largest retailer in the world for which
they are earning in billions and their financial position is so good that
the investors try to invest more, the bankers and the creditors extends
the loan and provides additional credit to them. In 2016 Tesco PLC has
a debt to total capital ratio of 70.54%, lower than the previous year.
Below figure 2 is the Tesco’s annual statement of financial position.

Cash flow Statement: One of the major financial statements is the

statement of cash flow. This statement provides data regarding all the
cash inflows and outflows of a company. The cash flow statement
informs how much cash was generated and used during a specific time
for example, for the six months ended December 31, 2014. There are
four sets of activities in the cash flow statement that reports how much
cash is generated. They are operating activities, investing activities,
financial activities and supplemental information. Operating activities
are those activities that convert items mentioned on the income
statement from the accruals to cash. Investing activities are those
activities that consist of selling and buying of long-term assets. Financial
activities are those activities that allow a firm to raise capital and repay
investors by issuing stocks or issuing dividends. Lastly supplemental
information reports about all the tradable items that did not involve
cash and the tax paid. Tesco PLC increased its cash reserves by £908.00
million in 2016 and then the company earned £2.13 billion from its
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operations. The company also paid £604.00 million in financing cash
flows and used £615.00 million on investments. Below figure 3 is the
Tesco’s annual statement of cash flow.

The Five Non-Management External Users

The Government: A government is a system where a group of people
controls a state or community. They set and regulate public policy and
exercises sovereign and political powers through customs,
establishments and laws inside a state. Government can be arranged
into many sorts: Democracy, aristocracy, monarchy, republic and
dictatorship. State government look at the financial statements to
examine and analyze the performance of companies such as Wal-Mart,
so that they can plan their financial and industrial policies. Government
is involved with every company whether it’s a public limited company
or a private limited company. Therefore they also set rules and
regulations which every company should follow. A reputed company
like Wal-Mart has to follow all the rules and regulations that are set by
the government, for example: a company like Tesco cannot have the
possession or consumption of alcohol or illegal drugs on the company
premises or on the company website unless the government permits
them to.

Another policy of the government is the Income tax where they

calculate the tax according to the company’s income. Income tax is
represented under the balance sheet method. Taxes are not meant to
finance the government expenses rather it helps in maintaining the

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economic distributions. Tesco pays taxes every year as the government
calculates on the basis of their income. Tesco PLC income tax for 2016
is £54 million and their effective tax rate is 33.2%. Deferred tax asset is
an accounting term that represents a situation where a business has
over paid taxes on the balance sheet. The retained taxes are ultimately
returned to the business in the form of over-payment which therefore
is an asset for the company; however when the business will no longer
have available fund on hand, the business can take it from the retained
taxes. The deferred taxes in Tesco’s balance sheet do not include any
deferred long term liability but their deferred income tax for this year is
£135 million. Figure 4 is the Tesco’s annual income tax and the deferred
tax rate.

The Customer: A customer is an individual who purchases the goods

or services produced by the business. Every businesses primary goal is
to attract the customers upon their products because it is the
customers who creates the demand for goods and services as well as
makes it possible to achieve business aims. Customer satisfaction is an
important role within the business because it is the indicator to
measure the increase or decrease in revenue of the business.

Customers use financial statements to see whether the suppliers have

the available resources to make sure that the supply of goods in the
future is stable. Customer’s interest are those relating to the prices
used by the company, the possibility to get after-sale services (such as
repairing), the possibility to get some price reductions, the maximum
amount of commercial loans received etc.

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Customers want Tesco to provide them better goods and services and
at the same time produce higher quality products so that the customers
get to know they are spending in the proper place. Tesco’s main motive
is to value their customers and offer customized services. However
customers can also be shareholders if Tesco provides ordinary shares
and earning per share with better amounts implemented on it.

Creditors (Trade Payables): Creditors are those who own money

from the business to its suppliers. Creditor plays important role in
providing supplies to Tesco, such as credit supplies, loans and owing
that Tesco requires during their period of trading. Financial report of
Tesco needs to be updated each year so that creditors may interpret
and take decisions of providing further credit supplies to Tesco. In here
creditors need to assume the financial condition of Tesco so to provide
potential possibilities of providing more credits, Tesco’s liquidity needs
to be observed so that their capability of paying debts can be disclosed
to the creditors. In 2016 Tesco’s trade payables is £8,568 million and
the previous year’s trade payables was £9,922 million.

The Shareholders: A shareholder is any person, institute or a

company where they own at least one share of the company’s stock.
The shareholders are the company’s owner because they invest time
and money in the company to help make the company bigger.
Shareholders are legally separate from the corporation and they are
generally not liable for the company’s debts. Shareholders do not own
any of the company’s assets they just invest to get a higher dividend.
Shareholders can sell their shares to someone else whenever they want
to. Tesco will be a good example for the shareholders because a

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company like Tesco has higher revenue so the shareholders will
definitely invest on the company because the last annual dividend
Tesco provided to their shareholders was £10.13 (pence per share).

Suppliers: A supplier is a person who supplies goods and services to an

organization. A supplier is usually a manufacturer or a distributor. A
supplier manufactures goods from the company and sells them to the
customers. Suppliers can be helpful in generating revenues of the
company and providing better quality products to the customers.
Suppliers would look into the cash flow statement of Tesco in order to
check if there are any liquidity problems. They will look at the
company’s 2015 total cash from operating activities which is €484
million as well as they will check the total cash from financing activities
which is €814 million.

Qualitative Characteristics of Accounting

Information
Relevance: Information of financial statement must be relevant to its

users in order to make decisions. Relevance Is generated mainly by

using four items which indicates to predictive and confirmed value but
it also have some limitations as sometimes financial information is
already accessed by the users.

Faithful Representation: It states that financial reports must be

complete, neutral and free of errors. Faithful representation is often
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measured by the uses of five items that includes neutrality, fulfillers,
free of errors and verifiable. It has some disadvantages as it isn’t
possible to measure faithful representation by only using the financial
report.

Understandability: It means the information in the financial report is

organized, specified and represented vividly. It is when the users are
able to understand the information that is represented in the financial
statement regarding its quality.

Comparability: It indicates to the quality of information which

enables users to see the similarities and differences at various times. It
is also known to be consistent. Consistency refers using the same
accounting terms at different times in an organization.

Timeliness: It states that information must be available to the users

before its ability to change decisions disappears. It is usually the time
taken to represent information and is also related to useful decisions.

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 Conclusion
The above report identifies the company overview and the three major
financial statements that have been linked with the Tesco PLC Company
as well as the five non-management external users are elaborated and
have been linked with the company. Finally qualitative characteristics
have also been described widely through linking with the Tesco PLC
Company. Therefore I hope that this report of Tesco PLC Company will
be applicable for the external users.

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 Reference List
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http://www.businessdictionary.com/definition/govern
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Available at:
http://accounting-simplified.com/purpose-of-financial-
statements.html Accessed at: 11.12.2016
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https://www.quora.com/Why-are-taxes-necessary
Accessed at: 12.12.2016
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Accessed at: 12.12.2016
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marketing-22741.html Accessed at: 12.12.2016
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Available at:
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statement/explanation Accessed at: 12.12.2016

9. Investopedia ‘Deferred tax’ Available at:

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 http://www.investopedia.com/terms/d/
deferredtaxasset.asp Accessed at: 12.12.2016
10. Accounting Coach ‘Introduction to balance sheet’
Available at:
http://www.accountingcoach.com/balance-sheet/expl
anation Accessed at: 14.12.2016
11. Accounting Coach ‘Introduction to cash flow’
Available at: http://www.accountingcoach.com/cash-
flow-statement/explanation Accessed at: 14.12.2016
12. Tesco ‘Annual report’ Available at:
https://www.tescoplc.com/media/264194/annual-
report-2016.pdf Accessed at: 14.12.2016
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https://uk.finance.yahoo.com/q/is?s=TSCO.L Accessed
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Accessed at: 15.12.2016
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Accessed at: 15.12.2016
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https://www.tescoplc.com/about-us/how-we-do-
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http://studymoose.com/stakeholders-of-tesco-essay
Accessed at: 16.12.2016

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18. Academia ‘Stakeholders at Tesco’ Available at:
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http://www.investopedia.com/terms/s/shareholder.as
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20. The telegraph ‘History of Tesco’ Available at:
http://www.telegraph.co.uk/finance/markets/2788089
/A-history-of-Tesco-The-rise-of-Britains-biggest-
supermarket.html Accessed at: 17.12.2016
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http://uk.reuters.com/business/quotes/companyProfil
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Financial-Analysis Accessed at: 18.12.2016

Appendix

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Figure 1 is Tesco’s annual Income Statement report

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Figure 2 is Tesco’s annual Statement of financial position report

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Figure 3 is Tesco’s annual Statement of cash flow report

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