Fundamentals of Management Accounting Financial Modelling

Question: Describe about the Fundamentals Of Management Accounting for Financial Modelling? Answer: Introduction The financial statement represents the actual financial position of the company. The main objective of the financial statement is to provide the required information to the decision makers. The users of the information can be divided into two categories as per their status in the company like internal users and external users. The internal users are the managers, employees, and the shareholders. On the other hand, the external users are the lenders, suppliers customers and the most important is the government. Here more emphasis is given to the six main users but there are certainly some other users who are using this information. Here two companies are selected the Tesco Plc and the Sainsbury Plc. Both are belonging to the retail sectors and listed on the London Stock Exchange. The main objective of conducting this study is to make a detailed analysis of the financial statement of both the companies and to understand how the financial statement is helping the users to take their in vestment decisions (Lunt, 2008). Company Overview Sainsbury Plc was introduced in the year 1869. It is one of the renowned companies belonging to the retail industry. This company is now operating almost 12000 supermarket and convenience store. They have employed almost 161000 people who are doing their job on behalf of the company. They provide the best possible service to all the retailers in the same category. Some of their competitors are Carrefour and Wal-Mart, etc. They provide an exclusive collection of their brands and ensure a better customer satisfaction (McLeod, MacDonell Doolin, 2007) (Tesco plc, 2013). Tesco is one of the largest retailers in the world. The company was incorporated in the year 1919 and founded by Jack Cohen in a small market in London. The company is having a large collection of women wear and accessories. As the time goes, the company is growing and at present they are operating almost 12 countries in the world. They recruit almost 530000 people and serve more than millions of customers in a week. (Lynch Gregor, 2004) : (Annualreports.com, 2014) Usefulness of financial information The financial analysis of a company cannot be conducted only by watching the financial statements. So before going to the detail discussion some relevant information is extracted from the annual reports and calculations of ratios is made for both the companies ( Robinson, T. 2012). The useful ratios are presented below: Ratio analysis Sainsbury plc Tesco plc 2014 2013 2012 2014 2013 2012 Liquidity Ratios Current assets 1612 1677 1572 13085 12465 12353 Current liabilities 4847 4667 4651 20206 18703 19180 Current Ratio 0.332576852 0.35933148 0.337992 0.64758 0.666471 0.644056 Quick assets 1612 1677 1572 9509 8721 8755 Quick Liabilities 4847 4667 4651 20206 18703 19180 Quick Ratio 0.332576852 0.35933148 0.337992 0.470603 0.466289 0.456465 Efficiency ratio Receivables 1428 1254 1099 2190 2525 2657 Revenue 23949 23303 22294 63557 63406 64539 Receivable turnover 16.7710084 18.5829346 20.28571 29.02146 25.11129 24.29018 Receivable collection period 21.76374796 19.641677 17.99296 12.5769 14.5353 15.02665 payables 4457 4571 4494 10595 11094 11234 Cost of goods sold 22562 22026 21083 59547 59252 59278 Payable payment turnover 5.062149428 4.81863925 4.691366 5.620293 5.340905 5.27666 Payable payment period 72.10375853 75.7475257 77.80249 64.94324 68.34048 69.17254 EBIT 924 804 823 2337 2134 3949 Interest 26 32 35 78 82 114 Interest Coverage Ratio 35.53846154 25.125 23.51429 29.96154 26.02439 34.64035 Equity 4369 4259 4233 14722 16661 16623 Total asset 10485 10441 10342 50164 50129 50781 Equity Gearing ratio 0.41669051 0.40791112 0.409302 0.293477 0.332363 0.327347 Total asset 10485 10441 10342 50164 50129 50781 Revenue 23949 23303 22294 63557 63406 64539 Asset Turnover Ratio 2.284120172 2.23187434 2.155676 1.266984 1.264857 1.270928 Debt 388 89 338 2009 887 1966 Equity 4369 4259 4233 14722 16661 16623 Debt Equity ratio 0.088807507 0.02089692 0.079849 0.136462 0.053238 0.11827 Profitability Ratios Gross Profit 1387 1277 1211 4010 4154 5261 Revenue 23494 23303 22294 63557 63406 64539 Gross profit ratio 5.9% 5.5% 5.4% 6.3% 6.6% 8.2% Operating profit 1009 882 874 2631 2382 3985 Revenue 23949 23303 22294 63557 63406 64539 Operating Profit Ratio 4.2% 3.8% 3.9% 4.1% 3.8% 6.2% Net Profit 716 602 598 970 24 2814 Revenue 23949 23303 22294 63557 63406 64539 Net Profit Ratio 3.0% 2.6% 2.7% 1.53% 0.04% 4.36% (Tesco plc, 2014) Dividend payment (extracted from the cash flow statement) Sainsbury plc Tesco plc 2014 2013 2012 2014 2013 2012 Dividend payment 320 308 285 1189 1184 1180 (Tescoplc.com, 2012) Internal users: 1. Managers The main internal user of the information is the Managers. They use all the financial information to formulate policies and to take decisions. For example, the net profit ratio of Tesco is in decreasing trend that is not a good sign of profitability. Managers can use this information to find out the reason behind it and as it is observed that one of the main reasons is the enhancement of the non-operating costs. So the management has to give focus to eliminate some part of the cost in order to improve its net profit stability. The responsibility of the managers is to maximize the profit, and without the financial information it is not possible for the management to achieve this goal (Allan, 2008). 2. Employees Employees are the main human assets of any organization. They need the financial information to depict the present as well as the future prospective of the company. The information will help them in taking a decision regarding their continuation with the organization. Apart from their salaries they sometimes get different benefits options and can participate in the decision making process. ESOP is one of the schemes that allow the employees to purchase shares of the company at a lower cost. All this benefit can only be given if the company is in a stage of higher profitability. So the employees are also getting the concern about the profitability and the solvency position of the company to ensure their benefit. 3. Shareholders Shareholders are the person who makes an investment in the equity share of the company. They have an ownership status within the organization. They are always very interesting to know that how the managers are utilizing their money into the operation of the business. They give more emphasis on the profitability and liquidity portion rather than solvency and other management policies. The share price of a company can be deeply affected by the dividend policy of the organization (Annualreports.com, 2013). If the amount of dividend is acceptable by the shareholders, it will increase their confidence in the company. As a result, the share price goes up. For both the companies the amount of dividend payment is increasing, but here one thing must be noted that in case of Tesco the Net profit ratio was too low in 2013, and it increased a bit in 2014 but the level is not satisfactory. Maybe the company is paying more dividend from their retain earnings and so there is an increase in the net dividend in spite of having a low net profit ratio. If this is the case, then it will not be a preferable condition for the shareholders. Ultimately the shareholders want to maximize their wealth by getting a required amount of dividend and the capital appreciation. So they can select the option of retaining or selling the ownership on the basis of the financial information provided (Peterson Drake, P. and Fabozzi, F. 2012). External users: 4. Lenders Lenders can also be called as the potential investors who are willing to invest in the organization. They are the future investors. Some of the lenders are banks, financial institutions, etc. The main information that is needed by these users is the financial stability of the company and their growth structure. The financial stability can be ascertained through the profitability ratios and the efficiency ratios. They also keep track on the liquidity balances. Now if the above two companies are taken into consideration, then it can be found that the interest coverage ratio in Sainsbury is more than the Tesco, and it is increasing, whereas Tesco has a good coverage, but it has been now in a declining trend. More of this ratio means more ability to pay the interest obligation. Now if the investors are willing to invest in the fixed capital of the company, then the Sainsbury will be safer than the Tesco. On the other hand, the debt-equity ratio is worse for both companies it implies that they have more dependency on Equity capital than the debt capital. From the view point of the liquidity, the condition for both the companies is not at all good as the current ratio, and the quick ratio is less than 1(Duque, 2009).The investor may also have to follow the trend of both the business whether it is increasing and static. All this information may useful for him at the time of selecting his investment option (Annualreports.com, 2012). 5. Suppliers and customers Suppliers and the customers are those parties who engage in purchasing or selling off their products and services to and from the company. They are not much interested to know the profitability of the company; they give more focus on the receivable, payable and inventory management policy. As in the case of above two companies, the receivable management policy is better in case of Tesco. They collected the dues from their debtors at a frequency of 12-15 days where as the Sainsbury plc collected their dues at an interval of 21days. The payable and inventory management policy is almost in a static position for the company, and the frequency of payment is very high. So if a customer wants to get more credit facility, then they should have invested in Sainsbury (Mook, L. 2013). 6. Government Any economy of the country is regulated by the government of the respective country. They need the financial information in order to know the contraction or expansion of the business, their taxation policy, labor laws, etc. Moreover with the introduction of the corporate governance policies it is the responsibility of the government to make supervision regarding the fulfillment of compliances. Here both the companies are paying their tax obligations in time and effectively follow the rules and regulations of corporate governance. Conclusion From the viewpoint of the above discussion, it can be said that the financial information is very useful in each and every single segment of an organization. It is very difficult to say that which part of the information is useful for which users. In the real market scenario when a person is willing to engage in business then all the information is equally important for him. Say for a creditor it is not enough for him to know that the company has a good payable policy. It is one of the factors that he can focus, but it will not be wise to be totally dependent on the factor. So it can be concluded that the financial information are very much useful for all the users to create a healthy relationship with the organization (Coskun Grabowski, 2005). References Allan, W. (2008). Fundamentals Of Management Accounting. Amsterdam: CIMA/Elsevier. Coskun, E., Grabowski, M. (2005). Impacts of User Interface Complexity on User Acceptance and Performance in Safety-Critical Systems. Journal Of Homeland Security And Emergency Management, 2(1). doi:10.2202/1547-7355.1109 Duque, J. (2009). Financial Modelling. Bradford: Emerald Group Pub. Hernes, M., Sobieska-Karpińska, J. (2015). Application of the consensus method in a multiagent financial decision support system. Information Systems And E-Business Management. doi:10.1007/s10257-015-0280-9 Lunt, H. (2008). Fundamentals of financial accounting. Amsterdam: CIMA/Elsevier. Lynch, T., Gregor, S. (2004). User participation in decision support systems development: Influencing system outcomes. European Journal Of Information Systems, 13(4), 286-301. doi:10.1057/palgrave.ejis.3000512 McLeod, L., MacDonell, S., Doolin, B. (2007). User Participation in Contemporary IS Development: an IS management perspective. AJIS, 15(1). doi:10.3127/ajis.v15i1.29 Mook, L. (2013).Accounting for social value. Toronto, ON: University of Toronto Press. Peterson Drake, P. and Fabozzi, F. (2012).Analysis of financial statements. 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