Professional Documents
Culture Documents
Financial Accounting
Financial Accounting
Financial Accounting
Contents
Introduction: ................................................................................................................................................. 3
Different users of Financial Statements: ...................................................................................................... 3
The management personnel and managerial employees: ....................................................................... 3
The non managerial employees: ............................................................................................................... 4
The shareholders: ..................................................................................................................................... 4
The trade creditors and the suppliers:...................................................................................................... 4
The market investors: ............................................................................................................................... 4
The competitors: ....................................................................................................................................... 4
Comparative Ratio Analysis of Marks and Spencer and Sainsbury over the period of three years: ........ 5
Profitability: .............................................................................................................................................. 6
Liquidity:.................................................................................................................................................... 7
Gearing: ..................................................................................................................................................... 7
Efficiency: .................................................................................................................................................. 8
Conclusion: .................................................................................................................................................... 8
References .................................................................................................................................................... 9
Appendix: .................................................................................................................................................... 10
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Introduction:
The process of communicating the financial information to its users known as accountancy and
this process forms to be one of the vital parts of financial management of the business. The
process of financial accounting is significant as this enables a business in the process of financial
management and record keeping for the business and for the meeting with the need of accounting
information for the different users or the stakeholders of the business (Paramasivan and
Subramanian, 2009). The financial information gathered from the financial statements serves to
be the only source of financial information required for the assessment of the performance of the
business and also serves to be of greater importance in the process of decision making. This
study would deal with the identification of six different users of financial information and
Sainsbury and Marks and Spenser are the two retail business organization selected for
conducting a ratio analysis and evaluate on the financial performance of the two businesses.
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purpose of effective decision making the financial information are of ample use for the business
growth and development.
The shareholders:
The shareholders are making use of financial information in order to evaluate the financial
performance of the business and thus to judge that how efficiently their investment are being
utilized by the business for the purpose to earn greater return for the shareholders (Pratt, 2000).
The shareholders have their respective shareholdings in the company and this is also their right
to get the financial insight of the business, by the way of annual reports.
The competitors:
The competitors also use the financial reports of a business to assess the competitive factors of
the business and to determine their position in the industry.
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Comparative Ratio Analysis of Marks and Spencer and Sainsbury over the
period of three years:
Ratios Formula Sainsbury Marks and Spencer
2012 2013 2014 2012 2013 2014
Profitability
Gross profit Gross profit / sales x 100 5.4 % 5.5 % 5.8 % 37.8 37.9 % 37.5
margin % %
Operating Operating profit / sales 3.9 % 3.8 % 4.2 % 7.5 % 7.5 % 6.7 %
profit margin x 100
Net profit Net profit after tax / 2.68 2.63 2.99 5.16 4.65 % 5.09
margin sales x 100 % % % % %
Return on Profit / Capital employed 8.35 8.27 9.3 % 11.86 11.45 12.89
capital x 100 % % % % %
employed
Return on Net profit / total assets x 5.04 4.91 4.9 % 7.02 6.29 % 6.78
Assets 100 % % % %
Liquidity
Current ratio Current assets / current 0.65 0.61 0.64 0.73 0.57 0.58
liabilities
Quick ratio Current assets - 0.33 0.28 0.49 0.33 0.17 0.17
inventories / current
liabilities
Gearing
Interest cover EBIT / Interest expense 7.44 7.16 7.86 5.85 5.5 5.79
Efficiency
Ratio
Debtors Days Debtors balance / Credit 1.66 1.86 1.93 3.91 4.06 4.16
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sales x 365 days
Inventory Average Inventory / cost 15.15 15.95 16.11 40.38 42.45 45.71
Days of goods sold x 365 days
Creditors Trade payables / cost of 32.37 31.58 30.37 56.35 57.45 59.99
Days sales x 365 days
From the comparative analysis conducted on the financial performance of the two selected
business organizations, Sainsbury and Marks and Spencer the main four financial segments
which are considered for ratio analysis and they are the profitability, financial gearing, liquidity
and the efficiency of the two businesses.
Profitability:
The profitability ratio is mainly used by the managerial personnel, by the employees,
shareholders, market investors and also by other users of financial information mentioned above.
The determination of profitability factor proves to be one of the vital factors of decision making
by all the groups of users or the stakeholders of the business. The managerial personnel
determine the profitability to judge on the performance of the business, the shareholders
considerer this to be a yard stick to determine the how profitably their funds are being utilized by
the business and thus they take their further financial decisions (Kimmel, et al. 2007). The
market investors determine the profitability of the business in order to examine whether their
investment into the business would prove to be profitable or not and the competitors also use this
ratio to compare the performance of their business.
From the above determination of profitability ratio this is apparent that gross margin in case of
Marks and Spencer is far better compared to that of Sainsbury. However, the operating margin of
Marks and Spencer reduced considerably over the period of three consecutive years, but in case
of Sainsbury there is consistency in the profit structures over the period of study. From the net
profit margins this is evident that Marks and Spencer is in better position than Sainsbury but in
case of the two business organizations the net profit margins have reduced during the year of
2014 compared to that of 2012. Similarly in case of returns generated by the two businesses from
the assets and capital utilization rate of return in case of Sainsbury is low compared to Marks and
Spencer.
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Liquidity:
The liquidity of the business is mainly determined for the purpose to judge the solvency of a
business and this also determines that how effectively the business has been attain a level of
maximum stability between the current assets and liabilities of the business. Therefore, this is by
the determination liquidity ratios the users are able to examine the solvency status of the business
(Harrison and Horngren, 2001). Along with the decision makers of the business the suppliers,
other investors of the market and also the trade creditors use this ratio to assess the solvency
situation of the business before taking any decision and deciding on the credit limit for the
business.
From the ratio analysis of Sainsbury and Marks and Spencer this is evident current ratios of both
the selected companies are less than 1, signifying the fact that the current liabilities are more than
the current assets. However, the rate of solvency in case of Marks and Spencer is better than
Sainsbury during the year of 2012 but, in the later years the rate of Marks and Spencer have
reduced, on the other hand Sainsbury has been consistent. The quick ratios of both the businesses
are considerably low and this could be a matter of concern for the two businesses. Therefore, the
suppliers and other trade creditors would think twice before considering any credit proposal for
the two selected business organizations.
Gearing:
The determination of the gearing aspect is another vital factor to be considered by the users of
financial statements and by the decision makers to judge the financial stability and risks
associated with the business. The attainment of effective capital structure or the mix is important
for the determination of risk associated with the business and this is determined with the help of
evaluating the quantity of equity and debt in the capital structure. This is mainly preferred to
have an adequate structure of capital or the debt equity mix so as to make the business all the
more stable (Elliott and Elliott, 2008). Thus, the use of more equity content in the capital
structure than debt is preferred for the attainment of stable business structure. The investors,
shareholders, trade creditors and other users also make use of financial information to determine
this ratio and examine the rate of leverage of the business and thus, to determine the financial
risks associated with the business.
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From the above this is apparent that Marks and Spencer is slightly more levered than Sainsbury
but both the businesses have more of debt content than the equity fund in the capital. At the same
time, the interest coverage ratio of the Sainsbury is better than that of Marks and Spencer and
investors would positive factor while making investment in the business.
Efficiency:
From the determination of the efficiency of the business one would be able to examine the
efficiency with which the business has been managing its working capital requirements and the
flow of cash within the business. The determination of efficiency ratio is mainly done by the
organizational managers, market investors, shareholders, trade creditors and other users for the
purpose to judge the efficiency with which the business performing (Stittle and Wearing, 2008).
Sainsbury has been able to perform better than Marks and Spencer as evident from the ratio able
above.
Conclusion:
Therefore, this is clear from the study that there are varied users of financial information of the
business and the set information are also used for the purpose to take important decisions
regarding the business, for the performance evaluation and for taking the investment decisions.
For the internal and the external users both make use of financial statements and the information
to take decisions regarding the financial management (Brigham and Houston, 2004). Such as
from above ratio analysis this is apparent that the financial performance or the financial health of
Marks and Spencer is considerably better than Sainsbury and from the view of making
investment selecting Marks and Spencer would be a profitable deal as apparent from the ratio
analysis report. Thus, the set financial information is being evaluated to detect the financial
efficiency and lacunae of the business for further decision making.
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References
Brigham, E. and Houston, J. (2004). Fundamentals of financial management. Mason, Ohio:
Thomson/South-Western.
Elliott, B. and Elliott, J. (2008). Financial accounting and reporting. Harlow: Financial Times
Prentice Hall.
Harrison, W. and Horngren, C. (2001). Financial accounting. Upper Saddle River, NJ: Prentice
Hall.
Kimmel, P., Weygandt, J. and Kieso, D. (2007). Financial accounting. Hoboken, NJ: John
Wiley.
Libby, R., Libby, P. and Short, D. (2004). Financial accounting. Boston: McGraw-Hill/Irwin.
Noguchi, M. (2005). Interaction between tax and accounting practice: Accounting for stock-in-
trade.Accounting, Business & Financial History, 15(1), pp.1-34.
Paramasivan, C. and Subramanian, T. (2009). Financial management. New Delhi: New Age
International (P) Ltd., Publishers.
Stittle, J. and Wearing, B. (2008). Financial accounting. Los Angeles: SAGE Publications.
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Appendix:
Financial Statement of Marks and Spencer
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Income Statement of 2013 and 2012
11
Balance Sheet of 2013 and 2012
12
Financial Statement of Sainsbury
13
Balance Sheet of 2013 and 2014
14
Income Statement of 2012
15
Balance Sheet of 2012
16
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