Tesco Financial Statements Financial Statements

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, including ratio analysis, common size analysis and trend analysis. Using these different techniques reveals different information about the company. So for example we know that Tesco earned £67.6 billion in revenue last year, and that this is an increase of 8.1% over the previous year. This is the top line number; we can see that the bottom line number is £3.8 billion, an increase of 11.7% from the year before. This basic analysis reveals that the company has increased its revenues faster than it costs. This is valuable information for all types of stakeholders. Investors find such facts reassuring. Unionized workers may see an opportunity to take their share of the increased profits, and customers may be upset that the company is earning higher margins from them, although it is hard to see where margins might come from on a 19p can of tomatoes.

The balance sheet is used to understand Tesco's financial condition. The assets, liabilities and equity are all outlined on the balance sheet. Again, this can be analyzed with common size, trend and ratio analysis. Bankers find the balance sheet to be important because it reveals the firm's liquidity and stock market investors also like to know the degree of risk the company has, which is related to the level of gearing. The balance sheet can also be used in conjunction with the income statement to calculate managerial efficiency ratios. These include such statistics as the fixed asset turnover and accounts receivable turnover. Such ratios are typically calculated against past performance and also against industry norms.

The statement of cash flows is important because it outlines all the different changes in the cash position. Remember that the income statement is calculated using GAAP and these accounting rules are based on the principles of accrual accounting. As a result, the net income is not the same thing as the cash flow. There are times when the cash flow figures may be more illuminating to the different stakeholders. Cash flow comes from operations, investing and financing activities. These represent the sources of capital and how that capital is spent.

Put together, the financial statements offer consistency, transparency and accountability. Tesco is like any other publicly traded firm in that it must produce its statements according to specific rules, and this makes the financial statements easy to understand for all stakeholders. The motivation behind any one individual's desire to read financial statements is unimportant, what is important s that they communicate the same information the same way to all the people in the audience. This in turn is critical to the strength of the capital markets. Consistent and transparent financial statements allow all stakeholders the opportunity to compare companies not only within industries but across industries. So Tesco can be compared not only against other firms in its business but against firms in entirely different businesses.