Financial Reporting

Evaluating Financial Aspect in Organization

Introduction to Financial Reporting

At present, businesses operating in domestic or international environment it is important for the management to ensure that company's financial statements fairly reflects the corporate position so that external observer can make appropriate conclusions and decisions (Curzon snd Wingler, 2013). Furthermore, company's information does not limit only to financial statements but in many countries large business enterprise has to publish interim financial reports as well as strategic and operating data information for wide range of corporate stakeholders.

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Present research report focuses on analysing and evaluating the financial position of Sainsbury plc with the help of using its annual report and other major financial statements. Sainsbury plc is one of the leading retail organisation around the globe with more than 1200 stores. However, it is defined as second largest chain of supermarkets after Tesco plc with the share of UK supermarket sector of 16.8%. Furthermore, operates at international level with wide range of products and services. By considering the firm report highlights the importance of several conceptual framework of IASB for preparing accurate and appropriate financial statements. Thereafter, study entails analysis of company's major financial statements as well as computing financial ratios to understand economic position of Sainsbury and assist stakeholders in making feasible decisions.

Task 1

In references to the IASB's conceptual framework, analyse the usefulness of Sainsbury financial statements

The general purpose of financial statements are to aid the corporate stakeholders like suppliers and creditors in making suitable decisions. However, all the major statements such as: balance sheet, income statement, shareholder's equity/debt statement and cash flow etc. are the general purpose which provides detailed information regarding financial wealth of the company and helps people associated with it in making appropriate decisions (Nga and Yien, 2013). Looking at the present market condition, it is important for management of large or small corporation to prepare all the major financial statements so that stakeholders associated with the firm can make understand economic situation and make feasible decisions regarding future contingency. In context to this, Concepts of IASB clearly states that, annual report of Sainsbury plc should provide detailed and accurate information to its external and internal observer so that they can make appropriate decisions. However, the main purpose of following the conceptual framework of IASB is that it ensures properly recording of all the transaction related to company's operations and investments. In regards to this, after looking at the annual report of Sainsbury plc it can be stated that, it is prepared in systematic manner as well as all the rules and regulations have been followed by the financial managers while preparing the major statements such as: income statement, cash flow statements, balance sheet and shareholder's equity statement. Furthermore, while analysing the annual report of Sainsbury plc various favourings that an individual can identify such as detailed information related to investments made, dividend paid as well as earnings per share earned during the reporting period (Bozcuk, 2012). In addition to it, various accurate and detailed information is given in financial statements by the means of which corporate stakeholders can easily analyse the liquidity, profitability and solvency position of the Sainsbury plc.

However, the main purpose behind preparing financial statements as per the set of rules and regulations of IASB is that it helps decision maker in analysing Sainsbury plc current position with its previous years performance. This is one of the major concept of IASB to prepare financial statements of two reporting year so that stakeholders can easily compare its position. However, present study entails annual report of 2012-13 and 2013-14 of Sainsbury plc.

There are various corporate stakeholders associated with the firm who are interested in different aspects of the company. For making clinical decision stakeholders requires accurate and appropriate financial information in annual report (Abraham, Deo and Irvine, 2008). However for example, suppliers and creditors generates their interest of data or information from balance sheet and income statement so that they can understand the time required by Sainsbury to make payment of debt. Along with this, both these major statements also evaluates solvency and liquidity position of the current reporting year which helps creditors in making decisions regarding future contingency. Therefore, from the above study it can be stated that, it is the responsibility of senior financial managers of Sainsbury plc to prepare financial statements on the basis of concepts of IASB so that they can provide accurate information and stakeholders can make feasible decisions.

Task 2

Identify the main external users of Sainbury's financial statements and their information requirements

There are various financial information users of Sainsbury plc which require adequate data in order to make feasible judgement regarding association with the firm's functioning. However, it is the responsibility of senior financial managers to record all the information accurately so that external users can understand the economic position in effective manner. For the present study various external users have been undertaken and information required by them from financial statements of the Sainsbury plc has been focused on.

Financial statements are prepared with the intention of making clear understanding to its observer who have adequate knowledge about business and economic activities and accounting information.

Institutional investors – In general terms, external users of annual report of Sainsbury are the investors who invest in the functioning of the business. The main aim of investors to analyse financial documents is to evaluate the economic wealth of Sainsbury so that they can make feasible or logical decision regarding future investments (Graham, Harvey and Rajgopal, 2005). Furthermore, banks use financial statements in order to decide whether to grant loan or credit to Sainsbury. As well as these institution uses financial statements to determine the profitability of granting a loan to Sainsbury. Top level management of bank has to focus on the asset base and liquidity base of the firm to identify that whether it is sufficient or not in terms of providing credit. Moreover, this external user will focus on current and quick ratio to determine the capability of firm in paying short term financial obligations. Therefore, it is crucial for top level management of Sainsbury plc to provide accurate and detailed information to its external users so that institutional investors can make accurate and feasible decisions regarding proving loan or credit.

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Shareholders – Shareholders are the one who invest in the functioning of business enterprise with the aim of getting dividend in the form of return. According to the present given scenario, shareholders play significant role for Sainsbury in generating large amount for raising funds to execute future functioning (Doyle, Ge and McVay, 2007). In order to invest money, shareholders requires various information in income statement regarding net profit generated by firm during the year. Furthermore, dividends paid to the shareholders. Mainly, with the help of balance sheet shareholders can easily evaluate the data related to assets and liabilities and make decision regarding financial wealth of the firm. Along with this, decision makers evaluate the financing approach of firm with the help of debt and equity ratio.

Therefore, above defined external users are the major investors in the functioning of Sainsbury. Furthermore, it is important for the management to provide them accurate information regarding financial health of the company so that they can make feasible decision for the future contingency and attain higher returns in near future.

Task 3

Critically evaluate the company's income statement to analyse the position of business

Being a public limited company it is important for Sainsbury to prepare all the major financial statements so that associated corporate people can make accurate decisions. Income statement is one of the major statement that assist in evaluating the income generated and expenditure incurred by the firm during reporting period.

From the above income statement it can be stated that, Sainsbury is making valiant efforts in regards to improve its overall profit of financial year. However, revenue generated in 2014 £23949 is higher as compared to 2013 £23303 million. For generating higher sales company incurred higher cost of sales. In order to evaluate actual position of firm Note 2d play important role it helps in understanding income statement of Sainsbury plc appropriately. According to the present given scenario, by the means of Note 2d, financial position of Sainsbury plc has been evaluated in comparison to previous year's performance. The revenue generated by the cited firm is showing higher results the reason behind this could be the offers and discounts given by the firm in 2014 which helped in generating higher sales (Zhu and Kraemer, 2005). Apart from this, note 2d assist managers in showing sales amount in income statement which excludes various economic factors such as taxes, net returns and discounts and fringe benefits given to the employees and consumers. Furthermore, with the help of above stated income statement it can be stated that, in spite of increase in cost of sales Sainsbury generated higher financial year profit of £716 as compared to last year profit of £602.

Segmental disclosure: The main purpose of note 4 segmental analysis is that it helps in providing appropriate information to various external and internal stakeholders of Sainsbury plc so that they can make feasible decisions regarding future functioning. However, after analysing and evaluating the financial statements of Sainsbury plc of year 2014 it can be said that, there are different means or sources available by the means of which company raised its revenue generation. In addition to it, with the help of note 4, senior authority of the firm can identify the amount of revenue generated by different countries in which they operate (Vice, 2013). The main advantage of this is that, it helps management to indulge potential measures regarding the tactics and strategies used by firm for each of the country. Along with this, note 4 segmental analysis helps in generating detailed information regarding balance sheet of Sainsbury so that debt and equity position can be analysed. Furthermore, by the means of segmental disclosure analysis position of cash and goodwill can be analysed which help external users in making appropriate decision regarding future association. Therefore, it is essential for managers to undertake segmental analysis of note 4 so that they can gather valuable information regarding variance between cash and goodwill of the firm during the reporting period. Moreover, it also define detailed information regarding capital expenditure incurred by firm during the course of entire financial year.

Earnings per share: In general terms, earnings per share can be defined as the portion of company's profit allocated to each outstanding share of common stock. However, it indicates the profitability of an organisation. According to the present given scenario, earnings per share in year 2013 was £32 and in 2014 it increased to £37.7 (Cox and Fardon, 2005). However, this can be directly linked to the increasing revenue. Top level management is making valiant efforts in minimizing the cost of sales due to which price of its shares are fluctuating at increasing rate. This is feasible sign for the Sainsbury as it operates in such a competitive market. Furthermore, with higher EPS it can be said that, management is paying higher dividends to its shareholders and attracting more of them to generate higher income for future functioning.

Task 4

Analysing balance sheet of Sainsbury plc

It a financial statement that evaluate the company's assets, liabilities and shareholders equity at the end of financial period. However, these three are the major elements of company's balance sheet which provides detailed information related to company's owns, owes and the amount invested by shareholders (Wahlen, Baginski and Bradshaw, 2010). Rationale behind preparing balance sheet is assist in evaluating the amount of assets company have in order to overcome its liabilities. On the basis of IASB, it is important for management to generate same amount in both side of balance sheet in order to ensure stability in financial wealth.

There are different elements of balance sheet that must be evaluated in order to make feasible and corrective decisions for the future measures. There are:

Current Assets – These are the assets which can be easily converted into cash to meet short term financial obligations. However, in regards to this it is crucial for the firms to have higher current assets because it will help top level management of Sainsbury in maintaining company's liquidity position (Melville, 2008).

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Non current assets – These are considered as the long term assets of an organisation because they are linked with goodwill of the firm. In context to this, it is important for senior authority of Sainsbury to manage and control its non-current assets appropriately to attain future sustainability.

Current liabilities – These are the liabilities which can be defined as the amount borrowed by firm to perform its routine activities in effective and efficient manner. However, from the above balance sheet it can be stated that, current liabilities of Sainsbury are lower in comparison to its current assets (Gibson, 2012). Therefore, Sainsbury has better financial position to execute its business functioning.

Non current liabilities – These are the liabilities which are associated with derivatives, deferred payments and other payables. These long terms liabilities can make huge impact on economic position of Sainsbury.

Equity – The main reason to show equity in balance sheet is to evaluate the amount or proportion of money invested by owner for executing the business operations. On the basis of above balance sheet it can be stated that, as Sainsbury is growing the amount of equity is increasing every year (McLaney and Atrill, 2010).

Task 5

Identify the objectives of cash flow statements

Cash flow statement can be defined as the document in which cash and cash equivalent transactions are recorded so that position of cash inflow and cash outflow can be evaluated. In general terms, Accounting Standard Board in 1996 stated that every firm small or large enterprise has to prepare cash flow statement in order to provide detailed information regarding cash position within firm (Brooke, 2009). However, after analysing the cash flow of Sainsbury plc it can be stated that, company in year 2014 generated cash operating and investing activities is £939 and £426 million respectively. Whereas used cash for financing business activities is £290 million. Therefore, this clearly indicates that, net closing cash balance of the mentioned firm is £1075 million and adding opening balance of £504 million helped company in retaining £1579 million for the future functioning. This considered as the feasible financial position for Sainsbury plc in comparison to its competitors.

With the help of above analysis of financial ratio, current position of Sainsbury in the present market can be evaluated. Following are the ratio interpretation:

Profitability ratio – This ratio assist in measuring the profitability of firm to analyse current position. However, these ratio indicates the capability of Sainsbury in sustaining such competitive market (Mirza, 2012). Gross profit ratio has shown increasing results from 6.05% to 6.22%. this clearly indicates that in year 2014 Sainsbury reduced or minimized its cost of sales. Furthermore, increasing operating profits indicates that management has appropriately managed income and expenses.

Liquidity ratio – These ratio defines the capabilities of Sainsbury in meeting out short term financial with its immediate liquidity. However, current ratio an quick ratio indicates that, Sainsbury has enough current liabilities and liquid assets to overcome short term financial obligations.

Debt equity ratio – This ratio helps in analysing the position of financial wealth of an organisation. However, it is important for Sainsbury plc to have lower debt/equity ratio because increasing figures indicates that company is using debt more to finance its business functioning and it might be dangerous for long term purposes (Statement of cash flow, 2012). However, slight increase in debt/equity ratio is not feasible for Sainsbury in such competitive market. On the other hand, decreasing price earning ratio indicates that Sainsbury is unable to attract investors and shareholders to raise its funds.

Task 6

Analyse the usefulness, to users, of any two additional statements published by Sainsbury plc

In the annual report of Sainsbury plc there are few more statements that can play significant role for external users in determining the financial position of the company. These are as follows:

Shareholders information – In terms of internal analysis, shareholders information is considered as very important aspect. However, it is because the market rate of shares are regulated on the basis of demand and supply of shares within target market. The main aim of using this statement is that it helps in determining detailed information related to shares and dividend paid on the shares.

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Five year financial record – This is another major statement which provides detailed information regarding company's long term financial performance and other key performance indicators. Furthermore, this statement helps top level management of Sainsbury plc in providing brief but appropriate report of five year performance (J Sainsbury plc annual report, 2014). This statement is used by each of the external and internal users in order to make effective and efficient decisions for the future functioning.


In conclusion to the above report, financial position of leading retail company of UK has been evaluated. However, the main purpose of this report was to evaluate the significance of accounting standards and conceptual framework of IASB in regards to prepare all the major statements of the business enterprise. Thereafter, by the means of financial statements and ratio analysis, economic position of Sainsbury has been present which will help observer in making appropriate and accurate decisions regarding future functioning.


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