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...
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.
Also for investors, the stock purchase decision must be made. As such, the investor needs to be able to analyze the company's financial performance over the years to try and identify trends. We can see this with Tesco, which publishes a five-year summary of financial results. This makes for easy comparison, something that is valuable to the investor in particular. An employee might care if also an investor, and a customer probably is not too concerned unless they want to know if the company is about to go out of business.
Overall, financial statements like those at Tesco are important for all stakeholders precisely because they provide the same information to all who read them. This means that whatever person motivation is driving a customer, employee or shareholder, the Tesco financial statements are easy to read and easy to understand. This is good for all who wish to read financial statements.
Works Cited:
Grant Thornton. (2011). The future of UK GAAP. Grant Thornton. Retrieved November 22, 2011 from http://www.grant-thornton.co.uk/services_/audit_and_assurance_x/the_future_of_uk_gaap-1.aspx
Investopedia. (2011). Efficient market hypothesis. Investopedia. Retrieved November 22, 2011 from http://www.investopedia.com/terms/e/efficientmarkethypothesis.asp
SEC. (2007). Beginner's guide to financial statements. Securities and Exchange Commission. Retrieved November 22, 2011 from http://www.sec.gov/investor/pubs/begfinstmtguide.htm
Tesco 2011 Annual Report. Retrieved November 22, 2011 from http://ar2011.tescoplc.com/
