Financial Reporting

Critical discussion on objective of financial statements

Statement of finance is the most significant way for communicating monetary information of business to different stakeholders. Different stakeholders have their own needs and required to the financial statements (Hopwood and McKeown, 2003). Major purpose for developing financial statements of the organization includes satisfaction of needs and requirements of different users of Sainsbury. Major financial statements comprise income statement, profit and loss account and balance sheet of the Sainsbury organization. As per the Kastantin, 2005 “Major purpose of income statement is summarizing the outcomes of the financial operations of the business in the form of profitability and loss” (Kastantin, 2005). But this objective if critically evaluated by Murphy and Yetmar, 2010 who states that “financial statement is not only described the profit and loss position of the organization but also it describes the expenses, revenue and income of the organization which help in financial reporting of the Sainsbury” (Murphy and Yetmar, 2010). Nga and Yien, 2013 states that “Balance sheet statement is developed by organization for summarizing the financial position of the company for a specific time period” (Nga and Yien, 2013). On other hand Ojha, Gianiodis and Manuj, 2013 states that “comprehensive statement of financial statement is developed with the purpose of communicating the information of company’s assets and liabilities and shareholder’s capital to their stakeholders” (Ojha, Gianiodis and Manuj, 2013). Portz and Lere, 2010 critically evaluates that “the major objective of cash flow statement is summarizing operating, financing and investing activities of the company for a financial year” (Portz and Lere, 2010). On other hand Zawawi and Hoque, 2010 express that “Cash flow statement is developed by companies for describing the cash inflow and out flow of the organization in a whole financial year” (Zawawi and Hoque, 2010).

Main external users of financial statement of Sainsbury and their information requirements

Financial statements communicate financial information of business to their external users, some important users with their specific needs and requirements are as follows:

Investors: are the most significant users of the financial statements of the Sainsbury. They are wanted to assess the feasibility of the company for their investment purpose (Bennouna, Meredith and Marchant, 2010). Along with this investors analyze the associated risk with their investment by analyzing company’s monetary statements. Investors forecast the future dividend for their investment amount on the basis of profit of the company in the income statement. Required financial information of investor includes profit of the company form income statement.

Creditors and financial institutes: are also major users of the financial statements of the organization because through the monetary information of financial statements creditors and financial institutes takes decision regarding the credit amount and loan for the business (Cox and Fardon, 2005). These users require assets and liabilities information of company which are generally summarizes in the balance sheet of organization.

Shareholders: generally take investment decision on the basis of financial statement analysis. These uses asses the associated risk and return of their investment amount. For investment decision they require the information of profitability of the organization and available assets and liabilities also (Elearn, 2013.).

Customers: are also major users of the financial statements of the company for assuring about the stable supply of goods by supplier in coming future. For this analysis they require the appropriate information of credit praiseworthiness of the organization in their balance sheet (Grieve, 2013). 

Competitors: for comparing the performance of the organization competitors uses different information of all financial information. As per the profitability, liquidity and turnover information of organization competitors makes their strategic and different business forecasting.

Community: are uses the information of financial statements for analysing the impact of business operation on whole economy, local society and environment (Hiro and Sofat, 2010).

Government: also required different information such as profit, income, sales and financial performance of the organization and it will helpful for developing tax and return rules and policies. Government also analyses financial statements for keeping track of economic progress of the business as per the economic analysis (Vice, 2013).

Income statement analysis

Income statement is also known as profit and loss account of the Sainsbury and it includes all monetary transactions of organization which are related to the incomes and expenses of this retail organization (McDonough, 2011). Group income statement of the Sainsbury shows that company is generating sufficient amount of profit for future operation of the business. As per the past year performance Sainsbury’s financial position is weak in terms of sales, profit and income. Sales revenue of the company is £m22294 which is higher than the previous year sales of the company. On other hand gross profit of the company is £m1211 in year 2012 but in 2011 it was £m1160 thus, it shows that company’s gross profit margin has decreased as compare to previous year of performance due to the high cost of goods sold (Watson and Head, 2010). In 2012 cost of goods sold is £m21083 but in 2011 it was £m19942 which shows that Sainsbury has been spending high amount of money on marketing and other activities of the business for increasing overall sales but it reduces the gross profit of the company which affects the overall income of the organization. Along with this High cost of goods sold also influence the financial performance of the company. Operating income and expenses of the company helps in computing the operating profit of the company (Hussain, 1996).

Sainsbury has high operating expenses in financial year of 2012 as compare to the 2011. Operating expenses includes administrative charges of the organization which is £m419 and it reduces the operating profit of the Sainsbury. Along with this, income statement shows that operating income of the company in 2012 is £m82 which is less as compare to the previous year operating income. Thus, overall income statement analysis reflects that overall gross profit margin of the company has reduced as compare to previous year due to the high cost of goods sold. Analysis of the profit and loss account of Sainsbury demonstrates that company is generating the other income from financial activities and share of post tax profit from joint ventures. But, post tax profit is less as compare to the 2011 income resources (Keller, 2013). Along with this other financial cost of the company has been increased by £m138 which reduces the profit before taxation of the company. Income statement shows that in 2011 Sainsbury’s profit before tax is £m827 and in 2012 it is £m799 which is less as compare to the previous year due to the high financial cost and low financial income of the company.

In 2012Profit before taxation reflects that there is no fair value in the property investment and financial fair value movement is also negative which reduces the overall profit of the company (Zawawi and Hoque, 2010).  Income statement analyses evaluates that major expenses of the company in the form of taxation includes income tax expenses. Due to the high sales revenue Sainsbury needs to pay high income tax which leads the low net profit of the company as compare to previous year. In 2012 Sainsbury has paid £m201 and in 2011 it was £m187. Due to the high income tax expenses net profit for the year 2012 is £m598. Therefore, income statement analysis shows that net profit margin of the company is also reducing as compare to the previous year due to high income tax expenses and low gross profit of the company (Vitez, 2013). Consequently, analysis of the financial statement shows that company is generating profitability and high sales revenue in whole year but it is very stumpy as compare to the previous year due to the high cost of goods sold, operating and income tax expenses, etc. Along with this analysis of income statement shows that high income tax payment reduces the overall net profit margin of the Sainsbury (Siano, Kitchen and Confetto, 2010).

Balance sheet analysis of Sainsbury

Balance sheet statement is an important statement for the financial reporting of the public listed retail organization it is known as comprehensive statement financial position of the Sainsbury and it reports the monetary performance of the company in the form of assets, liabilities and shareholder’s capital in a specific time (Portz and Lere, 2010). Annual report of the J. Sainsbury contains the balance sheet of organization for year 2012. It shows that financial position of the company for financial year of 2012 and 2011 also. Balance sheet statement of Sainsbury contains non-current and current assets and liabilities and equity capital of the company which leads the financial strength of the Sainsbury. Group balance sheet statement and its analysis shows that company has sufficient assets for managing its all liabilities. Net assets of the company show that company is managing its assets effectively as compare to the previous year (Nga and Yien, 2013).

Balance sheet statement reflects that Sainsbury has invested high amount in purchasing property, plant and equipments as compare to the year 2011. In 2012, overall non-current assets are £m10308 but in 2011 it was £m9678 which shows that company has more fixed assets for managing their non-current liabilities. Along with this investment in joint venture also increases the value of fixed assets of the company (Ojha, Gianiodis and Manuj, 2013). Major current assets of Sainsbury include inventories, trade and other receivables, derivative financial instruments, cash and cash equivalents, etc. In 2012 current assets of the Sainsbury is £m2032 which is higher than the previous year financial strength of the company. Value of current assets has been increasing due to the high inventory and cash and cash equivalents values. High inventories reduces the overall inventory turnover of the organization which is effective for Sainsbury but on other hand it reduces the overall quick liquidity position of the company which declines the long term debt paying capabilities of the organization (Kastantin, 2005). In 2012 Sainsbury did not held any assets for sale. Total assets of the company have been increasing form previous year which will improve the financial capability of the Sainsbury. Current liabilities of the Sainsbury are included trade and other payables, borrowings, tax payable, provision and derivatives and financial instruments, etc. In which trade and other payables increases and tax payable reduces the current liabilities of the Sainsbury (Murphy andYetmar, 2010). Company has obtaining funds from the borrowing which is higher than year 2011 that leads increment in the current liabilities of the company. Balance sheet shows that company have not sufficient assets for managing all current liabilities of the Sainsbury and it affects the liquidity position of the company as well as financial strength of organization for paying its long term debt. But as compare to the previous year company has low derivatives and financial instruments and provisions which improve the liquidity position of the organization (Davis, 2012). Non–current liabilities of the Sainsbury include differed income tax liability, borrowings and retirement benefits obligations majorly.  Borrowings are most important part current liabilities which increases the overall liabilities of the company.

Therefore company has been facing lots of problems in managing all liabilities by their available assets (Balance Sheet Template, 2012). It influences investors and creditors decisions for providing finance for the future operations of the company. Sainsbury needs to focus on assets and liabilities management of the organization otherwise company will face the future finance problem.

Cash flow analysis of Sainsbury

Cash flow statement includes the all transaction of the cash inflow and outflow of the Sainsbury. It is a public limited organization so it requires developing cash flow statement for future financial reporting of the organization (Davis, 2013). It provides a clear picture of cash movement in the organization and it is helpful for stakeholders and their decision making. The major objectives of the cash flow statement are as follows:

• To communicate information regarding cash inflow and outflow of the Sainsbury by their operating, financing and investing activities of the firm to their stakeholders (Gitman, 2013).
• To demonstrate the impact of different financial transaction on cash resources.
• To explain the amount of cash come, out and remain in the Sainsbury organization during the financial year through the all activities of organization.
• Its objectives include various causes for changes in the future cash balance of the company.
• It determines needs and requirements of the finance for the organization (Gorchels, 2006).
• To forecasts the future cash flow of the Sainsbury.

Cash flow statement of the Sainsbury shows that company is generating sufficient amount of cash which is helpful for managing all cash out flows from operating, investing and financing activities (Curzon and Wingler, 2013). Sainsbury has £m739 amount in the form of net cash and cash equivalents which affects the liquidity position of the organization. Operating activities of the organization has association with the profitability of the organization because high operating income increases the profitability margin of the Sainsbury and on other hand high operating expenses reduces the overall financial strength of the company. Because operating cash inflow and out flow can increase and decrease the net profit margin of the company. The cash inflow of Sainsbury shows that company is generating £m1067 cash from operating activities which is very higher than the previous year (Birnberg and Sisaye, 2010). It shows that company’s operation management is managing effectively as compare to the previous year. Along with this cash amount from operating activities influences the investor’s decisions for investing money in Sainsbury organization because organization is generating sufficient amount of cash so investors and creditors will provide money for financial purpose. On other hand company has been investing £m1227 amount of cash in purchasing plan and machinery it affects the net cash inflow from the previous year. Along with this in 2011 company has negative cash flow from their financing activities which influences the investor’s decision making for their investment because it reduces the dividend payment of the Shareholders (Pratt, 2013). But in 2012 company has paid £m285 for dividend payment to their shareholders, which increases the overall interest of investors and creditors for investing their money in Sainsbury for high dividend payment for their investment. On other hand in 2011 net cash balance of the company was decreased by £m334 but in 2012 it has been increased by £m239 it shows strong financial position of the organization in the form of profitability and liquidity.

Therefore, current cash flow statement shows strong cash position of the company as compare to the previous year. Thus, current position of the Sainsbury attracts more investors, shareholders and creditors for investment purpose (Lchigo, 2011).

Ratio analysis of Sainsbury

Financial ratios are major part of financial reporting of the Sainsbury organization because it provides the information of all financial statements as well as profitability, liquidity, efficiency and turnover position of this retail organization.

Profitability ratios includes gross, net and operating profit margin of Sainsbury organization. These ratios provide the information about the capability of Sainsbury for generating income in future financial year (Gross profit ratio (GP ratio), 2014). In 2012 gross profit margin of the company is 5.43% which is less as compare to the previous year as well as net profit margin is also decreased by 2011. It shows that company is managing all its expenses but its profitability is also decreased from 2012. Reason behind the low profitability is high cost of goods sold and operating expenses of the organization (Bennouna, Meredith and Marchant, 2010). Net profit margin is also very low it shows that company is spending high amount of money on marketing and other activities which reduces the overall profitability of the Sainsbury and it also affects the stakeholder’s interest towards the organization. Sainsbury has low profitability but it shows that company has effective investment decision making as compare to the debt situations (Zawawi and Hoque, 2010).

Major liquidity ratios of the organization are current ratio and quick ratio. Value of current and quick ration is 0.65 and 0.35 respectively which shows that liquidity position of Sainsbury is very weak. On other hand ratio analysis shows that value of liquidity ratios are increased as compare to the previous year but still Sainsbury needs to focus on working capital management of the organization (Elearn, 2013). Current ratio shows that company is not managing its all current liabilities very effectively by their current assets. Quick ratio also shows that company has low inventory which reduces the overall liquidity position of the company. Therefore, liquidity position of the Sainsbury reflects that company is not capable for paying its long term debts by their current assets. Assets and inventory turnover ratio shows efficiency of the organization. Higher ratios are more favourable for the organization that reflects company is generating high revenue by using per dollar of assets and inventory. Total assets turnover ratio is 1.81 which is very low for Sainsbury as well as inventory turnover ratio is also very low, so company needs to focus on assets and inventory management (Cox and Fardon, 2005).

Gering ratios includes debt and equity ratio and time interest ratio which is helpful for financial analyst, banks and investors for effective understanding of capital structure of Sainsbury. Debt and equity ratio of Sainsbury is effective because it shows that 43% of debts are financed by their equity. It shows low financial risk for all business operations of organization. Time interest ratio is also very low which shows that company has high debt as compare to their liquidity position (Gitman, 2013).Above calculation of financial ratio shows that price earnings ratio and dividend payment ratio are major investment ratio for Sainsbury. The value of prices earnings ratio is 10.58 and dividend ratio is 5.05% which is very low for attracting more investors and creditors for investment. Therefore, these ratios affect the ability for obtaining finance from external resources of the Sainsbury (Portz and Lere, 2010).

Therefore, Sainsbury is managing is expenses by its income but its liabilities is higher than assets. So, company needs to focus on reducing liabilities of the organization. It reduces overall profitability and liquidity position of the organization.

CONCLUSION

The present report concludes that as per the international financial reporting standards all financial statements are very essential for financial reporting of the organization. As per the annual financial report of Sainsbury income statement, balance sheet and cash flow statement shows the actual financial position of the organization. Along with this income statement analysis explains that company has sufficient income for managing it expenses but its profitability position is decreased due to the high operating expenses and cost of goods sold. Analysis of the balance sheet reflects that Sainsbury is not managing its current assets and liabilities very effectively. It current liabilities are higher than current assets of the organization due to the high amount of borrowings. In addition cash analysis shows that Sainsbury is generating high amount of cash from operating activities of the organization as well as it has sufficient net cash balance for managing all cash out flows from operating, investing and financing activities of the organization. Financial ratio analysis shows that Sainsbury has low profitability and liquidity position as compare to previous year as well as investment ratios also reflects that company is not so capable for attracting more investors and creditors for investment purpose.

REFERENCES

• Birnberg, J. and Sisaye, S., 2010. Extent and scope of diffusion and adoption of process innovations in management accounting systems. International Journal of Accounting and Information Management.
• Burns, J. and et. al., 2004. Management accounting education and training: putting management in and taking accounting out. Qualitative Research in Accounting & Management. 1(1).
• Curzon, E. And Wingler, J., 2013. SEC adopts new financial responsibility and reporting requirements for US-registered broker-dealers. Journal of Investment Compliance. 14(4).
• Davis, A. H., 2012. Selected FINRA notices and disciplinary actions, June-August 2012. Journal of Investment Compliance. 13(4).
• Davis, A. H., 2013. Selected FINRA notices and disciplinary actions, September 2012-April 2013. Journal of Investment Compliance. 14(2).
• Hopwood, W., and McKeown, J.C., 2003. Market Effects, Size Contingency and Financial Ratios. Review of Accounting and Finance. 2 (1).
• Kastantin, T. J., 2005. Beyond earnings management: Using ratios to predict Enron's collapse. Managerial Finance. 31(9).
• Murphy, S. D. andYetmar, S., 2010. Personal financial planning attitudes: a preliminary study of graduate students. Management Research Review.

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