Assignment 1: Financial Accounting
Tate & Lyle and Wessex Water
Table of Contents
2. Financial Ratios4
2.1 The importance of financial ratios4
2.2 The four categories of financial ratios4
2.2.1 Liquidity ratios4
2.2.2 Profitability ratios5
2.2.3 Efficiency ratios5
2.2.4 Investment ratios6
2.3 Tate and Lyle performance7
3. Environmental Accounting9
3.1 Environmental Accounting Wessex Water9
3.2 Environmental Accounting Tate and Lyle12
5. Works Cited14
Peter, here is the report as promised to clear up any confusion you have about financial ratios and environmental accounting. I’ve split the report into two halves. The first half will show you how to make interpretations about a company’s performance through the use of financial ratios. I will demonstrate this through looking at a five-year financial review for Tate and Lyle plc (T&L). It is important to have a time series of reasonable length to put the ratios into perspective, and five years is of a reasonable duration to make realistic judgements on T&L’s performance.
The second half will cover environmental accounting and discuss how and why sustainable profit is becoming more prominent in modern accounting. Through looking at how environmental accounting is being implemented within both Wessex Water plc (WW) and T&L, I hope this will make both financial ratios and environmental accounting clearer to you.
2. Financial Ratios
3.1 The importance of financial ratios
‘Ratio analysis is the most useful means of comparing one figure with another because it expresses the relationship between lots of amounts easily and simply’ (Dyson, 2010: 219). Put simply, a ratio is the division of one financial measurement by another.
But before you do this, it is first important to understand why we use ratios and not absolute numbers. Absolute numbers are limited because you cannot use them to make like-for-like comparisons. For example, through using absolute values you can’t make comparisons between entities with different variables such as size or efficiency. However, you can with ratios as ratios are always to the same scale.
3.2 The four categories of financial ratios
There are hundreds of financial ratios (Dyson, 2010:221) that allow us to understand different elements of a company’s performance. These can be separated into four categories dependant on what you are trying to interpret with them. Following I will go through each category individually with you.
2.2.1 Liquidity Ratios
Liquidity Ratios show how well a firm can cover it’s current liabilities. But, like all the ratios in this report, the results vary dependant on the operating strategies of the business (Hettinger and Dolan-Heitlinger, 2011:186). For the four categories I will provide you with an example taken from T&L’s five year review using the year 2007.
Take a look at the example below:
This would mean that for every £1 of current liabilities, T&L has £11.70 of current assets. Generally, the higher the ratio, the more liquid a company is.
2.2.2 Profitability Ratios
These ratios let us know ‘the relative success or failure of business performance’ (Gowthorpe, 2005: 284). An example is the operating profit ratio, seen below, which tells us how efficient the company’s operations are.
The given percentage reflects what proportion from each pound of sales is used to pay manufacturing costs. I will discuss this ratio, along with the two investment ratios in more depth later when using them to analyse T&L’s performance from their five year summary. 2.2.3 Efficiency Ratios
Efficiency Ratios allow us to see how efficiently ‘fixed assets have been utilised in the business’ (Gowthorpe,...