Financial Accounting

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You are required to research two companies that would be the ideal companies you would like to work for.  The companies should be non-financial companies, i.e. you should not select banks, building societies, insurance companies or estate agents You should write a report to the newly appointed chairperson of the companies, addressing the following issues:Identify six different groups of users of financial statements, who would be interested in these companies (ensure that both internal and external users are fairly represented). Provide a brief summary of these users and a brief description of the purposes for which they will use the financial statements. Obtain the latest four consecutive years of the published Income Statement and Statement of Financial Position (Balance Sheet) for the companies; most importantly the companies should be listed on the London Stock Market.

  • Explain the context, purpose and users of financial reporting.
  • Describe the qualitative characteristics of financial information.
  • Demonstrate an understanding of accounting systems; demonstrate the use of double entry and record transactions and events.




Unilever is a multinational company that manages more than 400 brands of FMCG and more than 12 leads to a humongous sale of more than €1 billion in a single year. The formation of Unilever can be traced to the year 1929 and the headquarters is based in Rotterdam, Netherlands. Unilever has various brands under its name such as Persil, Magnum, Sure, Axe, Lipton, etc. With innumerable brand, it got a strong reach and hence able to cater to more than 150 million people. The products are sold in more than 190 countries and it has a huge base of employees that counts 1,79,000 and above. The corporation contains a huge product base that contains foods, cosmetics, detergents, personal care, shampoos, household products, etc (Unilever, 2016). It consists of two parent companies that operate as a separate entity; Unilever NV and Unilever Plc in London.


Nestle can be tagged as one of the largest company that produces consumer packaged goods that stress on the increment of the nutritional value that is consumed and at the same time taste is increased.  The company is regarded as a company that is attributed to heath, nutrition, and wellness. It is a Swiss company that was established in the year 1866. Similar to Unilever it devotes a lot of time in research and development. It invests more than 1.5 billion in the research activities. It produces more than 10 thousand products and distributes to more than 130 countries (Nestle Plc, 2016).

It has always been concerned about nutrition and hence the marketing strategy is more concerned off the demographics that project the shift in the standard of living. The time has changed completely. It has influenced the lifestyle of the people and the produced products that gathered a lot of focus.

Six Different Groups Of Users Of Financial Statements, Who Would Be Interested In Nestle And Unilever

Business contains various stakeholders that are classified into internal and external stakeholders. Both have a strong interest in the functioning of the company and hence rests on the financial reporting. The financial statements help in projecting the information in a detailed manner that enables the related parties to evaluate the current scenario, growth, and momentum of the company (Berk et. al, 2015). Both the companies have a strong appeal and hence the financial statements are strongly demanded by the stakeholders.

Internal Users

The internal users comprise of the management, employee and the owners. The financial statements enable the managers to judge the performance by creating a benchmark. The performance of the company can be easily compared with that of the competitor (Guerard, 2013).


Owners contribute capital in the business and bear all the risks that are present in the business. They have a strong interest in the profitability and solvency of the business. The owners of Unilever and Nestle are concerned with the profit and solvency as they want to fetch higher profits.  Hence, the owners use the financial statements to get a clear understanding of the performance.


The management of Unilever and Nestle comprises of the Board of Directors, managers and other officials of the business. The accounting information that pertains to the cost of sales, profitability, and solvency is needed for the purpose of planning, control and the process of decision making. The management of both the company is interested in evaluating the business capacity that will help to reap benefits in the future (Bodie et. al, 2014). Further, the management can judge the solvency and ensure that the obligation of the debt is met on time. It will facilitate the preparation of ratio and help in knowing the short term or long term solvency of the business.


Since both the companies are showing rapid signs of progress, the employees will be eager to know about the remuneration policy and job security. The financial statements will clarify the doubts and provide a clear understanding.

External Users


Since both the companies have a strong market and have potential to expand, credit is needed. However, the creditors will be eager to know the credit worthiness of the organization. The terms of credit are defined by the creditors as per the evaluation of the financial health of the business. Creditors contain suppliers and banks (Damodaran, 2012).


Investment is highly needed to expand the business and create a favorable environment. However, the investors will invest only when they are fully satisfied with the company’s performance. The evaluation of the company can be done through the financial statements that will provide a strong understanding of the returns that can be expected (Damodaran, 2012).

Regulatory Authorities

The authorities need to check whether the disclosure of the company is in tune with the rules and regulations of the company. This is in tune with the stakeholder interest so that the decision taking on the basis of such information is correct.

1. Performance Analysis Of Unilever And Nestle Plc

Performance analysis plays a vital role in terms of planning and decision making because the evaluation provides a strong understanding of the past performance of the business and helps in probing further opportunities that can be grabbed by the business (Williams, 2012). It is done through computation of ratios and helps in evaluating the changes that have happened in the business. The profitability ratios are a strong indicator that helps in shedding light on the efficiency level of the company. It denotes the skills of the company in deriving profit from the assets and the investments that it procured. Thus, it is an important consideration in view of the long-term goals of the company. The ratio provides a clear cut understanding in about the ability of the company to earn profits (Damodaran, 2012).

2. A 4 Years Evaluation Of The Profitability Of Nestle And Unilever PLC

Profitability ratios can be described as the main factor that sheds light on the profit earning skills of the company. It is vital from the point of view of the company because a decision can be made for the long term considering the current position (Parrino et. al, 2012). There are various ratios that shed light on the profitability of the company like the gross profit margin, net profit margin and the return on capital employed. The main goal of the company resides in earning of profit and ROC enables to trace the profit that is generated. Hence, through this, an investor can make a sound decision by calculating the profit margin and this guides the investor whether to invest in the company or not. When the fundamental assessment of the company is needed then the return on capital employed is a strong option (Spiceland et. al, 2011).

ROCE = profit before income and tax / (total assets – current liabilities) * 100

Gross profit margin = Gross profit / sales * 100

Net Profit margin = Net profit / sales *100

ROCE, GP Margin, and NP margin are calculated to ascertain the financial well-being of the company. It enables in specifying how effective the organization is, in utilizing the labor, material and the process of production. The Board, as well as the investors,  have a strong reliance on such ratios because it enables in knowing the manner in which the revenue can be converted into profits (Northington, 2011).

The table sheds light on the ROCE, NPM, and GPM on both the companies. The income statement, as well as balance sheet has been utilized to compute the ratios. The table reflects that ROCE of both the companies remained stagnant and had marginal movements. For Nestle ROCE fell from 2012 to 2014 then revived with a marginal positive move however for Unilever, the ROCE kept on increasing from 2012 to 2014 however, fell in the last year (Unilever, 2016).

Gross profit margin indicates the financial health of the business and projects the active nature of the company in terms of utilization of the labor and material (Needles & powers, 2013). The Gross profit of Nestle Plc projected a string increment from one year to another. It was 47.5% in 2012 and with a steady journey, it reached 50.5% in 2016. On the other hand, Unilever GPM even projected an increment in the GPM. The highest jump was witnessed in the year 2016 that accounted 90% jump.

The net profit margin of Nestle could not match the performance of Unilever. NPM of Nestle remained passive and fell in 2016 while Unilever projected increment in all the years. This projects that financial performance of Unilever is better as compared to Nestle Plc (Nestle Plc, 2016).

3. A 4-Year Review On Liquidity And Efficiency Of Nestle And Unilever PLC

Liquidity ratios help in determining the ability of the company in meeting the obligations. It projects whether the company has sufficient funds or resources to cover the obligations that will arise in the near future. It sheds light on the liquidity aspect of the company and strikes whether the company can look forward to growth or be affected by the money outflow. On the other hand, the efficiency ratio indicates how efficient is the management in utilizing the resources of the company to generate wealth (Merchant, 2012). For Nestle Plc and Unilever, three major liquidity ratios and efficiency ratio is computed.

The current ratio determines how effectively the business has rotated the funds so that the inventories and debtors are converted to cash to pay the creditors. It is the excess of current assets over current liabilities (Melville, 2013). A current ratio of 2:1 is regarded as the benchmark. As per the above computation, it can be seen that the current ratio of both the company is inadequate and the availability of current assets are low to meet the obligations. There is a shortage of liquidity.

Quick ratio contains the benefit of excluding stock so that the funds from stock are not released.  The standard ratio is 1:1. The quick ratio of Nestle is better as compared to Unilever as Nestle has us near to the standard ratio and is above .50. However, Unilever is in a dangerous position as it falls below .50 (Unilever, 2016).

4. A 4-Year Review On Working Capital Ratio Of Nestle And Unilever PLC

The working capital is used to project the excess of current assets over current liabilities. If the current assets exceed the level of current liabilities then it is positive and this strikes that the company is not going to suffer from lack of funds or in meeting the obligations. If the current liabilities are more than it is likely to impact the business as it will be difficult to meet the obligations

The above computation projects that the working capital ratio of Nestle is positive in some cases and is better projected to meet the obligations as current assets match current liabilities (Libby et. al, 2011). However, Unilever is facing the acute problem as the base current assets are not sufficient to meet the current liabilities hence, an alarming situation. The inventory turnover of Unilever is more effective as the stocks are released very often but in the case of Nestle Plc, it is slow.


The main aim of the report was to shed light on the financial performance of two giants in the FMCG that is the Nestle Plc and Unilever. To provide a strong analysis, computations of ratio were done that projects the performance of the company in the light of many factors. The computation of liquidity, profitability, efficiency, working capital, and solvency ratio were done. As per the overall analysis, it can be said that both the companies are looking forward to long-term stability and provide immense benefits to the customers at large. Going by the overall scenario, the selection of Unilever should be done as it projects a sound fundamentally. The gross profit has increased steadily that boasts of the profit. The ROE is a firm which the investors vouch for. Moreover, the working capital ratio is satisfactory. Hence, going by the overall analysis the selection of Unilever must be done.


Berk, J., DeMarzo, P. & Stangeland, D 2015,  Corporate Finance,  Canadian Toronto: Pearson Canada.

Bodie, Z., Kane, A. & Marcus, A. J 2014, Investments,  McGraw Hill

Damodaran, A 2012,  Investment Valuation,  New York: John Wiley & Sons.

Guerard, J. 2013, Introduction to financial forecasting in investment analysis, New York, NY: Springer.

Libby, R., Libby, P. & Short, D 2011, Financial accounting, New York: McGraw-Hill/Irwin.

Melville, A 2013, International Financial Reporting – A Practical Guide, 4th edition, Pearson, Education Limited, UK

Merchant, K. A 2012, ‘Making Management Accounting Research More Useful’, Pacific Accounting  Review, vol. 24, no.3, pp. 1-34.

Needles, B.E. &  Powers, M 2013, Principles of Financial Accounting, Financial Accounting Series: Cengage Learning.

Nestle Plc 2016, Nestle Plc Annual report 2016, viewed 28 March 2016,

Northington, S 2011, Finance, New York, NY: Ferguson’s.

Parrino, R., Kidwell, D. & Bates, T 2012, Fundamentals of corporate finance, Hoboken, NJ: Wiley

Spiceland, J., Thomas, W. & Herrmann, D 2011,  Financial accounting, New York: McGraw-Hill/Irwin,University Press

Unilever 2016, Unilever Annual report 2016, viewed 28 March 2016,

Williams, J 2012,  Financial accounting, New York: McGraw-Hill/Irwin.

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