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EDEXCEL BUSINESS STUDIES CASE STUDY JUNE 2009 - UNIT 1 (Tesco plc 2007) watch

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    (Original post by Ariful)
    hmmm i think ur right...........questions will come frm Di and Donny!!!!!!!but we don't hav much info to write about it....so i am sure that the question paper will have additions...nd yeah....<atoo parrt mairo na> i knw u luv xams..or else u wudn't hav bothered writing this huge post.....newayz,...give me the link to the 'TOOLKIT'!!!

    i hate exams.... gave a mock yesterday it was stupid...:eek3:
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    Here are my points on Di and Donny
    The Di and Donny,
    The forecasted cashflow is given;
    Limitations:

     Firstly, it’s a “trading cash flow” not a complete cashflow,
     Secondly, the cash is regarded as a profit this can be evidenced by the “the trading cash-flow is predicted to provide an overall balance of £90 000, compared with £60 000 in 2006.”
     Moreover, the “Subsidies” shows the there will be demand of products which will compel government to grant subsidies to lower the prices.
     Furthermore, the projected cash flow is of year 2006 rather than 2007 so any thing can be expected so there are likely chances of actual cash flow too.
     The opening balance of “60,000” is not added.
     The closing balances of every three months are not added as well.


    an one thing......c'on guyz answer me about tesco wheter it is a legal monoply in UK or not coz it has 30% market share :O:O:O
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    Evaluate the importance of a strong working capital to Teso.

    I wrote this by hand but would like to cross reference points if other people have answered this question then let me know.
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    (Original post by Hello2112)


     The closing balances of every three months are not added as well.

    They are added, Apr-Jun: 28250-250=28000, Jul-Sep: 29500+28000=57500 etc.

    And the cash flow is of 2007, not 2006. The projected closing balance for 2006 was $60,000. So if we were to make adjustments, shouldn't we use the actual rather than the projected? Or is $60000 the actual balance?

    And how come Di and Donny isn't listed here: http://www.tesco.com/regionalsourcin...ge=eastEngland

    I checked all regions.
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    I looked For Di ans Donny aswell couldnt find anything. is it possible that the farm name is different and that we were just given the actual owners names.
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    my lecturer predicts there will be a cash flow question for unit 3. has anyone done some cash flow questions?
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    How about if we discuss those questions from the toolkit? Im gonna post it up. Anyone feel free to post up a sample answer. Unit 1 first.

    UNIT 1

    Topic 1: Structure of Business



    1. What business sectors are considered in the Tesco case study?

    2. "In 1932, Tesco Stores Ltd was formed and in 1947 the company was floated on the Stock Exchange"(line 14-15). Analyse the benefits to Tesco of being a PLC.

    3. "In 2005, it was reported that 2,000 local retail shops had closed down as supermarkets expanded. These closures were one of the factors that led the...industry"(line 9-11). Evaluate the extent to which an oligopoly exists in the UK supermarket industry.

    Topic 2:Business Objectives & Stakeholders


    1. "Tesco...into new retailing services"(lines 27-30). To what extent have corporate objectives been important to Tesco's success?

    2. Explain why profits are important to Tesco plc.

    3. "The core purpose...like to be treated"(lines 26-27). Assess the extent to which Tesco meets its core values with regard to its stakeholders.


    Topic 3: Economic Influences

    1. "In 2007...effect on consumer spending"(lines 42-3). Assess the main macro economic factors and other influences that afffect the demand for Tesco products.

    Topic 4: Legal, Political and Social Influences


    1. To what extent does Tesco fulfil its requirements for Corporate Social Responsibility (CSR).

    2. "The OFT... local retail market..."(lines 11-12). Assess the extent to which the OFT could be justified in its concern with respect to Tesco.


    Topic 5: Internal Organisation and Communication

    1. Analyse the issues of communicating with Tesco's large workforce of 276000 workers. (the toolkit stated 276000, but if calculated from the case study its 376000, not sure which is the correct one)

    Topic 6: Motivation in Buiness

    1. Analyse the use of extrinsic and intrinsic rewards as a way of motivating Tesco's large workforce.



    p/s: pls refer to the case study for information on the lines stated.
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    erm if u guys need unit 2 & 3 questions, let me know ok.
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    Yaa sure v hve been looking for the questions for unit 3
    ................sure !
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    Tesco has shown improvement
    in managing its working capital over the years. It can be deduced that in UK Tesco runs
    on negative working capital of 15 days and effectively manages its relations with
    suppliers with less stock in its warehouses. Tesco on average pay its suppliers in 32 days
    with stock holding of about 17 days. These figures are the best amongst the rivals of
    Tesco. Whereas Sainsbury one of the main competitor of Tesco faces some problem with
    its working capital management as they are trying to negotiate longer payment periods
    from their supplier to improve its working capital. Sainsbury over past three years have
    done cash flow improvements through cutting back capital expenditure and improving
    the working capital. But Tesco is on its toes as well and looking into development of new
    methods for driving its business by wider programme of improvements in managing
    working capital. Working Capital is the amount required to finance stock and debtors
    after deducting the credit made available by the suppliers. In case of grocery retailing
    stock is readily converted into cash at checkout counters long before the suppliers are
    paid. In retail industry debtors are insignificant and creditors surpass stock by
    considerable margin hence, creating a negative working capital margin. Trade credit
    generated can be used to finance other business activities and that what Tesco is doing.
    Tesco has said that it aimed to be the number one food retailer in all of its 11 over sea
    markets. Effective management of working capital would help Tesco achieve this goal.
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    this is some information i got it from a website! i think its really useful!
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    Toolkit for Unit 3

    UNIT 3

    Topic 1: Financial Accounts

    1. Explain how Tesco utilises its fixed assets to help its expansion objective.

    2. Evaluate the cash flow problems faced by Di and Donny's Farm.

    3. Evaluate the usefulness of ratio analysis in understanding Tesco plc's financial performance.

    4. Assess the extent to which the Cash Flow information shown about Di and Donny's Dairy Farm enables the reader to evaluate the overall prospects for the business.

    Topic 2: Budgeting

    1. Assess the extent to which the use of budgeting might assist Tesco in managing its global operations.

    Topic 3: Classification and Analysis of Costs

    1. Discuss the role of contribution analysis in determining the viability of each of Tesco's product lines.

    2. "... start up losses..."(lines 93-4). Evaluate the usefulness of breakeven analysis for Tesco in starting up in the American market.
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    (Original post by yenyuin)
    erm if u guys need unit 2 & 3 questions, let me know ok.



    hey...... cud u plz post me tha link for the toolkit....nd tha questions plz ......
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    1) Using the context distinguish between capital and Revenue expenditure?

    Ans1) Capital expenditure means buying of fixed assets that are going to last in the business for more than one year for example: during 2007/2008 tesco opened 574 stores.


    Revenue expenditure means spending on all assets and expenses that give a business a short term benefit except fixed assets. For example: the wage paid to the people who work in tesco.

    2) Analyze reasons why Tesco plc must distinguish between its capital and Revenue Expenditure?

    Ans2) Capital expenditure means buying of fixed assets that are going to last in the business for more than one year.

    Revenue expenditure means spending on all assets and expenses that give a business a short term benefit except fixed assets.

    Reasons of distinguishing between revenue and capital expenditure are:

    1) Revenue expenditures are those expenses that have to be paid as a hole once it has been anticipated like for example wages for the workforce paid by tesco. While capital are those expenses that will not be paid all together when anticipated like for example if tesco buys a truck for delivery it won’t be written in the balance sheet as a whole expense but instead it will be depreciated for a certain amount time like 5 to 6 years.

    2) Tesco must distinguish between capital and revenue expenditure because once a capital expenditure is occurred in the long run it can be exchanged for cash for example the lands banks that tecso has if sold can raise the share prices by 40 %. But revenue expenditure cannot be exchange in the form of money once u have anticipated the expenses it can’t be changed to money for example the petrol needed for a delivery van in tecso cant be sold back to get money.

    3) Explain the difference between profit and Cash in Financial Statements?

    Ans3) profit is the surplus of revenue over cost for a certain period of time. Most people are interested in the profit because it will tell them (stakeholders) how is the business being managed are the expenses being over weighted by the sales or vise versa. Profit tells the stake holders about the profitability of the business.

    Cash is the amount of money that a business has in hand or in the bank. Cash tells the stakeholders about the liquidity of the business that is the business able to pay its debtors on time or is the firm liquid enough to face surprise problems in the industry.


    4) Using the context assesses the extent to which Break-even analysis is a suitable financial tool for a Tesco supplier such as Di and Donny's Dairy Farm?

    Ans4) break even means when total cost of the business equals the sales revenue which means it will show the firm when it’s going to start to make a profit.
    Break even can be measured by using a graph or using and equation (total fixed cost / contribution).

    As mentioned in the case study that 94%of tesco suppliers say that tesco is trustworthy, fair and reliable and that tesco has an on going commitment with di and Donny this mean tesco is going to tell the exact amount of good that tesco will need which means di and Donny know their quantity being sold. Di and Donny can estimate their fixed cost (good that don’t change as the output changes). Like for example the amount of land it will need to produce the good to supply tesco. Di and Donny can also predict that how much variable cost will be incurred in the production of the good. Then di and Donny can add up the variable and fixed cost and get a conclusion of total cost. Since di and Donny know how much they have to produce they can set a price that will get them a sufficient amount of profit and plot the graph if their break even point is reached easily it a good thing but if not di and Donny will have to do all of the process all over again. Or they can just take the expected amount of fixed cost and divided it with the contribution which is the variable cost minus the selling price if the amount of break even is the same as spotted in the graph then they will have to do the process al over again with predicting the cost and everything mush more correctly than before.

    However the break even will have a series of problem like:

    1) Break even predicts that the fixed cost is the same and doesn’t change while this is not true.
    2) Since it is based on assumption the assumptions can go very wrong and there might the problem of doing the break even again which is time consuming
    3) Break even will not even take the surprise changes in the economy such as the inters rate falling in 2007 which dropped the sales for tesco this means lesser demand which means lesser supply.













    5) Discuss the importance of working capital in the financial management of Tesco plc?

    Ans5) Working capital measures how much in liquid assets a company has available to build its business and is calculated using the following formula, Current Assets – Current Liabilities.
    Since Tesco has stores scattered throughout the nation, a strong WC in respective stores will allow them to gain business opportunities. A strong WC will ensure short term survival of the business. However, WC can be misleading if a large portion of it is in the form of Debtors and Stock instead of other liquid assets such as Cash/Bank.

    WC will be misleading in these cases as a lack of sales will build up stocks, and credit sales will increase debtors, thus also increasing chances of bad debts. The business will not be receiving cash in any of these situations, and as such will face liquidity problems if this persists.

    However, if WC is well balanced or is more concentrated upon cash/bank, Tesco will be able to engage in further market research, expansion, new projects, R&D and participate in more corporate responsibility programs. These will eventually bring in long term benefits such as economies of scale and reduced cost per unit.

    A strong WC is always beneficial as it reflects good operations and opens doors for new opportunities. It acts as a major key to survival, and can possibly save Tesco from bankruptcy, however it is can easily mislead, and alone is not sufficient to measure the financial performance of Tesco. Hence, other analysis tools such as the Quick Assets and Gearing ratios must be utilized to fully evaluate Tesco’s performance.

    A strong WC is not always a positive sign as it also indicates that cash is tied up in the business, and if cash makes up majority of WC, it could also mean that Tesco does not enough stock to meet future demand.

    6) Define the term budgeting?

    Ans6) budgeting are plans for the future of the business these budgets are formed by first planning second effective allocation of resources third setting targets forth coordination fifth monitoring and sixth modifying.










    7) Evaluate cash flow position for Di and Donnie?

    Ans7) cash flow describes the flow of cash in to and out of a business. And tells about the liquidity position of the business

    As can be seen in the trading cash flow of di and Donny is well constructed even thought it has a negative cash balance in the begging year it has well recovered from it most probably from bank overdraft.

    However we cannot actually tell liquidity position from the just the trading cash flow we will have to see the liquidity ratios to be sure that di and Donny are liquid enough to pay it short term debts the ratios that tell about the liquidity position of the business are current ration and acid test ration which we are unable to find in the case of di and Donny because of in sufficient information provided we will need to see the profit and loss account and find the current assets and dived them by current liability. Plus in the case study we are only provided with the trading cash flow the full cash flow which means in reality maybe di and Donny might not be as liquid as shown in trading cash flow because the payments might be higher than the receipts in the real cash flow. And also because this trading cash flow is a prediction they might have not taken into account the rise in interest which will actually decrease the sales.

    8) associate the loss of $85 million to capital and revenue expenditure?

    Ans8) Capital expenditure means buying of fixed assets that are going to last in the business for more than one year

    Revenue expenditure means spending on all assets and expenses that give a business a short term benefit except fixed assets

    as stated in the case study that it’s a start up loss this means the loss was basically because of buying new capital expenditure in US which means new land in order to build tesco and there would also be other cost such as the labor who are working to build the building or the labor which will be employed in the business there will also be the transportation cost for the movement of good from the supplier to the stores there would also be the cost of decorating the store all of these cost will be recorded as a revenue u expenditure there would also be the cost of promoting tesco in US as because it’s a new formed business this means a lot of advertising. Tesco might have also kept the prices below its cost in order to attract customers which might have lead to a loss in the business.

    dunno whether they are good enough but plzz correct it
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    one of the question was already ans by someone ere so thanx for that ans
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    hey.....haider.....av ya done any answers on the importance of brand extension strategy of tesco for unit 2 .....................
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    (Original post by crazymujib)
    hey...... cud u plz post me tha link for the toolkit....nd tha questions plz ......
    Sorry I do not have any link to get the toolkit. It was bought by my lecturer and she distributed it in hard copies for us.
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    (Original post by aayman_farzand)
    Evaluate the importance of a strong WC and as a financial performance indicator of Tesco.

    Working capital measures how much in liquid assets a company has available to build its business and is calculated using the following formula, Current Assets – Current Liabilities.
    Since Tesco has stores scattered throughout the nation, a strong WC in respective stores will allow them to gain business opportunities. A strong WC will ensure short term survival of the business. However, WC can be misleading if a large portion of it is in the form of Debtors and Stock instead of other liquid assets such as Cash/Bank.

    WC will be misleading in these cases as a lack of sales will build up stocks, and credit sales will increase debtors, thus also increasing chances of bad debts. The business will not be receiving cash in any of these situations, and as such will face liquidity problems if this persists.

    However, if WC is well balanced or is more concentrated upon cash/bank, Tesco will be able to engage in further market research, expansion, new projects, R&D and participate in more corporate responsibility programs. These will eventually bring in long term benefits such as economies of scale and reduced cost per unit.

    A strong WC is always beneficial as it reflects good operations and opens doors for new opportunities. It acts as a major key to survival, and can possibly save Tesco from bankruptcy, however it is can easily mislead, and alone is not sufficient to measure the financial performance of Tesco. Hence, other analysis tools such as the Quick Assets and Gearing ratios must be utilized to fully evaluate Tesco’s performance.
    Most of the points are taken from the mark scheme of past papers.

    And here's a point which I forgot to include in the answer. It needs some work, but you'll know what I'm trying to say.
    ayman i guess it will be better to further elaborate the points....
    give some problems resulting from the lack of working capital such as poor relationship with suppliers resulting from inability to pay debts or higher creditor payment period, which might further lead to supply of stocks being halted and therefore result in loss of sales as well as a loss of reputation within the market...in addition u could mention inability to raise loan for any investment as lenders are likely to ascertain the credit worthiness of tesco plc... poor working capital will also lead to demotivated staff as it will be short of cash to pay its fixed costs nn overall it can lead to a loss of shareholder confidence, therefore in future tesco might find it hard to finance its expansion objective through shareholders equity

    However as tesco plc is a retailing business therefore it is unlikely that it will face working capital shortages due to the fact that most of its sales are on cash nn it will be having a higher stock turnover.

    so wat say abt these points?
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    (Original post by crazymujib)
    hey.....haider.....av ya done any answers on the importance of brand extension strategy of tesco for unit 2 .....................

    no man srry im only doing unit 3
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    (Original post by shoaib farooq)
    ayman i guess it will be better to further elaborate the points....
    give some problems resulting from the lack of working capital such as poor relationship with suppliers resulting from inability to pay debts or higher creditor payment period, which might further lead to supply of stocks being halted and therefore result in loss of sales as well as a loss of reputation within the market...in addition u could mention inability to raise loan for any investment as lenders are likely to ascertain the credit worthiness of tesco plc... poor working capital will also lead to demotivated staff as it will be short of cash to pay its fixed costs nn overall it can lead to a loss of shareholder confidence, therefore in future tesco might find it hard to finance its expansion objective through shareholders equity

    However as tesco plc is a retailing business therefore it is unlikely that it will face working capital shortages due to the fact that most of its sales are on cash nn it will be having a higher stock turnover.

    so wat say abt these points?
    Ya I already had those in mind, will only mention them if its the third part of 1 or 2, or 2nd part of 3.

    Btw, I replied to you in BSF.

    Edit: No one here mentioned overtrading.

    Overtrading is the expansion of a business at too fast a rate for the working capital to support. It is a common cause of business failure as it leads to illiquidity.
    For Di and Donny this could be a problem, not for Tesco.

    Edit2: Appendix 2 is probably for 2006 http://en.wikipedia.org/wiki/TNS_Worldpanel

    Edit3: Another thing, I don't remember who mentioned it but Tesco is a natural monopoly, not a legal monopoly. Legal monopolies are those that the government grants permission to produce a specific product.
 
 
 
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