Just last week in our class about financial accounting we learnt about the importance and relevance for good accounting principles. Over or understating the assets or liabilities of a company usually corresponds to major repercussions. Early this week Tesco released that it had mistakenly over estimated its profit forecast for the first half of the year by 408 million dollars. This accounting error that Tesco made dropped the share prices 11.6 % in one day to a year to date low of $194 per share.Tesco said the profits overstatement was “principally due to the accelerated recognition of commercial income and delayed accrual of costs”. This means that Tesco wrongly reported the timing of the accounting payments between the suppliers. This crippling accounting error further shows the importance of correctly stating the revenue of the company properly and how devastating a mistake can be to the stock valuations. In response to the error Tesco fired four high level executives and launched an internal investigation as to determine the impact on the full year’s results. However, such precautions will not stop Tesco from generating a 3.6 billion dollar loss on the stock valuation and from losing the trust of numerous investors.
