Conceptual Frameworks of Accounting - Assignment Example

FINANCIAL ACCOUNTING AND REPORTING By of the of the School Task Q1 Conceptual frameworks of accounting basically identify a range of different user groups, commonly known as stakeholders of any given organization. These stakeholders’ include (Weygandt et al 2010, pg. 5): i. Present and potential investors ii. Employees iii. Lenders iv. The public v. Government agencies particularly tax authorities vi. Customers vii. Suppliers viii. Other trade creditors Through the financial reporting, these stakeholders need different range of information for various reasons. These reasons include: i. General purpose financial reporting provides information needed by the stakeholders to make decisions about holding, selling and buying debt or equity instruments particularly in the case of lenders, present and potential investors and other trade creditors. Further, they need the information to set or provide loans or other types or forms of credit (Weygandt et al 2010, pg. 4). ii. This kind of information informs the stakeholders about the financial performance, financial position and changes in the financial position of the company or organization. iii. They need the information about the resources of the organization not only to assess the prospects for future organization’s net cash inflows but also to identify how efficiently and effectively the organizations management has discharged or performed their duties and responsibilities in using the existing resources of the organization. For instance, it helps them to portray the results of the stewardship management hence being able to assess the management’s accountability so that their decision making process is influenced for their betterment (Weygandt et al 2010, pg. 4). Types of financial and non-financial; information needed by the stakeholders Financial Non-financial Investors Earnings and revenue growth Cash flow trends. Debt load Environmental, social and governance (ESG) performance for instance Anti-corruption/bribery Protection of human rights Social/employee matters Environmental issues Employees Adequate returns, profits and income Remuneration rate Other Employee benefits and payments Good reputation of the company Employee development programs Future growth potential Organization culture Fairness, anti-corruption/bribery Lenders, supplies and other trade creditors Financial position (liquidity) Cash flow trends Earnings and profits(profitability) Creditworthiness of the organization (credit rating) Growth prospects Customers Earnings/profits Cash flow growth Affordable prices fairness of pricing policies high quality and safe products corporate social responsibility programs going concern of the organization (growth prospects) The public profits cash flow trends to sustain the programs Social benefits and welfare programs Employment opportunities Environmental protection programs Government agencies Allowable expenses Profits or earnings Taxable income Tax paid Expected future profits Proportion of profits absorbed by taxation Level of sales activity Stocks, investments, liquidity and dividend levels, Filing of tax returns at an appropriate time Compliance with required rules and regulations in the preparation and reporting process Future investment plans Q1.2. Regulatory agencies and bodies are basically formed to address the needs of various user groups of financial statements. They usually address these needs by specifying procedures and requirements that should be followed in preparing and presenting financial statements. The different aspects used in addressing these needs include a) Conceptual framework of financial reporting This Framework states the basic concepts that should be followed in preparing and presenting the financial statements particularly for the external users. It addresses the needs of different user because by addressing the reporting of the financial reporting, qualitative characteristics of the useful financial information, and by stating the definition, measurement and recognition of different elements of the financial statements (Alexander & Archer, 2008, pg. 2.20). b) International Accounting Standards IAS on the other hand, addresses the needs of the users by detailing the preparation of financial statements and by explaining the accounting treatment of various items in the financial statements, for instance inventories, leases, intangible assets to mention but a few. c) International Financial Reporting Standards IFRS on the other hand, are designed in order to make company accounts comparable and understandable across international boundaries because it acts as a common global language particularly for multinational corporations. They specify accounting rules to be followed by accountants in order to maintain their books of accounts in a manner that is relevant, comparable, reliable and understandable as per the internal and/or external users hence addressing their varied needs (Alexander & Archer, 2008, pg. 2.20). Q1.3. Explain why financial reporting as a discipline needs to be regulated? Discuss major regulatory bodies and their influence on the UK, European and global financial reporting. Financial reporting as a discipline is relied upon by many user groups for their decision making processes. This therefore requires that it be highly regulated to ensure that these needs are met. The following reasons indicate why this process should be regulated apart from the above reason. Firstly, the financial statements are usually subject to accounting fraud because the management is normally rewarded based on the company’s performance which is usually measured using the financial statements that they prepare themselves. The financial reporting should be therefore regulated to reduce the opportunistic behaviors that may come from the managers and owners to report unrealistic earnings so that they may attract many investors fraudulently (Alexander & Archer, 2008, pg. 2.25). Secondly, the financial reporting is relied upon by many stakeholders to make various financial decisions; it should therefore be regulated so that a credible financial reporting is established to ensure that there is high degree of reliability. This will ensure that valid decisions are made on the part of the stakeholders. Thirdly, to achieve economic efficiency, the financial reporting needs to be regulated so that the interest of the public and other stakeholders is protected from unfair and irrelevant deeds of the management and owners. This will ensure that all the information needs of stakeholders, particularly the individual shareholders are met. This will ensure that situations of information asymmetry are rectified (Kieso et al, 2011, pg. 125). Financial reporting should be regulated so that the competitive advantage enjoyed by the accountants is eliminated and hence making them be accountable for their mistakes particularly their fraudulent acts. This is achieved by listing the rules and regulations to be followed in the preparation and presentation process hence ensuring infirmity for easy comparison purposes. Finally, worldwide capital markets are highly sensitive to any released information. Any unfavorable information released distorts the confidence of the investors hence making them to sell their stocks so that further loss can be avoided. In addition, free rider problem in the capital markets (market imperfection on the capital markets) demands for the need of regulation so that efficient level of accounting information can be disclosed by the firms. On the other hand, there is a need to set a standard accounting treatments so that the increasing complexity and complicated nature of business and accounting practices can be addresses so that comparability and transparency of financial reporting can be efficiently increased (Alexander & Archer, 2008, pg. 2.20). Major regulatory bodies Basically company’s success is highly dependent upon the financial accounting and reporting it adopts. Accounting and reporting world is governed by numerous Regulatory bodies which set the standards in terms of decision making and language of accounting to be used by a company. Without these overseeing or regulatory bodies, there would be lack of good decisions and complete chao. These regulatory bodies include: a) Internal Accounting Standards Board (IASB) The body was actually established to develop financial accounting standards that are understandable for financial statements. Its main objective is to develop accounting standards. It influences the UK, European and global financial reporting because it ensures that one set of accounting standards is established and used globally because of the enhanced global market (IASB, 2009). b) The Financial Accounting Standards Boards (FASB) This body was established in 1973 particularly by the Securities and Exchange Commission. It influences the UK, European and global financial reporting because its main objective is to provide a uniform set of financial reporting standard for the public. It therefore ensures that global investors and the public are protected from fraud (FASB, 2009). c) The Governmental Accounting Standards Board (GASB) The main aim of this body is to establish a set of standards and guidelines to educate the financial report users so that they may be able to better understand the useful information provided in the financial reports (GASB, 2009). d) Security and Exchange Commission (SEC) This body was established after the great crash of 1929 so that abusive stock market crashes that accrued can be curbed hence returning stability to the stock markets. The Securities Act of 1933 primarily deals with the truthful disclosure about the securities that are sold in the primary market. The Securities and Exchange Act of 1934 sees that adequate information about the securities that are traded in the secondary markets is provided. This led to the establishment of the Security Exchange Commission (SEC).The SEC therefore aims at enforcing the congress laws and also ensuring that all publicly reporting firms and companies actually comply with the (GAAP) generally accepted accounting principles (SEC, 2009). e) The International Federation of Accountants This organization was founded in Munich, Germany on 7 October 1977. It has various bodies under it. The main aim of founding it was to represent accountants in education, public practice, industry, and commerce and government service. f) Financial Services Authority The body was responsible for regulating the financial services in the UK between 2001 and 2013. However, it was abolished because of the perceived Bank’s regulatory failure during the 2007-2008 financial crises. It influenced the UK because it aimed at protecting consumers by promoting healthy competition among financial service providers and ensuring that the industry remained stable g) Financial Reporting Council This is the independent regulator of the Republic of Ireland and the UK which is basically responsible for the promotion of high quality governance of the corporates and reporting in order to foster investments. It influences the UK, European and global financial reporting because it aims at promoting high quality reporting and corporate governance thus fostering investments in the countries. h) The Institute of Chartered Accountants in England and Wales (ICAEW) This is a professional body in the UK formed to train chartered accountants so that they can have work experience and skills that the business world demands. It influences the UK, European and global financial reporting because it aims at promoting high quality reporting. Q 1.4 (a) Provisions of financial reporting for the companies incorporated in the UK as per Companies Act 2006 In preparation and reporting of the financial statements, directors should adhere to the generally accepted accounting standards (GAAPs) and practices of the IFRS, IAS, FASB, GASB or US GAAP. (b) Main provisions of Companies Act 2006 pertaining to Income statement, balance sheet and disclosures. Financial statements (income statement, balance sheet and notes) prepared for any given reason should give a true and fair view. These financial statements prepared should be subject to audit. Preparation of financial statements in not a requirement. (c) Provisions of the Directives relating to the financial accounting and reporting. The 8th European Directives prescribes the following Quality assurance by the audits A public oversight that is independent More frequent rotation No conflicts of interest on the part of the auditors Task 2, A, B and C (see the attached excel file) Q 2.1 Income statement for the year ended 31 December, 2013 sales 480000 less sales discount 8000 sales returns 12000 20000 net sales revenue 460000 less cost of goods sold 300000 gross profit 160000 less operating expenses administrative expenses stores salaries 25000 salaries 9000 add: accrued salaries 3000 12000 utilities 17000 add: accrued utilities 1000 18000 57000 selling expenses stores supplies 120000 less: At hand 100000 20000 freight out 7000 advertising expense 16000 less: prepaid for next year 8000 8000 depreciation on stores equipment 8000 provision for bad debts 2950 45950 total operating expenses 102950 operating income 57050 income from other activities interest revenue 3000 add: accrued interest 2000 5000 net income 62050 balance sheet as at 31 December 2013 assets cost depreciation net book value land 50000 stores equipment 50000 16000 34000 accounts receivable 59000 2950 56050 cash 300000 inventories 416000 total assets 856050 capital and liabilities capital 800000 less drawings -10000 add: net income 62050 852050 accrued salaries expense 3000 accrued utilities expense 1000 total capital and liabilities 856050 Q2.2 INDIRECT METHOD STATEMENT OF CASH FLOW FOR THE YEAR ENDED 31 DECEMBER 2013 cash flow from operating activities net profit before taxation 2370 add depreciation 880 net cash flow before working capital changes 3250 adjustments decrease in receivables 280 increase in inventories -370 decrease in payables -390 net cash flow from operating activities 2770 Q 2.3 Income statement for the year ended 31 March 2011 sales 60000 opening inventory 3200 purchases 44000 47200 less damaged inventory w/o -1000 less stolen inventory -4000 42200 less closing inventory 6200 cost of goods sold 36000 gross profit 24000 expenses trade expenses 7400 inventory damaged 1000 inventory stoles 4000 vehicle expense 7020 discount allowed 1620 depreciation buildings 500 motor vehicle 1500 1500 22540 net profit 3100 statement of financial position as at 31 March 2011 assets cost accumulated depreciation net book value buildings 10000 6500 3500 motor vehicles 5000 3000 2000 inventory 6200 trade accounts receivable 6700 prepayments (trade expenses) 80 balance at bank 4810 total assets 23730 capital and liabilities capital 16800 add net profit 3100 less drawings -4300 15600 trade payables 7600 accrued expenses 530 8130 23730       cash book       opening balance 4310 trade accounts payable 39400 trade accounts receivable 57980 trade expenses 7360 agency commission 300 vehicle expenses 6720   drawings 4300   balance c/f 4810 62590 62590       income and Expense account (I&E)   sales 60000 opening inventory 3200 purchases 44000 47200 less damaged inventory written off -1000 less stole inventory -4000 42200 less closing inventory -6200 cost of goods sold 36000 gross profit 24000 cost 60% gross profit 40% sales 100%     trade accounts receivable       opening balance b/f 6300 discount allowed 1620 sales 60000 cash received 57980   closing balance b/f 6700 66300 66300     trade accounts payable       discount received 1200 opening balance b/f 4200 cash paid 39400 purchases 44000 closing balance c/f 7600   48200 48200         vehicle expenses       cash 6720 accrual b/f 230 accrual c/f 530 I&E accounts 7020 7250 7250                 prepayments 120 I&E accounts 7400 cash 7360 prepayment c/f 80 7480 7480 workings 1. purchases=100%/15 0f £440 2. closing inventory=3200+3000=£6200 Q 2.4 1. Total amount paid for the acquisition= 75%*160000=£120000     cost of control accounts         consideration 180000 share capital(75%*100000 75000   Pre-acquisition profit(75%*60000) 45000   goodwill written off 36000   balance to consolidated balance sheet 24000 180000 180000   2. goodwill calculation= 180000-120000= £60000 goodwill written off =(60000/5)3=£36000 3. minority interest     minority interest         balance to consolidate balance sheet 57500 shares capital(25%*100000) 25000   accumulated profit (25%*130000) 32500 57500 57500   4. accumulated profit         accumulated profit         minority interest 32500 my company 240000 cost of control (75%*60000) 45000 Orset limited 130000 goodwill written off 36000 balance to consolidated balance sheet 256500   370000 370000 consolidate balance sheet       as at 31 march 2013       assets goodwill 60000 less: amortization 36000 24000 sundry net assets 790000 total assets 814000 capital and liabilities share capital 500000 accumulated profit 256500 756500 minority interest 57500 total capital and minority interest 814000 Task 3a Q3.1 The following user groups requires information on the following Lenders, suppliers and other trade creditors Solvency of the company (ZüLch & Hendler, 2011, pg. 7-8). Present and potential investors Firm’s risk and return Firms ability to pay dividends on their investments In general they require information on firm’s financial performance, financial position and its ability to generate cash. The public The firm’s recent developments and the trends on its prosperity which may enable it to make substantial contribution to the local economy. Employees Firm’s ability to provide employment opportunities, remuneration, retirement and other benefits. Firm’s stability and profitability Firm’s financial position and financial performance Customers Assurance of the firm’s continued existence Firm’s financial position (Weygandt et al 2010, pg. 6). Governments and their agencies Compliance with rules and regulations. Firm’s profitability and liquidity (financial position) (ZüLch & Hendler, 2011, pg. 7-8). Task 3B Q3.2 Procedure to follow in publishing financial statements in annual reports Preparation of individual accounts Preparation of group accounts Preparation of notes to the accounts Approval and signing of the accounts by the directors Preparation of director’s report Circulation of the copies of accounts and reports Filling of the reports and accounts Revision of the defective accounts and reports Publication of the accounts. Q3.3 The company would need to comply with accounting standards and reporting regulations stipulated by the US GAAP, the Financial Accounting Standards Boards (FASB) and the Governmental Accounting Standards Board (GASB). The present differential accounting considerations include: In the US Last in First out (LIFO) is permitted as inventory costing method unlike in the UK. In the US revaluation of assets in certain circumstances is not allowed. US GAAP uses two-step method to impair write-downs unlike IFRS which uses single-step. Q3.4 partnership income statement       for the year ended 31 March 2013     sales revenue 448700 less cost of goods sold opening inventory 15600 add: purchases 184600 200200 less closing inventory 21400 178800 gross profit 269900 less expenses salaries 88000 insurance (4000-1500) 2500 rent (3000+(1.10*10000) 41000 sundry expenses 39400 depreciation (48300-12800)*20% 7100 bad and doubtful debts 2400 less adjustments (3800-3300) -500 1900 179900 net profit 90000             division of the profit   You   Brador   total     net profit       90000     capital   2500   2500   5000           85000     profit balance (85000* 60,40%   51000   34000   85000       53500   36500   0                               partners current account             You Brador   You Brador   opening balance     2600 opening balance   3800     drawings   48400 36900 share of the profit   53500 36500   balance c/f   8900   balance c/f     3000     57300 39500   57300 39500                 4. A Analysis of financial statements Liquidity ratios 2012 2013 2014 Industry average Current ratio 2.33 1.10 1.85 2.7 Quick ratio 0.85 0.37 0.67 1 Liquidity ratios indicate the firm’s ability to meet its short term obligations as they fall due (Graham & Smart, 2012). The firm’s current ratio decreased from 2.33 in 2012 to 1.10 in 2013. It then increased to 1.85 in 2014. Even though the firm is able to meet short term obligations, its liquidity level is lower than that of the average industry (Kapil, 2011, pg. 121). The firm’s quick ratio also showed the same trend as the current ratio, decreased in 2013 and increased in 2014 implying an increase in the firm’s ability to meet short term obligations using its most liquid assets. The firm’s current and quick ratios are however; lower than that of the industry average. This indicates that the firm is less liquid when compared to the industry average. Activity ratios 2012 2013 2014 Industry average Average collection period 37.35days 39.55days 45.55days 32days Accounts receivable ratio 9.77times 9.23times 8.01times 11.4times Total asset turnover 2.34 2.04 2.01 2.5 Fixed asset turnover 9.95 6.21 8.61 2.5 Inventory turnover 4.0 4.45 3.55 6.1 Activity ratio basically shows how well it is managing its liabilities and/or how effectively a company is utilizing its assets. These ratios indicate how efficiently the assets of the firm are working to generate sales revenue (Graham & Smart, 2012). Average collection period has increased throughout the period hence showing that the firm takes more time to collect its receivable. The company’s accounts receivable period is higher than that of the industry average, this shows that the firm takes more time to realize the accounts receivable hence reduction in efficiency. The decrease in the accounts receivable ratio indicates reduction in efficiency in using receivables to generate returns. This ratio is however; lower than that of the industry average. This shows that the firm is less efficient that the industry. The company’s total asset turnover and inventory turnover have decreased throughout the period implying that the company is using more assets and inventory to generate less revenue hence inefficient in their operations. Both the ratios are also less than those of the industry average thus showing that the firm is less efficient in using its assets and inventories to generate revenue. Even though fixed asset turnover has decreased, it is greater than the industry average. This shows that the firm is more efficient in using its fixed assets to generate revenue that the industry. It also indicates that the firm using few assets to generate more revenue. Generally in terms of activity, the firm is less efficient in their operation than other firms in the industry (Graham & Smart, 2012, pg. 42). Debt ratios 2012 2013 2014 Industry average Debt ratio 54.81% 95.37% 55.61% 50% Debt-equity ratio 1.21 20.58 1.25 1 Times interest earned 3.35 -3.92 6.28 6 These are ratios that indicates how leveraged a company is. They assist a company to compare their equity to the borrowed funds. It shows the proportion of the company’s activities that is funded by the borrowed funds in comparison to those activities funded by the equity. It therefore, measures the company’s long term solvency (Khan & Jain, 2007). The debt ratio and debt-equity ratio are higher than that of the industry average, this shows that the company is highly leveraged, uses more debts than other firms in the industry hence the company is considered to have taken on more risk compared to the industry. Times interest earned decreased in 2013 to -3.92 and increased in 2014 to 6.28 which relatively higher than the industry average value. This indicates that the firm has more cover for the interest expense. Generally the company is very risky than other firms because it uses more debts in its operations and has more business risks. Profitability ratios 2012 2013 2014 Industry average Gross profit margin 6.09% -11.84% 7.14% 15% Net profit margin 2.56% -8.91% 3.60% 5% Return on assets 5.99% -18.14% 7.25% 9% Return on equity 12.25% -39.42% 16.34% 18% Profitability ratios determine the company’s bottom line and the returns it gives to the investors. These ratios indicate the company’s overall performance and efficiency. These ratios are generally grouped into two: returns and margins. Margin ratios show the company’s ability to translate the dollar sales into the profits. Return ratios; on the other hand, shows the company’s ability to measure its overall efficiency through the generation of the returns to shareholders and other stakeholders. These ratios basically highlight the ability of a company to generate its earnings relative to sales, assets, and equity (Mukherjee & Mohammed Hanif, 2006). The company’s profitability ratios have considerably decreased in 2013. However, they have also increased considerably in 2014. Generally these ratios re below the industry average value, this implies that the company is less profitable than other firms in the industry. The company is therefore relatively less efficient in its operations compared to the industry average hence. However, apart from the year 2013, the firm is profitable enough to meet its operating expenses and other expenses and still realize some earnings from its operations (Thukaram Rao, 2003). Market ratios 2012 2013 2014 Industry average P/E ratio 91.15 -14.46 83.48 14.2times M/b ratio 1.32 1.23 1.41 2.9times Market value ratios evaluate the economic status of a company in the wider marketplace. These ratios give the management of the firm an idea of what their investors perceive or think of the company’s current performance and future prospects. Market value ratios therefore help in measuring the different ways the relative value of a firm’s stock are viewed (Kapil, 2011, pg. 121). According to the P/E ratio, the firm’s stocks are highly valued compared to the industry average. This shows that investors expect a higher earnings growth from the company than any other companies. This implies that the firm’s investors are willing to pay more per dollar of earnings than those of other firms in the industry. However, the firm’s M/B value is lower than that of the industry. This shows that the firm’s relative value is lower than the industry average. However, the value is more than 1 showing that the stock is undervalued. When compared to the industry average, this value is less than the industry average; implying that other firms in the industry has greater market capitalization than the firm. 4. B comparison Liquidity ratios Next 2011 2012 2013 Current ratio 1.28 1.54 1.48 Quick ratio 0.99 1.05 1.08 Burberry 2011 2012 2013 Current ratio 1.60 1.70 1.72 Quick ratio 1.66 1.82 1.42 Next’s current ratio fluctuates, increases and decreases showing a fluctuation in liquidity. Its quick ratio however increased consistently. On the other hand, Burberry current ratio increased consistently implying an increase in liquidity while its quick ratio fluctuated. According to liquidity ratios, Burberry should be considered for future investments because current ratio implies an increase in its ability to meet short term obligations. In terms of quick ratio, Next should be considered for future investment because the ratio indicates an upward trend. However, Burberry is more liquid evidenced by its high ratio values and for that Burberry should be considered for future investment. Activity ratios Next 2011 2012 2013 Average collection period 71.5days 74.14days 73.56days Accounts receivable ratio 5.10times 4.92times 4.96times Total asset turnover ratio 1.84 1.86 1.88 Fixed asset turnover ratio 4.55 4.82 5.20 Inventory turnover ratio 6.53 6.44 7.34 Burberry 2011 2012 2013 Average collection period 32.21days 28.54days 29.15days Accounts receivable ratio 11.33times 12.79 12.52 Total asset turnover ratio 1.10times 1.15 1.14 Fixed asset turnover ratio 3.04 3.17 2.56 Inventory turnover ratio 1.98 1.79 1.59 A critical look at the ratios indicates that Burberry manages their receivables efficiently than next. It converts them to cash in a short period of time unlike Next which uses twice as much as the period taken by Burberry. When considering future investment, Burberry is better off in terms of accounts receivable period and accounts receivable ratio. Next total asset turnover increased considerably while that of Burberry fluctuated. This implies that Burberry is worse off compared to Next in terms of this ratio. With regard to fixed asset turnover, Next is better off that Burberry because its ratio shows an upward trend hence making it better for future investment unlike Burberry. And finally, Next’s inventory turnover ratio shows an upward trend unlike that of Burberry that shows a downward trend. With regards to this ratio, Next is better off when considering future investment. In general, next should be considered for future investment because most of its ratios showed an upward trend hence increase in efficiency unlike Burberry. However, the firm should try to reduce its accounts receivable period. Profitability ratios Next 2011 2012 2013 Gross profit margin 29.3% 30.4% 31.6% Net profit margin 12.2% 13.8% 14.3% Return on assets ratio 22.4% 25.6% 26.9% Return on equity ratio 172.5% 213.2% 178.1% Burberry 2011 2012 2013 Gross profit margin 67.3% 69.9% 72.1% Net profit margin 13.7% 14.3% 13.0% Return on assets ratio 15.1% 16.5% 14.8% Return on equity ratio 28.1% 29.7% 24.6% Both the company’s ratios showed an upward trend despite small fluctuations in a few ratios. This implies an increase in profitability in both companies. With regards to gross profit margin, Burberry is better off for future investment than Next. However, in terms of net profit margin, Burberry is better off than Next for future investment. With regards to return ratios, Next is better off for future investment while Burberry is worse off. In general, Next should be considered for future investments because is it relatively better off than the Burberry. Debt management ratios Next 2011 2012 2013 Debt ratio 0.87 0.88 0.85 Debt-to-equity ratio 6.71 7.33 5.63 Times interest earned 23.33 20.82 23.97 Burberry 2011 2012 2013 Debt ratio 0.46 0.45 0.40 Debt-to-equity ratio 0.86 0.81 0.66 Times interest earned 59.24 104.69 93.46 Burberry uses less debt compared to Next. Further its debt usage shows a downward trend unlike Next that shows an upward trend. Again in terms of debt-to-equity ratio next uses more debt compared to equity than Burberry. According to both ratios, Burberry is better off compared to Next. With regards to Times interest earned, Burberry is better off than Next because it has much cover for the interest expense. In general, Burberry is better off while Next is worse off hence the company is very risky because it uses more debts in its operations and has more business risks compared to Burberry. Market value ratios Next 2011 2012 2013 P/E ratio 9.35 9.6 13.02 M/B ratio 202.5 263.9 405.9 Burberry 2011 2012 2013 P/E ratio 1.56 2.92 3.01 M/B ratio 36.5 43.33 43.9 According to the P/E ratio, the Next’s stocks are highly valued compared to the Burberry’s. This shows that investors expect a higher earnings growth from the company than the other companies. This implies that the firm’s investors are willing to pay more per dollar of earnings than those of the Burberry. In addition, Next’s M/B value is also higher than Burberry’s. This shows that Next’s relative value is higher than that of the Burberry. This implies that Next has greater market capitalization than Burberry. In general, Next should be considered for future investment potential because Next is better off than Burberry. References Alexander, David, & Archer, Simon. (2008). International Accounting/Financial Reporting Standards Guide 2009. Chicago, CCH. FASB (2009) retrieved March 23, 2009 from www.fasb.com GASB (2009) retrieved March 23, 2009 from www.GASB.com IASB (2009) retrieved March 23, 2009 from www.IASB.com Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2011). Intermediate Accounting. 13th Ed. New York: Wiley. Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2011). Principles of Accounting. 11th Ed. New York: Wiley. SEC (2009) retrieved March 23, 2009 from www.sec.com Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2010). Financial accounting: IFRS. Hoboken, N.J., Wiley. ZüLch, H., & Hendler, M. (2011). International financial reporting standards (IFRS) 2011: Deutsch-Englische Textausgabe der von der EU gebilligten Standards und Interpretationen = English & German edition of the official standards and interpretations approved by the EU. Weinheim, Wiley-VCH Verlag GmbH & Co. KGaA. Read More