Next Plc Financial Reporting - Coursework Example

? Department: Lecturer: Introduction The key conceptual framework concepts are developed by the Sustainable Accounting Standards Board and some of them include materiality concept, accrual concept, financial analysis and others that are used to analyze and report the financial reports (Taylor 1996). Further to the concepts, there are other rules that guide the reporting that is known as the International Accounting standards which are slowly being replaced by the International Financial Reporting Standards. In the financial statements of Next PLC, sales increased by 3.1% as well as a growth in profit which grew by 9%. Due to this increase in performance of the financial statements of the company, the earnings per share increased as well as the dividend payout ratios went up with a coverage of 2.8 times for the full year, which is the shareholder’s interest in the organization. As compared with the market ratios from IHG company, Next company shown a growth in all its financial aspects. The accounts have been presented in accordance with the IFRS 7 and 12 which requires disclosure of interest in other parties IFRS 10 which requires consolidating the group accounts and IAS 1 to 9 which talks of all the disclosures. The disclosures of the segments are contained in IAS 14 but superseded by IFRS 8 which requires every segment to be disclosed separately (Weygandt 2012). Since the exceptional items are material in nature, the materiality concept applies and that is the reason why they are disclosed separately since they are matters which might have an impact on the financial statements. They are divided into continued and discontinued exceptional items. Ratio Analysis: Liquidity Ratios This is a ratio that measures the firm’s ability to meet its obligations financially. Historically these ratios have been used to measure the overall health of organizations. Their usefulness is being diluted as the modern companies Next PLC are holding fewer current assets to generate revenue. However, these ratios remain a good measure in this industry because the hotel industry relies on huge amounts of current assets to generate income. The meaning of these ratios is measured based on the relevant industry norms (Clatworthy 2005). Current Ratio Current Ratio = Total Current Assets Total Current Liabilities Account 2013 2012 Increase/Decrease Total Current Assets 1,207.8 1,139.9 Total Current Liabilities 816.0 742.4 Current Ratio 1.48 1.53 -0.05 From the above analysis, Next PLC is a company which can meet its short term obligations in both year 2013 and year 2012, however at a closer look, it shows that it has decreased its ability to meet these short term obligations in the year 2013 which is a fall back from the previous period. A further identification is that the group has disposed a lot of its current assets and also paid more of its obligations in terms of liabilities. In further analyzing the cash position of the group in the cash flow statement, the group has covered more of its expenses on the revolving cash flows from operations, which is a healthy indication of the organization's ability to operate in the foreseeable future (Gibson 2012). Quick Ratio Quick Ratio = Cash and Equivalents - Inventory Total Current Liabilities Account 2013 2012 Total Current Assets 1,207.8 1,139.9 Inventory 331.8 371.9 Total 876 768 Total Current Liabilities 816.0 742.4 Current Ratio 1.072 1.034 This ratio is more accurate than the current ratio since it reveals how the company can meet its short term liabilities without having to dispose its stock. And in this case of study, the company still remains stable and even better since the stock levels are low and that means the company can meet its short term financial obligations with ease. In year 2013, it indicates that the company did better than year 2012 just like the previous ratio. Any ratio that is positive means that the company can meet its obligations and any figure that is negative means that the company is highly risky especially to the investors to invest in and also to the creditors, it means that they would be paid with difficult (Greuning 2006). Management Ratios Sales Receivable Ratio Sales / Receivable = Net Sales Trade Receivables Account 2013 2012 Net sales 492.6 462.9 Trade receivables 718.1 699.1 Ratio 0.69 0.66 According to (Clatworthy 2005), sales receivable ratio will measure the number of times debtors go in a year compared to sales. It determines the period between when a sale is made and the actual collection of cash. The credibility of the debtors is measured in this ratio. This also measure the number of days a debtor remains in the company’s books. From the above ratios, net sales go above the trade receivables which are positive and shows that the company collection period is reasonable. Days Receivable Ratio Days Receivables = 365 Sales/ Receivables Ratio 365/0.69 = 529 days This ratio shows how days on average in which it takes a company to collect its sales. If the number is very high, that’s an indication that there are some debts that are going uncollected. It is also a measure of internal controls in terms of debt collection and a weak control shows a long days receivable ratio. Next company has a very high collection period which is not health in terms of its internal controls. Cost of Sales Payables Ratio Cost of Sales / Payables = Cost of sales Trade Payables Account 2013 2012 Cost of Sales 2,437.0 2,395.8 Accounts Payables – Trade 537.2 545.0 Cost of Sales Payable Turnover Ratio 4.536 4.396 This measure of liquidity will measure the number of times creditors turnover in a year and can provide insights for the operations of the company; it will include how well the company works with suppliers. There has an increase in cost of sales payable turnover ratio which means that the suppliers were paid better last year as compared to this year 2013. Days Payable Ratio APDOH = 365 Cost of Sales/Payables Account 2013 2012 Cost of Sales 2,437.0 2,395.8 Payable Turnover Ratio 4.536 4.396 APDOH 537.25 544.99 The days payable ratio is high on Next PLC just as it is in days receivable ratio. It shows that the credit terms of this organization are long both from creditors and debtors meaning that the company’s policies are those of long credit periods. Sales / Net Working Capital Ratio Sales / Working Capital = Net sales Net working capital Account 2013 2012 Net Sales 492.6 462.9 Total Current Assets 1,207.8 1,139.9 Total Current Liabilities 816.0 742.4 Net Working Capital 391.8 397.5 Sales/Net Working Capital Ratio 1.257 1.164 Working capital is the difference between the current assets and current liabilities. To measure how well they are utilized, this is the ratio that does so. The long- term survival of an organization is so much dependent on how best it manages its current operations. The number of times Next PLC covers its working capital in year 2013 is 1.2 which is a clear indication of how well its foreseeable future can be predicted. Sales / Net Fixed Assets Account 2013 2012 Net Sales 492.6 462.9 Net Fixed Assets 685.8 714.3 Net Sales/Net Fixed Assets Ratio 0.718 0.648 This ratio will indicate the effectiveness of fixed asset usage in the business to in the production of income. Since there is very little activity in the fixed assets over the years, there is usually no big movement in this ratio, unless there is a high turnover of fixed assets or huge depreciation rates. In this case of Next PLC there has not been much deviation. Net Sales / Total Assets Account 2013 2012 Net Sales 492.6 462.9 Total Assets 1,893.6 1,854.2 Net Sales/Total Assets Ratio 0.26 0.24 This ratio is more of a summary of management level of management of total assets on sales. Next plc’s indication is there has not been much movement on sales to total assets ratio. Coverage Ratios Coverage ratios measure the ability to service debt from operations. EBIT / Interest EBIT/Interest = EBIT____ Interest Account/Item 2013 2012 Earnings Before Interest and Taxes 695.1 601.8 Interest 29.0 28.9 EBIT/Interest Ratio 23.96 20.82 Next plc’s earnings can cover the interest 23 times in the year 2013 which are more times than previous years of 2012 which is an indication that the company is repaying its loans promptly and the liquidity improving. Leverage Ratios Leverage ratios also known as gearing ratios measure the extent to which the organization finances its debt. It shows how the organization will meet its long term obligations. This ratio is more useful to the shareholders also know if their earnings would be diluted by debt repayment . Fixed / Worth Fixed / Worth = Net fixed assets Tangible net worth Account 2013 2012 Net Fixed Assets 685.8 714.3 Net worth 285.6 222.7 Less Intangible Assets 44.8 45.6 Tangible Net Worth 240.8 177.1 Fixed Assets/ TNW 2.848 4.033 This ratio will show the extent in which the company has put its capital into fixed assets in particular plant and equipment. A big ratio will show relatively a bigger investment in plant and equipment and this will show a good liquidity to meet the creditor obligations. Debt / Worth Debt / Worth = Total Liabilities Tangible Net Worth Account 2013 2012 Total Liabilities 1,608.0 1,631.5 Tangible Net Worth 240.8 177.1 Total Debt/TNW Ratio 6.678 9.212 This ratio shows the capital relationship of creditors and shareholders and is also referred to as advantage degree. A highly geared firm will have less flexibility to borrow in future. A higher ratio will indicate the company is using a large amount of debt in financing its business on a daily basis. Profitability Ratios Profitability ratios are the tools for evaluating the management performance. Gross Margin and Operating Margin Account 2013 2012 Net Sales 3,562.8 3,441.1 COGS 2,437.0 2,395.8 Gross Profit 1,125.8 1,045.3 Gross profit markup 3.16 3.29 Gross profit margin 2.16 2.29 The Gross profit and the Operating profit both represent a company's ability to convert sales into profit. They are calculated in different levels of results. In both gross profit and net profit margin, there is a decline from year 2012 to this year’s performance. Gross profit markup is a division of gross profit over the cost of sales while net profit margin is the division of the gross profit over the sales, however there are more of the ratios of the same value which measure the net profit instead of the gross profit and the impact is the same in terms of analysis of the management. Price/earnings ratio= market price per share Earnings per share Earnings per share = net income available to shareholders Number of shares outstanding Account 2013 2012 Income attributable to shareholders 492.7 463.0 Number of shares outstanding 16.1 16.9 Earnings per share 30.60 27.40 Price earnings ratios 14.3 13.4 The conceptual framework is the guideline in which the accountants follow when coming up with the reporting, they are created by the international accounting standards board and some of the guidelines are referred to as IFRS which are replacing the IAS. The two fundamental conceptual frameworks attribute i.e. Relevance and faithful representation are required when presenting the financial statements. Accountants are required to portray the uttermost accuracy when presenting the financial statement since they are used by so many stakeholders including the shareholders, creditors, debtors, management, government, industry and the general public (Blake 1996). Further in preparation of the financial statements, the organizations have a statutory requirement to have their financial statements audited by an independent auditor in order to express an opinion which is more relied by the stakeholders. The opinion given by the independent auditor shows that the accounts have been prepared in accordance with the generally accepted accounting practices and compliance to the accountant standards. In reporting the financial statements, relevance of the report is very important for irrelevant information brings cumbersomeness in the financial statements which would have no meaning to the statements. For comparison purposes, the financial statements are prepared in two years i.e. The year in question and the previous year. The directors of the company are required to disclose all the relevant information in the financial statement and for Next PLC, they decided to disclose the remuneration, policies followed in remunerating legal requirements of the UK laws, corporate governance from the management composition to the auditors and company control. All this is relevant information and a transparent way of disclosing the company performance (Alexander & Britton 2004). The auditors also have disclosed the scope of work they have done, consolidating the financial statements and expressing their opinion on the financial statements. Without these disclosures the information on the financial statements otherwise would not be relied upon. Next PLC went ahead to disclose the exceptional items in the financial statement to enhance the relevance of the statement. These exceptional items have been divided into continued and discontinued operations. For the continued operations, Next PLC has disclosed pension, sale of property and the VAT recovery while on the discontinued operations the company had disclosed the sale of ventura. These exceptional items would not have otherwise been disclosed if they didn’t have any impact on the financial statements. The materiality concept requires the company to disclose any material information that might have any impact on the financial statements when reporting on its notes. These exceptional items are material to the financial statements and that’s the reason why they have been disclosed. References BLAKE, J., & AMAT, O. (1996). Interpreting accounts. London, International Thomson Business Press. CLATWORTHY, M. (2005). Transnational equity analysis. Chichester, Wiley. http://public.eblib.com/EBLPublic/PublicView.do?ptiID=228325. GREUNING, H. V. (2006). International Financial Reporting Standards: a practical guide. Washington, DC, World Bank. WEYGANDT, J. J. (2012). Cram101 textbook outlines to accompany: Financial accounting: IFRS edition [by] Jerry J. Weygandt, 1st edition. [United States?], Content Technologies, Inc. GIBSON, CHARLES H. (2012). Financial Reporting and Analysis + Thomsonone Printed Access Card. South-Western Pub. TAYLOR, P. A. (1996). Consolidated financial reporting. London, P. Chapman. ALEXANDER, D., & BRITTON, A. (2004). Financial reporting. London, Thomson. Read More