Financial Ratios Analysis and Interpretation

This assignment focuses on analyzing various key financial ratios including Gearing Ratio, Interest Coverage Ratio, Return on Assets Ratio, and Price to Equity Ratio. The provided data allows for a comparative analysis of these ratios across two periods, highlighting potential trends and insights into the company's financial health and performance. Students are expected to interpret the calculated ratios and discuss their implications for the business.

Running head: FINANCE AND ACCOUNTING
Finance and Accounting
University Name
Student Name
Authors’ Note

2FINANCE AND ACCOUNTING
Table of Contents
Finance and Accounting.............................................................................................................1
Solution to Task 1:.....................................................................................................................4
Introduction of Competitor Company: Tiffany & Co................................................................5
Analysis of key financial ratio of two firms during the period 2015 and 2016.........................6
Interpretations taking into account macro business and macroeconomic factors....................16
Solution to Task 2:...................................................................................................................21
Analysis of the sources of funding...........................................................................................21
Analysis of current state of financing in the selected company Burberry Plc.........................23
Solution to Task 3:...................................................................................................................29
Analytical and generic discussion of the relevance of management accounting.....................29
References................................................................................................................................34
Appendix:.................................................................................................................................38
Financial Statements of the selected firm Burberry Plc...........................................................38
Financial Statements of the competitor firm Tiffany & Co.....................................................41
Ratio Calculations....................................................................................................................44
I. Operating Profit Margin Ratio..........................................................................................44
II. Return on Capital Employed Ratio...............................................................................44
III. Gearing Ratio................................................................................................................44
IV. Interest Coverage Ratio.................................................................................................44
V. Return on Assets Ratio..................................................................................................45
VI. Price to Equity Ratio.....................................................................................................45

3FINANCE AND ACCOUNTING
Solution to Task 1:
Introduction of selected company: Burberry Group Plc
Burberry Group Plc, is in essence a publicly traded luxury fashion business headquartered in
London, England. In essence, its chief fashion house concentrates on and allocates trench
coats, diverse ready-to-wear outer dress, fashionable accessories, fine scent, sunglasses, as
well as cosmetics (Burberryplc.com 2017).
Burberry Plc essentially established during the year 1856 mainly concentrated on the process
of development of primarily outdoor attire. In essence, the fashion house has necessarily
progressed to specifically high fashion market development as well as creation of innovative
fabric known as Gabardine that is entirely breathable as well as waterproof. There are
necessarily 45 degree selected pattern based scarves, different fashion accessories as well as
trench coats. Primarily, the first shop was introduced in the Haymarket situated in London
during the year 1891. As such, Burberry was necessarily a self-governing family controlled
corporation till 1955 that is at the time when the firm was reincorporated. The exclusive
check pattern can be considered as the most extensively copied trademarks. In essence,
Burberry Plc can be regarded as a popular one for mainly trench coats. In addition to this,
Burberry Plc has diverse branded stores as well as franchises throughout the globe and
markets by means of concessions in different third party stores. Essentially, the coats were
necessarily worn in different trenches during the period of First World War by British army.
As per reports, during the period 2015, the company Burberry is rated at the 73rd in
particularly Interbrand’s Best Global assessment and that is ahead of specifically Ralph
Lauren as well as Hugo Boss. The company necessarily has over and above 500 stores in
more than 50 nations.

4FINANCE AND ACCOUNTING

5FINANCE AND ACCOUNTING
Introduction of Competitor Company: Tiffany & Co
Tiffany & Co also referred to as Tiffany is a well-known retailer of jewellery and speciality
retailer, which has its headquarters situated in the New York City. Tiffany necessarily
markets jewellery, crystal, watches, leather goods, sterling silver and water bottles.
Fundamentally, Tiffany is well-known for luxury goods and is specifically known for
diamond and different sterling silver jewellery (Tiffany.com 2017).
Tiffany & Co is essentially a holding corporation that functions by means of different
subsidiary corporations (jointly known as company). The main principal subsidiary of
Tiffany is necessarily Tiffany and Company is necessarily a jeweller as well as field retailer,
whose product offerings comprise of extensive adoption of jewellery (that is approximately
92% of the global net sales in the year 2016). In addition to this, the product offerings of the
company also include timepieces, china, fragrances, accessories, crystal, sterling silverware
as well as stationary. By means of Tiffany and Company as well as other subsidiaries, the
entire corporation is involved in the design of the product, manufacturing as well as retailing
actions.
The corporation’s important growth tactics include selective expansion of distribution
channels in significant markets all around the globe without disturbing the TIFFANY & CO’s
long-term value of trademark. Furthermore, the strategy of the company is also to enhance
the overall sales figure of the firm in subsisting stores by generating novel products.
Moreover, the strategy is also to augment the overall control over firm’s supply of the
product and attain superior margins of profit by means of direct sourcing of diamond as well
as manufacturing of internal jewelry. Additionally the management of the firm is also to
augment awareness among the customer by means of marketing as well as public associations

6FINANCE AND ACCOUNTING
programs. In addition to this, the company is to offer customer service that makes certain a
finer shopping experience.
Analysis of key financial ratio of two firms during the period 2015 and 2016
Operating Profit Ratio: As rightly indicated by Weygandt et al. (2015), the operating profit
margin reflects the total amount of profit a particular corporation makes after making
payments for diverse variable production costs namely wages, materials and many others.
Essentially, this ratio also expresses as a percentage of total sales and thereafter replicates the
overall efficiency of a corporation controlling costs and expends related with operations of
business. Operating profit ratio is enumerated by dividing profit before interest and tax by the
total sales of the corporation. A higher ratio reflects a desirable financial condition of the
firm. Therefore, the financial condition of both Tiffany Plc and Burberry Group Plc is said to
have deteriorated during the year 2016. However, Tiffany Plc is however said to have better
financial condition in comparison to Burberry.
Tiffany Burberry
2015 2016 2015 2016
Operating Profit Margin
Ratio
Profit Before Interest and Tax 891.4 760.1 440.3 402.9
Sales 4249.9 4104.9 2523.2 2514.7
Ratio 20.974611
18.5168
9 17.45006 16.02179

7FINANCE AND ACCOUNTING
2015 2016
Tiffany
17
17.5
18
18.5
19
19.5
20
20.5
21
21.5
Operating Profit Margin Ratio
Ratio
2015 2016
Burberry
15
15.5
16
16.5
17
17.5
18
Operating Profit Margin Ratio
Ratio
Return on Capital Employed
Weygandt et al. (2015) asserts that return on capital employed is necessarily a profitability
ratio that enumerates the extent to which a corporation effectively functions in a bid to
generate higher amounts of profit. This ratio is calculated by dividing by EBIT by the capital
employed. A higher ratio can be considered to be more favourable. In case of both the firms,
the return in capital employed declined during the year 2016 as compared to the year 2015

8FINANCE AND ACCOUNTING
reflecting deterioration of financial condition. However, the financial condition of Burberry is
said to have better financial condition in comparison to that of the competitor firm Tiffany
Plc.
ROCE Tiffany Burberry
2015 2016 2015 2016
EBIT 891.4 760.1 440.3 402.9
Capital Employed (Total assets-Current
liabilities) 4522.6 4391.7 1592.4
1775.
3
Ratio 19.709901
17.3076
5 27.65009
22.69
476
2015 2016
Tiffany
16
16.5
17
17.5
18
18.5
19
19.5
20
Return On Capital Employed Ratio
Ratio
2015 2016
Burberry
0
5
10
15
20
25
30
Return On Capital Employed Ratio
Ratio

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Gearing Ratio:
The gearing ratio helps in comparing the debt of the firm with that of the total equity.
Essentially, this reflects the total percentage of a corporation financing that mainly comes
from the both creditors as well as financiers (Weil et al. 2013). In essence, higher gearing
ratio replicates unfavourable financial condition for the corporation.
Gearing Ratio
Tiffany Burberry
2015 2016 2015 2016
Non-current liabilities 1671.9 1462.2 140.9 154.4
Shareholder's Equity 2850.7 2929.5 1451.5 1620.9
Ratio 58.648753
49.9129
5 9.707199 9.525572
2015 2016
Tiffany
44
46
48
50
52
54
56
58
60
Gearing Ratio
Ratio

10FINANCE AND ACCOUNTING
2015 2016
Burberry
9.4
9.45
9.5
9.55
9.6
9.65
9.7
9.75
Gearing Ratio
Ratio
Interest Cover Ratio:
Warren et al. (2013) mention that the interest coverage ratio can be considered to be a
financial ratio that helps in enumerating capability of a corporation to disburse interest
payments on particularly the debt. As the measurement of coverage is more than 1 it reflects
that the corporation is generating enough income for making payments for the interest
obligations of the corporation. Burberry has a better interest coverage during the year 2016
and in comparison to Tiffany Plc.
Interest Coverage Ratio
Tiffany Burberry
2015 2016 2015 2016
Profit Before Interest and
Tax 891.4 760.1 440.3 402.9
Interest Expense 62.9 49 3.8 2.3
Ratio
14.17170
1 15.51224 115.8684 175.1739

11FINANCE AND ACCOUNTING
2015 2016
Tiffany
13.5
14
14.5
15
15.5
16
Interest Coverage Ratio
Ratio
2015 2016
Burberry
0
20
40
60
80
100
120
140
160
180
200
Interest Coverage Ratio
Ratio
Asset Turnover Ratio:
Warren et al. (2013) asserts that the return on assets is necessarily a profitability ratio that
helps in enumeration of net income generated by the total assets during the specific period of
time (that is 2015 and 2016). A higher ratio can be regarded to be more desirable as this
reflects that the corporation is more effectually managing all the assets of the corporation for
generating higher amounts of net income (Warren et al. 2013). The financial conditions of
both the firms have deteriorated during the year 2016 in comparison to the year ago period.

12FINANCE AND ACCOUNTING
However, there is relatively higher ratio of the firm Burberry in comparison to that of
Tiffany, representing undesirable financial condition of the corporation in comparison to the
Asset Turnover Ratio
Return on Assets
Ratio
Tiffany Burberry
2015 2016 2015 2016
Average Net Income 484.2 463.9 341.11 314.6
Average Total Assets 5180.6 5121.6 2173.2 2314.3
Ratio 9.3464078
9.05771
6 15.69621 13.59374
2015 2016
Tiffany
8.9
8.95
9
9.05
9.1
9.15
9.2
9.25
9.3
9.35
9.4
Return on Assets Ratio
Ratio
2015 2016
Burberry
12.5
13
13.5
14
14.5
15
15.5
16
Return on Assets Ratio
Ratio

13FINANCE AND ACCOUNTING
Price to Equity Ratio (P/E Ratio) :
Price-earning ratio that is also referred to as PE ratio essentially enumerates overall market
value of a specific stock in comparison to the earnings of the corporation. In this case, lower
ratio reflects poor financial performance of the firm (Warren et al. 2013). However, the same
has improved for both the firm during the specified period. However, this ratio is observed to
be higher in case of Burberry in comparison to that of the competitor firm.
Price to Equity
Ratio
Tiffany Burberry
2015 2016 2015 2016
Current Share Price 76.29 75.11 1129.6 1681.37
Earnings Per Share 3.79 3.59 76.4 69
20.129288
20.9220
1 14.78534 24.36768
2015 2016
Tiffany
19.6
19.8
20
20.2
20.4
20.6
20.8
21
Price to Equity Ratio
Ratio

14FINANCE AND ACCOUNTING
2015 2016
Burberry
0
5
10
15
20
25
30
Price to Equity Ratio
Ratio
Interpretations of the factors that affected
The financial ratio presented above can be grouped by the category of the information they
present to the analyst. Essentially, the wide groupings enumerate liquidity else wise
capability of the company to generate cash. Analysis of financial ratio helps in enumerating
profitability along with activity of the company namely business cycle for the purpose of
determining effectual usage of assets. The enumeration of financial ratio can help in
enumerating leverage for testing potential of the company to grow (Otley and Emmanuel
2013). Ultimately, this too enumerate and arrive at outcomes that are utilized by shareholders
namely earnings per share, price-earnings ratio and many others.
Financial evaluation carried out for the two corporations can help in selection, analysis and
interpretations of pecuniary data together with other relevant information to aid in the process
of investment as well as financial decision making (Palepu et al. 2013).
Operating profit margin ratio calculated for analysis of the profitability conditions of the two
firms in this report compares elements of income with corporation’s sales figure. The
outcomes hereby replicate the amount of each dollar that remains after incurrence of

15FINANCE AND ACCOUNTING
operating expenditure has declined for both the firm, reflecting undesirable condition in terms
of profitability considered over the period 2015 and 2016. As mentioned in the annual report
of the firm Tiffany Plc, it can be hereby stated that sales of the company are very much
sensitive to the alterations in the economic conditions (Tiffany.com 2017). As per
declarations of the company’s reports, challenges in the global economic circumstances and
associated lower levels of consumer confidence over a drawn out time period have adverse
effects on the sales as well as earnings of the firm (Repetti and Jung 2014). Annual report of
Tiffany plc also adds that consumer spending for particularly discretionary good normally
falls during decrease in consumer confidence and this can be cited as a reason behind the fall
in sales from 4249.9 to 4104.9 as well. Furthermore, it can be hereby mentioned that Tiffany
Plc has made investment for operation of a considerably number of firm’s stores in the area
of Greater China and expects to continue in undertaking the same. The hold back in the entire
Chinese economy might have exerted negative influence on the company’s sales as well as
profitability of firm’s stores in especially Greater China (Tiffany.com 2017). The annual
pronouncements of the firm Tiffany Plc assert that uncertainty regarding present economic
environment makes it complicated for the corporation to forecast various operating outcomes.
Again, the annual report of the firm Burberry Plc reflects that comparable sales of the firm
has dropped by -1% since the entire business invested in particularly customer insight for
driving product as well as service initiatives, assisting in the process of enhancement of
conversion. The comparable sales of the company Burberry Plc decreased by 1%
approximately. Essentially, the luxury segment of the company became challenging.
However, retail segment of the firm accounted for 2/3rd of the EIMA earnings. Reports
suggest that comparable sales of the year enhanced by a single-digit percentage.
A unfavourable return on capital employed registered for the firm Tiffany Plc reflects that
the earnings before interest and tax (EBIT) of the firm has declined during the period 2016 as

16FINANCE AND ACCOUNTING
compared to the year ago period. The declarations of the firm reveal that strengthening of the
US dollar against various foreign currencies might have negatively affected the overall
profitability. As per the yearly pronouncement of Tiffany Plc, alterations in the product else
wise geographic sales mix might have affected overall profitability of the firm. Furthermore,
enhancement in the costs incurred for diamonds along with other precious metals otherwise
decreased supply might possibly unfavourably affect the capability of the firm to manufacture
and market products at anticipated margins of profit (Sherman and Young 2016). Firm failure
to secure and the same time retain locations for store in prime locations as per fitting terms
and if investments for constructing or renovating subsisting stores do not necessarily produce,
the sales of the corporation might be in jeopardy. Material disruption, failure of the firm to
successfully execute and carry out alterations might perhaps lead failure of the information
system that in turn could have negative effect on the overall business of the firm. The capital
employed of the firm decreased during the year 2016 in comparison to the previous year’s
figure. The EBIT also decreased significantly in comparison to the capital employed that led
to the decline in the ratio. In case of Burberry Plc as well, the EBIT of the firm declined,
however, the capital employed of the firm increased significantly during the period 2016 as
compared to the year 2015. The decline reflected an undesirable financial condition for the
firm (Sherman and Young 2016). The decline can be attributed to decrease in overall
licensing profit associated to the planned expiry of the Japanese licenses. The slowdown of
the Chinese economy, enhanced geopolitical concerns in particularly the Middle East as well
as Russia, uncertainty prevailing in particularly the Euro zone are cited as the primary factors
behind the decrease in the yearly report of the firm. Therefore, analytical review of the annual
declarations of the firm Burberry Plc provides the validation behind the decline in the return
in capital employed.

17FINANCE AND ACCOUNTING
The increase in gearing ratio of the corporation Tiffany Plc reflects an undesirable financial
condition of the corporation. The non-current liabilities of the firm Tiffany Plc has declined
while the shareholder’s equity of the firm has increased leading to decline in the gearing
ratio. This low gearing ratio reflects a higher proportion of firm’s debt in comparison to the
equity of the corporation (Sherman and Young 2016). The increase in the shareholders’
equity of the corporation Tiffany Plc essentially replicates that the common stock of the firm
(having $0.01 par value, 240.0 authorised shared, 124.5 as well as 126.8 outstanding shares)
increased, supplementary paid in capital also increased. Furthermore, retained earnings of the
corporation Tiffany Plc also increased and the accumulated comprehensive loss also
decreased directing towards overall increase in the shareholders’ equity. Again, as per the
annual report of the firm Burberry Plc, it can be hereby stated that ordinary share capital of
the firm remained at the same level that is £0.2 million. Again, share premium account
enhanced while the capital reserve of the firm Burberry Plc declined. Besides this, as per the
yearly pronouncement of the corporation, the hedging reserves of the corporation enhanced to
£8.1 million from the level of (0.3). In addition to this, the foreign currency translation
reserve also augmented to £ 164.9 million.
The interest cover ratio enumerated for the two firm helps in comprehending overall capacity
of the corporation to pay off the interest obligations on the recorded debts of the corporation
(Sherman and Young 2016). Calculations for interest coverage ratio of Tifanny Plc show that
profit before interest and tax of the firm has declined and at the same time interest expense
has declined. Annual report of the firm asserts that interest expense along with financing
costs of the corporation Tifanny Plc has decreased to $3 million (that is to say 6%) during
2016 owing to low amount of interest expenditure. Low interest expense on particularly long
term debt was observed. This has led to the increase in the ratio. However, decrease in the
interest expense of the firm reflects that the company has improved potential to disburse the

18FINANCE AND ACCOUNTING
debts (Otley and Emmanuel 2013). Again, analytical review of the financial circumstances of
the firm Burberry Plc replicates that the profit before interest and tax has decreased, while the
interest expense of the firm has also decreased directing the way towards increase in the ratio.
Analysis of the turnover ratio of the firm shows that financial condition of both the
corporation has deteriorated as the average net income of both the firms has declined. In
particular, average total assets of Tiffany declined while the average total assets of the firm
Burberry Plc increased. There is comparatively superior ratio of the corporation Burberry Plc
as compared to the firm Tiffany Plc replicating unfavourable financial state of affairs.
Moreover, price-earnings ratio that is indicated as P-E necessarily calculates market value of
a specific stock in comparison to the income of the firm (Otley and Emmanuel 2013). As
lower price earnings ratio reveals comparatively poor financial condition of the firm, it can be
said that condition of Tiffany Plc and Burberry Plc has improved. Analytical review of the
financial condition of the firms reflects that this ratio is witnessed to be higher for Burberry
Plc as compared to the rival firm. The current share price of the firm is comparatively higher
as well as earnings per share.
Solution to Task 2:
Analysis of the sources of funding
The management of Burberry intends to invest 25% of the net assets that is employed by the
corporation. As such, this can be considered to be aligned to the expansionary plans of the
firm that in turn can help in building a solid foundation of the firm.
Net Assets is calculated by subtracting the total liabilities of the firm from the total assets of
the firm.

19FINANCE AND ACCOUNTING
NET ASSETS = Total assets - Total liabilities (here, total liabilities= (Current Liabilities +
Long Term Liabilities)
= £1620.9m
Net assets are necessarily the same amount as that of the shareholders’ equity of the
corporation. In effect, both represent the variance between what the firm owns and what the
company owes. However, 25% of the net assets =25/100*1620.9=£405.225m
Few sources of finance:
Companies can generate profit by selling its product at a price that can help in covering the
costs of production. However, this can be considered as the fundamental source of finance for
any organization and hopefully can be regarded as the mechanism that generates higher
amount of money. Again, just like individuals, corporations can also borrow funds. As such,
this can be carried out privately via loans from bank or else it can be carried out publicly by
means of debt issue (Maas et al. 2016). Nevertheless, the drawback of borrowing money is
that there is an interest charge that the firms need to pay to their lenders. In addition to this, a
corporation can generate fund by selling a certain part of itself to investors by issuance of
shares and this is referred to as equity financing. Essentially, the advantage of this is that
financiers do not have the need for interest payments as is required in case of bondholders.
The demerit is that additional profit of a firm can be divided among different shareholders. In
an idyllic situation, a company can bring in cash simply by selling different goods as well as
services for generating a profit. However, at the time of analysing firms, it is important to
study the balance of different major sources of financing (Bebbington and Thomson 2013).
For instance, excessive amount of debt can lead the company into trouble as the company
would have to bear the liability of payments of interests along with the principal amount

20FINANCE AND ACCOUNTING
borrowed. On the other hand, a corporation might not succeed to achieve growth potential in
case if it fails to utilize a specific amount of money that it has the capacity to borrow.
Analysis of current state of financing in the selected company Burberry Plc
The selected corporation intends to invest 25% of the overall net assets for the purpose of
buying of land and building. Essentially, this involves elaborate analysis of different internal
as well as external sources of finance before deciding a particular source of financing.
The internal sources of a finance also referred to as capital suggests about the nature of
funding. Essentially, this is finance or else capital that a firm generates internally out of the
business activities. This is dissimilar to funds such as bank loans that are externally arranged
by firms from different external sources such as from banks else financial institutions. As
such, the internal source of funds mainly includes the retained profits, proceeds from the sale
of company’s assets and reduction or else control of firm’s working capital (Christ and
Burritt 2013). The main features as well as characteristics of the internal source of funds are
that there exists no outside dependence for catering to the requirements of capital. Main
sources of internal source of capital are:
- Retained Profits: - As rightly indicated by Lopez-Valeiras et al. (2015), retained
profits or else earnings are referred to as internal source of finance of a corporation as
they are the end product of operating a business. This particular phenomenon can be
referred to as ploughing back of profit. The retained earnings of the firm Burberry is
observed to be £ 1000.8 m during the year 2015 while the same increased to £ 1140.9
m during the year 2016. Thus, it can be witnessed from the annual report declared by
the firm Burberry Plc that the retained earnings of the firm have increased over the
mentioned period. The benefit of having retained earnings can be observed in the
characteristics. Fundamentally, retained earnings of the company Burberry can be

21FINANCE AND ACCOUNTING
considered to be an effective source of internal finance as there exist no issue costs
attached to the same that necessarily ranges between 2% and 3%. Finally, investment
of retained earnings in diverse projects of the businesses with IRR better than return
on investment can directly have a positive effect on the wealth of the shareholders and
thereby is said to serve the main aim of the management.
- Sale of assets: Yet another effective internal source of funding is from the proceeds
of the sale of assets/resources of the corporation. When business sells off its different
resources and cash generated out of this particular activity is utilized internally for the
purpose of financing the entire capital requirement, it is called internal source of
finance. A severe disadvantage of this specific type of financing is that the advantages
of useful resources that are sold can no longer accrue to the specific business. A
probable and perfect explanation to that specific situation of sale as well s lease bank.
In particular, it is a specific type of lease under which it can get the requisite cash and
simultaneously use the asset under consideration in exchange for a particular lease
rental (Hopper and Bui 2016). With this alternative, the business might end up
making more payments during the long term, but the present finance issues can be
resolved. The proceeds from the sale of the assets are recorded to be £ 2523.2 m in the
year 2015 that decreased to £ 2514.7 m in the year 2016.
- Reduction or else controlling of working capital- Decreasing the working capital
can function as an effective internal source of finance and can be broadly categorised
as current assets or else current liabilities. Usually, a business needs two different
types of finance namely, finance in the long term and working capital finance for
daily requirements (Williams 2014). Decrease in the working capital can be attained
either by speeding up the entire cycle of receivables as well as stock or else wise by
lengthening the cycle of specific payable accounts. Essentially, both are expected to

22FINANCE AND ACCOUNTING
decrease the entire working capital necessity and thus the funds put in for working
capital can be used for other finance or else capital necessity. As such this specific
source stems from efficient administration of working capital and apt usage of
different working capital management mechanism. The total assets of the firm
Burberry is registered to be £2173.2 during the year 2015 that again increased to
2314.3 during the year 2016. Essentially, the current assets under the heads of asset
are also observed to increase from £1334 in 2015 to £1494.9 in 2016. However, the
total liabilities for the firm Burberry is recorded to be £ (721.7) m in 2015 and £
(693.4)m in 2016. Nonetheless, the current liabilities registered under the head total
liabilities in the annual financial assertions of the company is registered to be £
(580.8) m in 2015 and £ (539.0) m in 2016. Therefore, the net assets else wise
referred to as working capital is calculated by deduction of the total liabilities borne
by the firm from the total assets of the firm. This working capital is found to be
£1415m in 2015 and £1620.9m in 2016. The working capital has increased and
therefore management of the firm Burberry can strive to lessen the overall cycle of
working capital by acquiring diverse receivables faster and at some point of time
stretching diverse payable accounts (Otley and Emmanuel 2013).
External Source of Financing
The external source of financing refers to different venues for acquiring finances that come
from outside the purview of a specific corporation. Fundamentally, external sources of
funding might perhaps take into consideration different novel business partner else wise issue
different equity or else bonds to generate long term requirements, commercial paper to
assume short term debt (Bodie 2013).
Equity Financing:

23FINANCE AND ACCOUNTING
Equity financing refers to process of funding in a business
Long term debt
One specific category of external debt financing is essentially the long term debt of the
corporation. Basically, long term loans normally comprise of debts that a firm expects to
accept over and above a year to pay back. Essentially, a benefit of long term financing is that
the firm can pay off the loan over an extended period, which lessens the monthly payment
requirement. In addition to this, interest earned on property purchases can be considered to be
tax deductible (Otley and Emmanuel 2013).
The interest expense on firm’s bank loan of the firm Burberry Plc is recorded to be £ (1.5)m
during the year 2016. However, the interest expense on bank loans was registered to be £
(1.8) m during the year 2015. Thus, it can be hereby mentioned that firm’s expense on bank
loans reduced in 2016 as compared to the year 2015. In addition to this, the bank charges of
the firm also dropped from £ (1.8)m in 2015 to £(0.7)m in 2016.
Short term loans
The firm can make use of short term loans along with lines of credit to finance diverse
ongoing functions of the firm. Williams (2014) asserts that the short term loan refers to
money borrowed and mainly repays the same within a specific year. Essentially, this loan

24FINANCE AND ACCOUNTING
scenario can be applied at the time of emergency requirement. Analysis of annual report of
the selected firm Burberry reveals that the short term loan of the firm presented as bank
overdrafts and borrowings under the current liabilities of the firm has decreased from £ 65.2
m to £51.5 m.
Again, line of credit implies a financial instrument that is normally utilized for short term
working capital necessity of a corporation, namely, inventory purchases, costs of future
projects or else payroll of company. However, this can be borrowed only at the time it is
required.
Diverse accounts of business
Another uncomplicated type of external debt funding is outgoings on accounts. At the time of
purchasing supplies inventory and supplies, particular suppliers often provide payments on
different accounts as against the direct cash (Hopper and Bui 2016).
Analysis of the company’s financing shows that the debt figure of the corporation has
decreased considerably. On the other hand, equity figure of the firm has increased. At
present, the management of the firm uses greater proportion of equity financing as compared
to debt financing for funding its activities. However, profitability of the firm has declined
despite the decline in debt structure of the firm. Additionally, return on assets of the firm
Burberry Plc has also declined in 2016 as compared to the year ago period. Therefore, it is
important for the firm to determine the optimal capital structure that presents the ideal mix of
debt and equity that can maximize the overall value (Christ and Burritt 2013).

25FINANCE AND ACCOUNTING
The management of the firm Burberry can consider the advantages and disadvantages of both
debt and equity financing before zeroing down on a particular financing source. As such, the
optimal structure of capital lies in between maximum amount of profitability of the firm and
the financial burden. The goal of majority of the companies is to use a mix of debt as well as
equity and function at a specific optimal structure in order to maximize the level of profit of
the firm (Maas et al. 2016).
As Equity does not have the need to be paid back, nonetheless, an aspect of exchange of
ownership is associated to equity. Contrarily, debt normally has lower costs than equity
owing to tax benefits, particularly, when the interest rates are lower. Nevertheless, debt is an
obligation for the firm to disburse a specific proportion of firm’s future earnings, even though
the income is decreasing. Although the optimal debt equity mix varies between industries,
however, as per general consensus, the optimal debt equity ratio needs to be within 2. Debt
equity ratio of 2 indicates that company obtain two-thirds of capital funding from debt and
one-third from equity of shareholders (Bebbington and Thomson 2013).
The debt equity ratio of the firm Burberry Plc is considerably low that indicates lesser
dependence of the firm on borrowed funds and lesser financial obligations. As debt is
intrinsically risky, lenders as well as financiers favour lower debt equity ratio as for lenders a
lower ratio implies a lower level loan default risk. However, for shareholders, it implies a
decreased possibility of bankruptcy in the occasion of an economic depression. Thus, the
management of Burberry Plc in this case is observed to ignore debt financing completely
that subsequently adversely affects growth opportunities of the firm. Debt capital permits
businesses to specifically leverage a small amount of money into a much larger sum and
reimburse the same over a certain time period (Figge and Hahn 2013).

26FINANCE AND ACCOUNTING
Based on analysis of the financial assertions of the firm Burberry Plc, it can be said that the
corporation does not appropriately make use of the particular leveraging potential of debt
financing. Thus, the management of the firm might perhaps be doing a disservice to
specifically ownership as well as shareholders by restricting the potential of the firm to
generate optimal profits.
Therefore, the current observation is that debt figure of the corporation has decreased
considerably. On the other hand, equity figure of the firm has increased. At present, the
management of the firm uses greater proportion of equity financing as compared to debt
financing for funding its activities. In view of the current circumstance, it can be hereby
recommended that the optimal capital structure be used by the management. Thus, debt
financing can be increased to presenting an ideal mix of debt and equity that can maximize
the overall value. Bearing in mind advantages of debt financing, the use of debt financing can
prove to be effectual. Debt financing can help the company to retain entire control and
administrative would not face the need to allot stake in the enterprise. Also, tax can also
decrease the rate of interest and interest.
Solution to Task 3:
Analytical and generic discussion of the relevance of management accounting
As rightly put forward by Figge and Hahn (2013), management accounting also known as
internal accounting can be considered as the sphere of accounting activity that delivers
interested internal users with significant pecuniary as well as financial information. This
assists in arriving at effectual decisions. This can be associated to implementing basic
procedures of accounting to specific business data, recognizing, enumerating, collecting,
categorising, registering, evaluating, preparing, summarizing, interpreting as well as
communicating information as regards cost accounting. Thus, management accounting can be

27FINANCE AND ACCOUNTING
utilized to plan, analyse, control business entity, makes certain effective as well as efficient
utilization of resources in a bid to meet specific strategic business objectives of the firm.
Essentially, efficiency as well as efficacy of management accounting relies on the capability
of the business to apply theoretical mechanisms into real practice, integrate information into
processes of decision making, augment and change procedures in response to altering
external conditions as well as internal potential of the corporation (Repetti and Jung 2014).
Again, the theoretical structure of management accounting is founded on two different
theories namely contingency as well as complexity. Contingency theory can help in analysing
the way management accounting can match the external environment and identifying facets
of environment that affects the same (Entwistle 2015). Yet another theoretical advance is the
complexity theory that can help in comprehending changes in organization, diverse
innovations, and divulging internal environment of the firm.
Analytical as well as generic discussion in light of theoretical background
As correctly put forward by Wang (2014), management accounting can be considered to be a
unitary as well as universal practise that is independent of time as well as space in which firm
operates. The management accounting practice in the firm Burberry Plc can also be evaluated
from the technical-managerial view point. Analysis of financial declarations as well as
functionalities of the business shows that management accounting is a social in place of a set
of technical as well as practical instrument. Management accounting in Burberry Plc also
undertakes a specific set of functionalities by appropriately defining different techniques
developed on the basis of theory as well as practise. This in turn helps in supporting decision
making along with controlling functions by delivering financial as well as non-financial
information. The management of the firm provides a feedback that plays a significant part in
management accounting (Brigham and Ehrhardt 2013). The primary form of feedback

28FINANCE AND ACCOUNTING
provided by management of Burberry includes performance report that can deliver
comparison of various results. Utilizing historical as well as environmental information,
forecasts are presented that sequentially act as an input in the process of decision making,
activities and evaluation of performance. Particularly, in this context, information regarding
the environment can be considered as uncontrollable facets that have an effect on the success
of the business procedure of the corporation.
Analysis of management accounting divulges different functions in the context of business
environment. As such, efficiency as well as efficacy of management accounting relies on the
capability of a corporation. There also exists certain uncertainty as well as complexity. Thus,
evaluation of management accounting in terms of the environment is useful. Environmental
pressures are also said to exert an influence on the process of designing management
accounting. The upshots of company’s operating procedures along with decisions are
essentially under the influence of the business environment. As such, predictions with
decisions are carried out in the world of uncertainty. Weil et al. (2013) asserts that
uncertainty can be referred to as a likelihood that an actual situation might deviate from what
is anticipated. Again, the contingency theory also needs to be assessed to illustrate
management accounting alterations that mentions that performance of diverse corporations
can lead to different results under the influence of same environmental facets. As rightly
indicated by Warren et al. (2013), the contingency theory in the area of management
accounting also indicates towards the premise that there exists no universally fitting
accounting system applicable to different business concerns in different state of affairs.
Nonetheless, accounting system is designed by diverse environmental facets. Fundamentally,
as per the premises of the contingency theory, environment of the corporation can be
conceptualised in context of perceived uncertainty. Therefore, with greater level of
environmental uncertainty, it becomes more intricate in configuring the system for effectual

29FINANCE AND ACCOUNTING
performance analysis. Warren et al. (2013) pinpoint that there are several environmental
factors that exert impact on the overall design of management accounting in organization or
industries. As such, the environmental factors can be considered as the uncertainty.
As correctly indicated by Vogel (2014), the complexity theory can be regarded as an
important theory that can help in explaining management accounting in corporation. It is
essentially an extension of the general theory that became the leading model of managerial
theory during the 1960s. Again, an appropriate usage of the complexity theory can help in
comprehending organizational development and might be regarded as a metaphor that
delivers novel insights.
The annual report of the firm Burberry Plc presents industry analysts forecast in the outlook
section. In addition to this, annual corporate planning procedure of the group comprises of
preparation as well as presentation of a strategic plan of three-year period, reforecasting of
the present period as regards business performance of Burberry Plc during the current year
and presentation of an illustrative budget for the subsequent year. Furthermore, Directors of
the firm have assessed the tactics, estimates and budget counting suppositions as regards the
products as well as markets of the Group, commitments concerning expenditure and
estimated flows of cash. Moreover, the Group also has all-inclusive planning, reports on
budgeting, forecasting along with monthly reporting procedures in place. These reports based
on approximated budget can assist in evaluating the performance of the company founded on
actual records from previous years (Warren et al. 2013).
As such, the management accounting reports of Burberry Plc namely forecast performance
takes into account business environment, actual historic outcomes of the business, growth
forecasts of the economy, risk adjusted rate of discounts and discount rate of different
business areas. This in turn assists in recognition of different higher earning areas of business

30FINANCE AND ACCOUNTING
worldwide. Subsequently, this helps the management of the company to concentrate all its
efforts on the identified areas of high performance instead of wasting both time as well as
money with lower margins of profit (Weil et al. 2013). Having evaluated current and
estimated beauty performance, the management of the firm has undertaken a fitting
assessment of whether any kind of impairment indicator subsists for the beauty license.
Again, having compared the future plans of the group along with forecasts for different
beauty products with the actual outcomes as well as market conditions, the management of
the firm can assess the future performance of the company. The future performance of the
company is approximated to support the present carrying value of the business license.
Annual report of the firm Burberry Plc also takes into account the value-in-use models
utilized to determine the overall amount of any kind of impairment charge. Essentially, these
are founded on suppositions counting different factors such as revenue forecasts, together
with the gross as well as operating margins and rates of discount. All these factors are also
said to be country and store specific. The stores of the company Burberry Plc might possibly
be located in emerging markets that are normally more unstable than the ones situated in
different developed markets (Lisowsky et al. 2017). Fundamentally, this specific group has a
material functioning asset base that might be vulnerable to impairment at the time when
trading performance is below anticipations. As such, similar judgements are utilized in the
process of determination whether an burdensome provision of lease is necessary and in
enumeration of appropriate provision amount. Additionally, judgements are also utilized in
the process of assessment of different alternative uses of stores that in turn might affect the
overall amount of burdensome lease provision.
The board sanctions different strategies of the group in the three year plan along with annual
budget. These reports are important part of the management accounting reports that include
decisions on strategy of the group approved by the board (Vogel 2014). These reports include

31FINANCE AND ACCOUNTING
annual budget and functional plans, capital expends and business transactions, financial
outcomes, and dividend. However, the board also takes into consideration the different risk
factors along with the control requirements as per the study of the market in which the
business operates (Weygandt et al. 2015). The management of the firm Burberry Plc also
takes into account diverse market conditions for designing figures on forecast reports. This
can help in bridging the differences between the estimated and actual figures in the financial
assertions. For instance, management of the firm analyses the marketing performance and
observes that the firm receives 71% revenue from retail and company has 17 million face
book followers. This has directed the management to put more emphasis on retail operations,
higher investment in the retail functionalities, more investment on social media marketing for
developing the brand image (mainly in the online platform).

32FINANCE AND ACCOUNTING
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Appendix:
Financial Statements of the selected firm Burberry Plc

37FINANCE AND ACCOUNTING

38FINANCE AND ACCOUNTING

39FINANCE AND ACCOUNTING
Financial Statements of the competitor firm Tiffany & Co

40FINANCE AND ACCOUNTING

41FINANCE AND ACCOUNTING

42FINANCE AND ACCOUNTING
Ratio Calculations
I. Operating Profit Margin Ratio
Tiffany Burberry
2015 2016 2015 2016
Operating Profit Margin
Ratio
Profit Before Interest and Tax 891.4 760.1 440.3 402.9
Sales 4249.9 4104.9 2523.2 2514.7
Ratio 20.974611
18.5168
9 17.45006 16.02179
II. Return on Capital Employed Ratio
Return On Capital Employed
Ratio
EBIT 891.4 760.1 440.3 402.9
Capital Employed (Total assets-
Current liabilities) 4522.6 4391.7 1592.4 1775.3
Ratio 19.709901 17.30765
27.6500
9
22.6947
6
III. Gearing Ratio
Gearing Ratio
Non-current liabilities 1671.9 1462.2 140.9 154.4
Shareholder's Equity 2850.7 2929.5 1451.5 1620.9
Ratio 58.648753
49.9129
5 9.707199 9.525572

43FINANCE AND ACCOUNTING
IV. Interest Coverage Ratio
Interest Coverage Ratio
Profit Before Interest and
Tax 891.4 760.1 440.3 402.9
Interest Expense 62.9 49 3.8 2.3
Ratio
14.17170
1 15.51224 115.8684 175.1739
V. Return on Assets Ratio
Return on Assets
Ratio
Average Net Income 484.2 463.9 341.11 314.6
Average Total Assets 5180.6 5121.6 2173.2 2314.3
Ratio 9.3464078
9.05771
6 15.69621 13.59374
VI. Price to Equity Ratio
Price to Equity
Ratio
Current Share Price 76.29 75.11 1129.6 1681.37
Earnings Per Share 3.79 3.59 76.4 69
20.129288
20.9220
1 14.78534 24.36768