Interpretation of Financial Statements of Next Plc through Ratio Analysis

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FAAR5019
Financial Accounting and Reporting
Autumn 2018

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Contents
Introduction......................................................................................................................................3
Part 1:...............................................................................................................................................3
Part 2: Interpretation of Financial Statements through use of ratio analysis...................................4
Working Capital Ratios................................................................................................................6
Liquidity Analysis........................................................................................................................7
Profitability Analysis...................................................................................................................8
Investor’s Analysis.......................................................................................................................9
Future of Next Plc in the UK Clothing industry............................................................................10
Conclusion and Recommendations................................................................................................10
References......................................................................................................................................11
Appendixes....................................................................................................................................12

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Introduction
The present report is developed for developing an understanding of the specific aspects of
the operations of Limited Liability Company (LLC). In this context, it has discussed the merits
and demerits of the LLC in comparison to the business structure of sole proprietorship and
partnership. This is followed by demonstrating an understanding of the financial statements of a
LLC, that is, Next Plc through the use of ratio analysis. The ratio analysis carries out an
examination of the working capital, liquidity, profitability and investor ratios of the company.
Part 1:
Limited Liability Company (LLC) can be regarded as a corporate structure in which the
members of the company do not possess any personal liability for meeting its financial debts or
liabilities. They can be regarded as hybrid entities that integrate the characteristics of both
corporation and sole proprietorship. LLC possess the business structure of both partnership of
sole proprietorship but a limited liability of a corporation. As such, in this type of businesses
there is distinction between the business assets from the personal assets of the owners and as
such they are not responsible for meeting their debt or liabilities. LLC is not regarded as a
separate entity and as such the company is not required to pay any taxes or being responsible for
any type of financial losses (Mancuso, 2016).
The major merit of the LCC in comparison to other business forms that are sole
proprietorship and partnership can be stated as follows:
 It is not subjected to higher types of financial regulations in comparison to the sole
proprietorship and partnership. As such, it facilitates the management for developing
flexible organizational structure in comparison to other business forms.
 There is no requirement for filling a corporate tax return as the owners report their share
of profit and losses on the tax returns that enables the firms to avoid double taxation.
 The ownership in the case of Limited Liability Company can be easily transferred to a
third party without having any impact on the business operations. On the other hand, the
ownership transfer in the case of sole proprietorship or partnership is a complex process
that requires that each of its assets, licenses or permits need to be individually transferred.

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 It is also attributed to be least expensive form of company structure to be established in
comparison to other business firms
 Also, the business in the case of limited liability company can be easily dissolved in
comparison to other types of business structure
 The owners are in complete control of the business and can take decisions that they think
to be adequate (Cody, 2007)
The demerits of the LLC business structure are stated as follows:
 The major drawback of establishing a LLC in comparison to the business forms of sole
proprietorship or partnership is that it incurs higher cost for its initial establishment. The
cost is incurred in the form of initial formation fees and filling fees
 There is a lot of paperwork requires foe establishing a LLC in comparison to other types
of business firms. The sole proprietorship or partnership can be established without
having any formal organizing procedures.
 It is required for the owners of the LLC to maintain separate records for maintaining their
liability protection. They are requires to keep personal affairs in distinction with the main
business and this is often a very complex process requiring huge time and money
 The owners of a LLC does not possess any authority for issuing shares in order to realize
funds from the investors (Martin, 2010)
Part 2: Interpretation of Financial Statements through use of ratio analysis
In this section of the report, interpretation of financial statement of Next Plc has been
done for last five years. In order to perform the interpretation of financial statement of Next plc,
ratio analysis has been used and this analysis covers working capital ratios, liquidity ratios,
profitability ratios and investor’s ratios.
For the purpose of calculation financial data has been collected from the annual reports of
Next Plc for last five years and it has been presented in below table:
Financial Statement data of Next Plc
Financial Data 2014 2015 2016 2017 2018
Trade Receivables £ 808.00 £ 844.30 £ 1,050.50 £ 1,125.80 £