Financial Accounting and Reporting: Ratio Analysis of Next PLC

This report provides a financial analysis of Next PLC using various ratios, including profitability, liquidity, investor, and working capital ratios, derived from the company's financial statements. It also discusses the merits and demerits of Limited Liability Companies (LLC) compared to other business structures like sole proprietorships and partnerships, highlighting aspects such as liability, fundraising, and organizational structure. Based on the ratio analysis, the report offers specific recommendations to Next PLC's management to address financial issues, focusing on strategies to improve profitability, liquidity, and working capital management. The analysis suggests that Next PLC faces challenges in maintaining stable financial performance, impacting its future prospects in the UK clothing retail industry, and emphasizes the need for effective financial strategies to overcome these issues. Desklib provides access to this and other solved assignments to aid students in their studies.

Running head: FINANCIAL ACCOUNTING AND REPORTING
Financial Accounting and Reporting
Name of the Student
Name of the University
Author’s Note

1FINANCIAL ACCOUNTING AND REPORTING
Executive Summary
The objective of the first part of the report is the analysis of the merits and demerits of Limited
Liability Company (LLC) as compared to the other forms of business like sole proprietorship or
partnership. The next part of the report involves in the analysis of four types of ratios with the
help of the financial information of Next PLC; they are profitability ratios, liquidity ratios,
investor ratios and working capital ratios. Based on the results of the ratio analysis, some specific
recommendations are provided to the management of Next PLC to revive their financial issues.

2FINANCIAL ACCOUNTING AND REPORTING
Table of Contents
Introduction......................................................................................................................................3
Merits and Demerits of LLC in Comparison to Other Form of Business.......................................3
Merits...........................................................................................................................................3
Demerits.......................................................................................................................................4
Analysis of Ratios............................................................................................................................4
Profitability Ratios.......................................................................................................................4
Liquidity Ratios...........................................................................................................................6
Investors Ratios...........................................................................................................................7
Working Capital Ratios...............................................................................................................9
Future of Next PLC in UK Clothing Retail Industry.....................................................................10
Recommendations..........................................................................................................................11
Conclusion.....................................................................................................................................12
References......................................................................................................................................13

3FINANCIAL ACCOUNTING AND REPORTING
Introduction
Financial Accounting can be regarded as a specialized accounting process that helps in
keeping track of the financial transactions of the companies. After that, with the help of various
accounting principles and standards, accountants record and summarize the transactions so that
they can be presented in the form of financial reports (Bevis 2013). The main aim of this report
is the analysis of the financial information of Next PLC with the help of relevant ratios. Thus,
this report provides the scope for the analysis and interpretation of the financial statements of the
companies. This report also sheds light on both the merits and demerits of Limited Liability
Companies (LLC) in comparison to the other form of businesses.
Merits and Demerits of LLC in Comparison to Other Form of Business
Merits
Proprietors Do Not Have Any Responsibility Towards Company Debts: It can be considered as
the most crucial characteristic of an LLC. The proprietors of a partnership or sole partnership
business are responsible for the debt of the business. In case the assets of a sole partnership or
partnership businesses are not enough to fulfill the obligations of the creditors, they can go after
the personal bank account, house and others of the proprietors to get their money back. However,
in case of an LLC, the owners do not have any liability in case the businesses run out of funds
(Lewis 2013).
It Is Easier for an LLC to Raise Money: An LLC can raise capital from many sources. It has the
option to admit new member by selling interests of membership. After that, it can create new
class of membership interests with the help of different voting or profit characteristics. The main

4FINANCIAL ACCOUNTING AND REPORTING
advantage in this case is that the new investors will not be liable towards the company liability
(Gomtsian 2015).
Ease in Transferring the Ownership: Under an LLC, ownership interest can be sold to third
parties without affecting the business operations. On the other hand, one cannot sell the
businesses of sole partnership or partnership as each assets, bank accounts and licenses need to
be transferred individually.
Demerits
High Cost to Set Up Business: It needs to be mentioned that an LLC takes more costs to be
established as compared to sole proprietorship or partnership businesses. For example, the setting
up of an LLC includes high costs like initial formatting fees, fitting fees and others (Mancuso
2017).
Formal Organization: As compared to sole proprietorship or partnership businesses, an LLC
requires more paper work. A sole proprietorship or partnership business can be commenced even
without an handwriting agreement in the presence of any formal organizational procedures.
Separate Records: It is needed for the owners of an LLC to maintain separate records with the
aim to liability protection of the members. In addition, the owner of an LLC is needed to keep
his/her personal affairs separate from the business of LLC (Schwarcz 2014).
Analysis of Ratios
Profitability Ratios
Particulars 2014 2015 2016 2017 2018
Gross Profit Ratio 33.16% 33.59% 34.78% 33.84% 33.44%
Net Profit Ratio 14.79% 15.87% 15.96% 15.51% 14.59%

5FINANCIAL ACCOUNTING AND REPORTING
Table 1: Profitability Ratios of Next PLC
(Source: as created by author)
2014 2015 2016 2017 2018
32.00%
32.50%
33.00%
33.50%
34.00%
34.50%
35.00%
33.16%
33.59%
34.78%
33.84%
33.44%
Gross Profit Ratio
Gross Profit Ratio (B/A)
Figure 1: Change in Gross Profit Ratio
(Source: as created by author)
2014 2015 2016 2017 2018
13.50%
14.00%
14.50%
15.00%
15.50%
16.00%
16.50%
14.79%
15.87% 15.96%
15.51%
14.59%
Net Profit Ratio
Net Profit Ratio (C/A)
Figure 2: Change in Net Profit Ratio

6FINANCIAL ACCOUNTING AND REPORTING
(Source: as created by author)
As per figure 1, slight fluctuations can be seen in the gross profit level from 2014 to
2018. However, as per figure 2, a decreasing trend can be seen in net profit ratio from 2016 to
2018; and it is not a healthy situation for Next PLC (nextplc.co.uk 2018). There is a need for
effective strategy for the company to revive the profitability situation.
Liquidity Ratios
Particulars 2014 2015 2016 2017 2018
Current Ratio (times) 1.76 1.82 1.40 2.29 1.96
Quick Ratio (times) 1.30 1.35 0.99 1.67 1.43
Table 2: Liquidity Ratios of Next PLC
(Source: as created by author)
2014 2015 2016 2017 2018
0.00
0.50
1.00
1.50
2.00
2.50
1.76 1.82
1.40
2.29
1.96
Current Ratio
Current Ratio (A/B)
Figure 3: Change in Current Ratio
(Source: as created by author)

7FINANCIAL ACCOUNTING AND REPORTING
2014 2015 2016 2017 2018
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
1.30 1.35
0.99
1.67
1.43
Quick Ratio
Quick Ratio {(A-C)/B}
Figure 4: Change in Quick Ratio
(Source: as created by author)
According to figure 3 and figure 4, major fluctuations can be seen in the case of both
current and quick ratio; and this aspect indicates towards the instability in the liquidity position
of Next PLC. In the year 2018, decrease in both the current and quick ratios can be seen. It
implies that there is a decrease in the capacity of Next PLC to satisfy their present business
obligating in the recent years (nextplc.co.uk 2018).
Investors Ratios
Particulars 2014 2015 2016 2017 2018
Interest Coverage Ratio (times) 25.54 26.45 27.44 21.90 21.65
Debt to Equity Ratio (times) 6.49 6.09 6.47 3.71 4.31
Table 3: Investors Ratios of Next PLC
(Source: as created by author)

8FINANCIAL ACCOUNTING AND REPORTING
2014 2015 2016 2017 2018
0.00
5.00
10.00
15.00
20.00
25.00
30.00
25.54 26.45 27.44
21.90 21.65
Interest Coverage Ratio
Interest Coverage Ratio
(A/B)
Figure 5: Change in Interest Coverage Ratio
(Source: as created by author)
2014 2015 2016 2017 2018
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00 6.49 6.09 6.47
3.71
4.31
Debt to Equity Ratio
Debt to Equity Ratio (C/D)
Figure 6: Change in Debt to Equity Ratio
(Source: as created by author)
According to figure 5, there is deistic decrease in the interest coverage ratio of Next PLC
in 2017 and 2018 from 2016; and there was an increasing trend in this ratio from 2014 to 2016.

9FINANCIAL ACCOUNTING AND REPORTING
The same aspect can be seen from figure 6 as decreeing trend can be seen in debt to equity ratio
in 2017 and 2018 from 2016. On the overall basis, fluctuation can be seen in this ratio over the
last five years that is not good for the business of Next PLC (Delen, Kuzey and Uyar 2013).
Working Capital Ratios
Particulars 2014 2015 2016 2017 2018
Inventory Turnover Ratio (times) 6.97 6.62 6.03 5.78 5.74
Accounts Receivable Turnover Ratio
(times) 4.90 4.84 4.41 3.77 3.42
Table 4: Working Capital Ratios of Next PLC
(Source: as created by author)
2014 2015 2016 2017 2018
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
6.97 6.62
6.03 5.78 5.74
Inventory Turnover Ratio
Inventory Turnover Ratio
(A/B)
Figure 7: Change in Inventory Turnover Ratio
(Source: as created by author)

10FINANCIAL ACCOUNTING AND REPORTING
2014 2015 2016 2017 2018
0.00
1.00
2.00
3.00
4.00
5.00
6.00
4.90 4.84
4.41
3.77 3.42
Accounts Receivable Turnover Ratio
Accounts Receivable
Turnover Ratio (C/D)
Figure 8: Change in Accounts Receivable Ratio
(Source: as created by author)
According to figure 7 and figure 8, a major decreasing trend can be seen in both
inventory turnover ratio and accounts receivable turnover ratio. This aspect indicates towards the
unhealthy working capital condition of Next PLC in the recent years. For this reason, the
management of Next PLC can face difficulties in conducting the daily business operations in the
lack of adequate working capital (Brooks and Mukherjee 2013).
Future of Next PLC in UK Clothing Retail Industry
The future of any business depends on certain factors like profitability, liquidity, working
capital and others. In case of Next PLC, the presence of problems can be seen in these major
areas. It is not possible for the business organizations to survive in the presence of these issues.
Thus, it can be said that Next PLC does not have a bright future in the UK retail industry in the
presence of these financial issue. In order to secure a bright future, the need for Next PLC is to

11FINANCIAL ACCOUNTING AND REPORTING
develop effective financial strategies so that the financial issues can be overcome (Brooks and
Mukherjee 2013).
Recommendations
Followings are the major recommendations for Next PLC to strengthen their situation in
the above-discussed financial areas:
 The management of Next PLC needs to identify the most productive products that need
more concentration and needs to eliminate the unprofitable products. This will help in
increasing the sales that can lead to increase in gross profit. Moreover, Next PLC needs
to develop strategies to reduce direct costs and overheads as it is helpful in improving
the profitability condition.
 In order to improve the liquidity position, it is recommended to Next PLC to negotiate
with their creditors about longer payment terms. At the same time, it is needed for them
to remove the unproductive assets as it will lead them to use their money in the
productive assets. Most importantly, it is needed for Next PLC to use long-term debts
for raising capital for their business. It will improve in their current and quick assets.
 It is recommended to Next PLC to pay off some of the existing debts with the aim to
decrease the amount of borrowings. This process will help the company in improving
their interest coverage ratio. Apart from this, in order to maintain a stable debt-to-equity
ratio, it is needed for the management of Next PLC to maintain an optimal mix of equity
and debt in their capital structure. This will reduce the overdependence of the company
on one of the medium for raising capital.