Financial Accounting: Marks And Spencer Essay

Question:

Discuss about the Financial Accounting for Marks and Spencer.

Answer:

Introduction

The report has been prepared to present the interpretation of financial statements of a public listed company Marks and Spencer to analyze its efficiency and performance during the financial year. In order to prepare the report, financial statements of the company have been considered for the years 2013, 2014 and 2015 to compare the results and calculate the financial ratios. Determination of financial ratio would assist in measuring the organization’s profitability, revenue generation from the sources of assets and other resources. The organization is engaged in retailing industry based in United Kingdom with the reported revenue of around ?10.30 billion while operating income ?762.5 million in the recent year while the number of employees in the organization reported to 83,069 in the current year.

Discussion

Accounting Ratios

Accounting and financial ratios of the company are measured to determine the efficiency with respect to the profitability, liquidity, investment leverage, solvency and interest coverage on debts. Accordingly, several accounting ratios have been measured for Marks and Spencer for three financial years 2013, 2014 and 2015 to analyze the overall performance and financial position. Profitability ratio provides the assessment on organizational competence to generate earnings against the expenses and costs (Ahmad 2016). Liquidity ratio of the company is measured to determine its ability to pay off the current obligations with the available funds and current assets that can be converted to cash immediately. Further, efficiency ratio is used to evaluate the ability of the company on optimum utilization of its assets and liabilities that helps in generating turnover and returns on the organizational resources. Similarly, gearing ratio measures the return on capital employed by the company along with the capital borrowed as debts to support the finances as well as interest costs used to borrow such funds (Saghi-Zedek and Tarazi 2015).

2015

2014

2013

(Amount- millions in GBP)

Profitability ratio

Net profit %

Net Profit/ Total Revenue

482/10,311

506/10,310

445/10,027

0.05

0.05

0.04

Gross profit %

(Total Sales- Cost of Goods Sold)/ Total Sales

701/10,311

695/10,310

445/10,027

0.07

0.07

0.04

Return on assets

Net Income/ Average Total Assets

482/8,196

506/7,903

445/7,611

0.06

0.06

0.06

Return on owner's equity

Net Income/ Shareholder's Equity

482/3,200

506/2,707

445/2,539

0.15

0.19

0.18

Increase in net operating profit

20

33

-

Change in total sales

1

283

-

Selling and distribution expenses %

Selling and distribution expenses/Net Sales

2,755/10,311

2,747/10,310

2,647/10,027

0.27

0.27

0.26

Liquidity ratio

Working capital ratio

Current Assets/ Current Liabilities

1,455/2,112

1,369/2,349

1,268/2,238

0.69

0.58

0.57

Liquidity ratio

(Current Assets- Inventory- Prepaid expenses)/ Current Liabilities

(1,455-798-145)/2,112

(1,369-846-129)/2,349

(1,268-767-108)/2,238

0.24

0.17

0.18

Equity ratio

Total Equity/ Total Assets

0.39

0.34

0.33

Efficiency ratio

Stock turnover

Net sales/Inventory

12.92

12.19

13.07

debtors period

Net Sales/ Accounts Receivable

58.25

56.96

71.11

Total asset turnover ratio

Net sales/Total Assets

1.26

1.30

1.32

Current asset turnover ratio

Net sales/Current Assets

7.09

7.53

7.91

Gearing ratio

Debt and Equity

Total debts/ shareholders' equity

1.18

1.39

1.58

(Source: Created by Author)

Interpretation of Accounting Ratios and Comparisons

Considering the profitability ratio of Marks and Spencer it has been observed that the net profit percentage has been increased during the recent year compared to the accounting year 2013. During the year, 2014 and 2015 the company’s performance remained stable in consideration with the net profit and gross profit 5.00% and 7.00% respectively while the percentage during the year 2013 at 4.00%. The profit percentage reflects the efficiency of Marks and Spencer to cover the cost of sales and other administrative expenses during the financial year. Further, profitability ratio on return on organization’s total equity provides the efficiency in generating income by utilizing the company’s total capital, which reflected decline at certain percentage (Biddle et al. 2015). During the year 2013, the company’s return on equity was around 18%, which was increased in 2014 by 1.00% while it declined again in the year 2015 by 4.00% represents that in the recent year the company could not utilize the capital amount in optimum manner. On the contrary, net operating profit of the company reflected increased value in the year 2014 as well as in the year 2015 while total sales revenue remained consistent. The result indicates the company could control its production and other indirect business costs that increased its profitability (Marksandspencer.com 2016).

Liquidity ratio provides the efficiency of the company to reflect the solvency as well as ability to meet the current obligations through current resources. The solvency of the organization is determined by working capital ratio, liquidity ratio and equity ratio that should be more than 1 as per the industrial standards (O’Neill, Sohal and Teng 2016). Working capital ratio of Marks and Spencer reflect positive increased ratio during the recent years but it is less than one, which is not idle and represents the minimum level of available funds to meet the organizational liabilities (Marksandspencer.com 2016). Similarly, efficiency and gearing ratio indicates the ability of the company to convert the cash funds from the organizational resources, which was declined during the year 2014 and 2015, compared to the year 2013.

Compared to the results of Macy during the year 2015 and 2014 it has been noted that the overall sales percentage of the company declined by around 1.05% whereas the gross margin ratio increased by 0.50%. This result indicates the efficient management of organizational cost structure even though the sales of the company declined. Besides, result of Marks and Spencer reflect increase in performance at higher percentage that was around 5.00%. Additionally, employment of organizational resources in order to generate revenue was higher in Macy at 11.00% whereas the percentage of revenue generation efficiency for Marks and Spencer was lower at 6.00%. Similarly, working capital ratio of Macy organization during the recent year 2015 was idle i.e. one while Marks and Spencer’s working capital ratio was lower than one, which is not considered as per the benchmark of industry as a whole (Investors.macysinc.com 2016). Therefore, it can be said Macy Company is efficient in employing the business resources and management of operating activities while Marks and Spencer is efficient in generating revenues.

Recommendation

Considering the calculation of financial ratios, Marks and Spencer is recommended to focus on managing the resources to perform the business activities effectively that helps in maximizing revenues and profitability. The working capital ratio of the company reflected lower value, therefore it is suggested that the management increases the value of current assets as well as manage the current liabilities. Further, ratio on total assets turnover of the company was lower hence, it is recommended that the management of Marks and Spencer should management its account receivable and other long- term investments so that the revenues can be maximized in subsequent years.

Conclusion

In view of the report on interpretation of financial statements of Marks and Spencer, it can be concluded that the performance of the company was consistent in the year 2014 and 2015 while it was lower in 2013. Considering the financial position of the company, it has been observed that the organizational resources with respect to current and non- current assets was under- utilized and hence, the revenue in terms of total assets reflect lower value. Efficiency ratio of the organization during 2015 reflected longer turnover period for conversion of cash funds from the current assets employed. Further, comparability of the company with the results of Macy reflected the aspects for improvement so that Marks & Spencer can develop its performance and financial position. However, the efficiency of the company in marketability and management of costs structure resulted in maximizing its overall revenue.

Reference List and Bibliography

Ahmad, R., 2016. A Study of Relationship between Liquidity and Profitability of Standard Chartered Bank Pakistan: Analysis of Financial Statement Approach. Global Journal of Management And Business Research, 16(1).

Basti, E., Bayyurt, N. and Akin, A., 2016. A comparative performance analysis of foreign and domestic manufacturing companies in Turkey. European Journal of Economic and Political Studies, 4(2), pp.127-139.

Biddle, G.C., Callahan, C.M., Hong, H.A. and Knowles, R.L., 2015. Do Adoptions of International Financial Reporting Standards Enhance Capital Investment Efficiency?. Available at SSRN 2353693.

Contiades, X., 2016. Constitutions in the global financial crisis: A comparative analysis. Routledge.

Hailu, A.Y. and Venkateswarlu, P., 2016. Effect of working capital management on firms profitability evidence from manufacturing companies in eastern, Ethiopia. IJAR, 2(1), pp.643-647.

Investors.macysinc.com. 2016. Quarterly Results - Macy’s, Inc.. [online] Available at: [Accessed 5 Dec. 2016].

Koleda, N. and Lace, N., 2015. Development of comparative-quantitative measures of financial stability for Latvian enterprises. Economics and Management, (14), pp.78-84.

Marksandspencer.com. 2016. Welcome to Marks & Spencer. [online] Available at: [Accessed 4 Dec. 2016].

O’Neill, P., Sohal, A. and Teng, C.W., 2016. Quality management approaches and their impact on firms? financial performance–An Australian study. International Journal of Production Economics, 171, pp.381-393.

Saghi-Zedek, N. and Tarazi, A., 2015. Excess control rights, financial crisis and bank profitability and risk. Journal of Banking & Finance, 55, pp.361-379.

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