Sie sind auf Seite 1von 31

BANKING ACADEMY, HANOI

BTEC HND IN BUSINESS (FINANCE)


ASSIGNMENT COVER SHEET

NAME OF STUDENT
REGISTRATION NO.
UNIT TITLE
ASSIGNMENT TITLE
ASSIGNMENT NO
NAME OF ASSESSOR
SUBMISSION DEADLINE

Owlish Group
Unit 2: Managing Financial Resources and Decisions
Financial Decisions and Financial Performance Analysis
Assignment 2 0f 2
Mr. JUN ALEJO BATHAN
10th January, 2013

We ________Owlish Group__________________ hereby confirm that this assignment is


our own work and not copied or plagiarized from any source. We have referenced
the sources from which information is obtained by us for this assignment.

Name of Students

Student Number

Signature

Date

VHngVn

F05-250

10/1/2013

VAnhTrang

F05-231

10/1/2013

PhmThKhnhHuynF05-090
NguynPhngHoa

10/1/2013

F09-078

10/1/2013

----------------------------------------------------------------------------------------------------------------

FOR OFFICIAL USE


Assignment Received By:

OWLISH GROUP F05A

Date:

Page | 1

Unit Outcomes

Outcome

Be able to
make
financial
decisions
based on
financial
information

(L03)

Evidence
for the
criteria

Analyse
budgets and
make
appropriate
decisions
Explain the
calculation unit
costs and make
pricing
decisions using

Feedback

Assessors
decision

Internal
Verification

3.1

3.2

relevant
information

Assess the
viability of a
project using
investment

3.3

appraisal
techniques

Be able to
evaluate the
financial
performanc
e of a
business

(L04)

Discuss the
main financial
statements

Compare
appropriate
formats of
financial
statements for
different types
of business

OWLISH GROUP F05A

4.1

4.2

Page | 2

Outcome

Evidence
for the
criteria

Assessors
decision

Feedback

Internal
Verification

4.3
Interpret
financial
statements
using
appropriate
ratios and
comparisons
both internal
and external

Assignment
( ) Well-structured; Reference is done properly / should be done (if any)
Overall, youve

Merit grades awarded

M1

M2

M3

D1

D2

D3

Areas for improvemen


Distinction grades awarded

ASSESSOR SIGNATURE

DATE

NAME:...............................................................................
(Oral feedback was also provided)

STUDENT SIGNATURE

DATE

NAME :..............................................................................
FOR INTERNAL USE ONLY

VERIFIED

YES

NO

OWLISH GROUP F05A

DATE

: .................................................................

VERIFIED BY : .................................................................
NAME

: .................................................................

Page | 3

Financial Decisions and Financial Performance Analysis

Prepared for
LecturerMr. JunAlejoBathan
Unit 1: Managing Finance Resources and Decisions
Banking Academy, Hanoi
BTEC HND in business (Finance)

Prepared by:
Owlish Group
Registration No: F05-090
No of words: 3000
Submission Date: 10th January, 2013

OWLISH GROUP F05A

Page | 4

TABLE OF CONTENTS

EXECUTIVE SUMMARY.............................................................................................................8
INTRODUCTION...........................................................................................................................9
MAIN BODY................................................................................................................................10
TASK 1: Ability of making price decision based on financial information...............................10
Outcome 3.1: Analysis of budgets and appropriate decisions...................................................10
3.1.1: Flexible budget and budgetary control........................................................................10
3.1.1: Brief summary of the possible causes of variances......................................................12
Outcome 3.2: Explanation of the calculation unit costs and pricing decisions using relevant
information.................................................................................................................................13
3.2.1: Specification of production costs.................................................................................13
3.2.2: Explanation of F05 Ltd costs which should be used for decision-making...................14
TASK 2: Ability of making price decision based on financial information...............................15
Outcome 3.3: Assessment of the viability of a project using investment appraisal techniques.15
3.3.1: Average rate of return..................................................................................................15
3.3.2: Net present value..........................................................................................................16
3.3.3: Summary for the capital investment committee, advising it on the relative merits of
the two projects.......................................................................................................................18
TASK 3: Ability of evaluating the financial performance of a business...................................18
Outcome 4.1: Discussion of the main financial statements.......................................................18
4.1.1: Balance sheet...............................................................................................................18
4.1.2: Income statement..........................................................................................................19
4.1.3: Cash flow statement.....................................................................................................20

OWLISH GROUP F05A

Page | 5

Outcome 4.2: Difference among formats of financial statements for different types of business
....................................................................................................................................................20
4.2.1: Balance Sheet...............................................................................................................20
4.2.2: Income Statement.........................................................................................................21
4.2.3: Statement of Cash Flows..............................................................................................21
Outcome 4.3: Interpretation of financial statements using appropriate ratios and comparisons
both internal and external...........................................................................................................21
4.3.1 Profitability and return on capital.................................................................................21
4.3.2 Borrowings....................................................................................................................23
4.3.3 Liquidity and working capital ratios.............................................................................25
CONCLUSION..............................................................................................................................29
APPENDICES...............................................................................................................................30
A. REFERENCES...................................................................................................................30
B. FINANCIAL STATEMENTS OF BURBERRY CORPORATION...................................33

OWLISH GROUP F05A

Page | 6

EXECUTIVE SUMMARY
Making financial decisions is not easy at all. To make a decision, the decision maker has to
gather and analyze a lot of financial information. This takes a lot of time and effort. Moreover,
the decision has to be accurate otherwise; the business will have to suffer from difficulties such
as not having enough money or losing a lot of money due to inaccurate calculation and
prediction of cost. The worst result of a wrong decision is the bankruptcy of the business.
Therefore, it is very important to analyze the financial information carefully. Furthermore,
investors or businesss owners has to know how to analyze and evaluate the financial
performance of a business. The analysis and evaluation are made based on the financial
statements that the business publishes every accounting/fiscal year to show the operation of the
company during the year, the cash flow which shows the sources of money coming in and
coming out, and how it generates profits from its activities like financing, investing, or operating.
The financial statements also help the readers know the financial health of the company, whether
it is doing well or it is going to go bankrupt. Finally, it helps investors know whether to invest in
the company or not so that they do not lose their money.
Therefore, this paper is to provide information on how to make financial decisions by giving
examples of budget analysis and making decisions, theory of costs relevant to pricing decision,
and evaluation of the viability of a project based on investment appraisal techniques. Moreover,
the paper provides a brief introduction of financial statements including the purposes, the
differences between the format of financial statements for different types of business (sole trader,
partnership, and company), analysis of financial statements with appropriate ratios, and using the
ratios to compare internally (within the company, by years) and externally (within the industry,
using industrial ratios or the ratios from the companies in the same industry). To help readers feel
easier when making the analysis of financial statements, Burberry, which is in the personal goods
industry, is chosen as an example. In this example, the paper uses the financial statements of five
fiscal years, from 2008 to 2012, to calculate the ratios and making the comparison. The
calculation and formulas are also written in detail so that it is much easier for readers to interpret
and apply in their own companies.

OWLISH GROUP F05A

Page | 7

INTRODUCTION
Managing Financial Resources and Decisions is a unit designed to give understanding of how
finance is managed within business organizations. It includes the way to evaluate different
sources of finance, compare the ways in which these are used, how to use financial information
to make decisions, consideration of pricing and investing decisions as well as budgeting. Finally,
it gives leaners techniques to evaluate financial statement.
In this assignment, as a financial analyst in XYZ Company, financial consultancy firm in the UK,
we are required to review, analyze and provide report to the three companies which are assigned
the chief financial comptroller of the companies and to extract the latest financial statements of
any company of our choice that is listed in the London Stock Exchange. The chosen company
here is Burberry, an infamous and old company in clothing and accessories industry of UK.
This report is divided into three main tasks. Each task covers particular topics.
Task 1 covers two topics:

Analysis of budgets and appropriate decision making

Explanation of the calculation unit costs and pricing decision making using relevant

information
Task 2 covers assessment of the viability of a project using investment appraisal techniques
Task 3 covers topics related to Burberry, the chosen company:

Discussion the main financial statements

Comparison of appropriate formats of financial statements for different types of business

Interpretation of financial statements using appropriate ratios and comparisons both

internal and external


The sources of information and formulas mostly come from books, online articles. The main
financial statements of Burberry are from the companys annual report.

OWLISH GROUP F05A

Page | 8

MAIN BODY
TASK 1: Ability of making price decision based on financial information
Outcome 3.1: Analysis of budgets and appropriate decisions
3.1.1: Flexible budget and budgetary control
Budget
4,000

12,000
8,000
2,000
4,000
3,000
9,500
38,500

Production (units)
Direct materials
Direct labor
Maintenance
Depreciation
Rent and rates
Other costs
Total costs

Actual results
6,000

10,500
8,500
2,500
4,500
3,500
5,000
34,500

Variance
2,000

(1,500)
500
500
500
500
(4,500)
(4,000)

Based on the estimated cost, the budgetary control (variance) analysis is as follows:

Fixed budget

Flexible budget

Actual results

Budget variance

(a)

(b)

(c)

(b) - (c)

OWLISH GROUP F05A

Page | 9

Production (units)
Variable costs
Direct materials
Direct labor
Maintenance
Semi variable costs
Other costs
Fixed costs
Depreciation
Rent and rates
Total costs

4,000

6,000

6,000

12,000
8,000
2,000

18,000
12,000
3,000

10,500
8,500
2,500

7,500(F)
3,500(F)
500(F)

9,500

13,500

5,000

8,500(F)

4,000
3,000
38,500

4,000
3,000
53,500

4,500
3,500
34,500

500(A)
500(A)
19,000(F)

This table can be analyzed as follows:


a) In producing 6,000 units, the expected costs should have been 53,500. Instead, actual
costs were 34,500, which was 19,000less than expected. The reason for the
improvement is that, given output of 6,000 units, costs were lower than expected.
Specifically, in variable costs, direct materials were reduced by 7,500, direct labor were
reduced by 3,500, and maintenance decreased by 500. In semi-variable costs, other
costs might be reduction in usage of water and electricity, which saved the company
8,500.
b) Fixed cost increased by 1,000. It can be assumed that the company bought more
machines and expanded the business. Therefore, depreciation, rent and rates increased but
not much compared to the reduction of variable costs and semi-variable costs.
c) In conclusion, the gap between flexible budget and actual budget is too wide
Variance
19,000
100 =
100 35.5
Formula: Flexible
53,500
Among the variances, the variances of semi variable costs are the highest:
Semi variable cost variance:

8,500
100 63
13,500

Some of the reasons could be F05 Ltd set standard cost too high compared to reality. The
company should reconsider to set more suitable standard cost.
d) A full variance analysis statement would be as follows:
OWLISH GROUP F05A

Page | 10


Fixed budget costs
Budgeted difference due to increased production
level (11,000 + 4,000)
Flexible budget costs
Variances
Direct material cost
Direct labor cost
Maintenance cost
Other costs
Depreciation
Rent and rates

38,500
15,000
53,500

7,500(F)
3,500(F)
500(F)
8,500(F)
500(A)
500(A)

Actual costs

19,000
34,500

3.1.1: Brief summary of the possible causes of variances(Rawes, 2012)

Material and material usage: The company may not predict the amount of materials used
and the efficiency of using those materials. Theprice decision does not consider discounts

and other costs like transportation, warehousing.


Labor and labor efficiency: The different level of skills causes variance of salary.
Unexpected employees behaviors like being late for work, industrial accidents, result in
the deduction of labor. Moreover, when the work takes longer to complete, it leads to an

increase in labor hour and salary payment because of overtime working.


Idle time: Due to natural disasters, the factory cannot operate but still has to pay for rent,

rates, salary. Besides, machine maintenance or breakdown can also result in an idle time.
Sales: Market and economic conditions can result in variance of sales. Emergence of new

competitors, intense rivalry among existing firms may cause a decrease in sales.
Selling overheads: include all indirect materials, wages and expenses incurred in
promoting sales and retaining customers (BPP, 2010). Eg: printing catalogues, website

maintenance costs, advertising and sales promotion


Distribution overheads: include indirect materials costs, wages and expenses incurred in
making the packed product ready for delivering to customer (BPP, 2010).Eg: wages for
packers, drivers, warehouses rent rates.

OWLISH GROUP F05A

Page | 11

Outcome 3.2: Explanation of the calculation unit costs and pricing decisions using relevant
information
3.2.1: Specification of production costs
Cost of production is a cost incurred by a business when manufacturing a good or producing a
service(Investopedia, 2012).It can be classified into two types: direct cost and indirect cost
a. Direct cost
Material: is cost of those materials which can be identified in the product and can
be conveniently measured and directly charged to the product. (Assar, 2012). For
example, component parts purchased for a particular jobs, primary packing

materials like carton, boxes.


Labor: includes the actual cost of wages as well as the employment taxes accrued
on these wages (Gartenstein, 2012). For example, wages and salaries for workers

participating directly in producing goods.


Expenses: is that portion of expense that is directly expended in providing a
product or service for sale and is included in the calculation of cost of goods sold

(W.Lee, 2012). Eg: supplies, power, fuel.


b. Indirect cost
Production overhead: (Peavler, 2013)
Indirect material: make production of a company's products possible but
can't be assigned to just one product. Eg: lubricants, glue, screws, tapes.
Indirect wages: all wages make production of a product or products
possible but can't be assigned to one particular product. Eg: Wages for
stores staff, maintenance staff.
Indirect expenses: affects the entire company, not just one product. Eg:

rent, rates, insurance of plant.


Administration overheads: the indirect expenditure incurred in formulating the
policy, directing the organisation and controlling the operations of an undertaking
(Assar, 2012).Eg: Depreciation of office computer equipment, general offices

rent, rate, and insurance


Selling overheads: includes the cost of seeking to create and stimulate demand
and of securing orders and comprises to cost to products dealt in and of efforts to
find and retain customers(Assar, 2012). Eg: printing catalogues, website
maintenance costs, advertising and sales promotion

OWLISH GROUP F05A

Page | 12

Distribution overheads: include the expenditure incurred in the process, which


begins with making the packed product available for dispatch (Assar, 2012)
(Assar, 2012). Eg: wages for packers, drivers and dispatch clerks

3.2.2: Explanation of F05 Ltd costs which should be used for decision-making
The costs that should be used for decision-making are often referred to as relevant costs. F05
Ltds relevant cost can be divided into two costs, including incremental cost and opportunity
cost.
a. Incremental cost.

Incremental cost is a cost associate with producing an additional unit (Hafeezrm, 2012). It
includes many different direct and indirect costs depending on the situation. For example, if F05
Ltd produces at full capacity, the incremental cost of adding production units might include costs
of equipment, workers salary, electricity to run the production line to make more products.
b. Opportunity cost
Opportunity cost is the cost of a foregone alternative. If you chose one alternative over another,
then the cost of choosing that alternative is an opportunity cost (Peavler, 2012). When F05 Ltd
decides to go for a particular project, it will ignore other projects and will lose opportunities for
them.
c. Fixed cost and variable cost
As BPP (2010) pointed out, in decision-making, the distinction between fixed cost and variable
cost becomes very important. Contribution (to fixed cost) is the difference between selling price
and variable cost.

OWLISH GROUP F05A

Page | 13

TASK 2: Ability of making price decision based on financial information


Outcome 3.3: Assessment of the viability of a project using investment appraisal techniques
3.3.1: Average rate of return
Average rate of return (ARR) is an investing concept that shows how much an investment made
over the investment's life. It is important for investors to calculate their ARR so they can make
better comparisons between the returns of different investments (Johnson, 2012)
Because straight-line depreciation will be used and no residual value is expected, the total
depreciation will be 80,000.

Total profit
Less depreciation
Total net profit
Average annual profit
Average investment
ARR

Project A

Project B

124,000
(80,000)
44,000
8,800
40,000
22%

122,000
(80,000)
42,000
8,400
40,000
21%

The formula:
Total net profit = Total profit Total depreciation
TotalNetProfit
Average annual profit = Totalnumberofyear
Average investment =

Totaldepreciation + Remainingcapital
2

Note: In this case, after 5 years, the company will get back total 80,000 it invested. The
money returns completely. Therefore, the remaining capital will be zero.
ARR =

Estimatedaverageannualprofit
100
Estimatedaverageinvestment

Conclusion: ARR of two project is higher than 0. However, the company should choose project
A because project As ARR (22%) is higher than project Bs (21%)
OWLISH GROUP F05A

Page | 14

3.3.2: Net present value


Net present value (NPV) is one of several methods investors and companies use to evaluate the
potential profitability of an investment or project. NPV measures the total amount by which an
investment is expected to increase based on the present value of its potential cash flows and
initial cost (Keythman, 2012). Net present value of two projects is shown as below:
a. Project A

Year

Payback capital

Discount rate

Present value

(r = 15%)

(PV)

0
1

80,000
22,000

(1+15 )1

19,130.43

25,000

(1+15 )2

18,903.59

26,000

(1+15 )3

17,095.42

24,000

(1+15 )4

13,722.08

27,000

(1+15 )5

13,423.77

The formula:
Present value in year (t)

PVt= Ct

1
(1+ r)t
t
(1+r ) =Ct

PVt: Present value in year t


Ct: Payback capital in year t
r: discount rate
Net present value
T

NPV = PVtCo
t=1

In project A:
NPV = (PV1 + PV2 + PV3 + PV4 + PV5) C0
OWLISH GROUP F05A

Page | 15

= (19,130.43 + 18,903.59 + 17,095.42 + 13,722.08 + 13,423.77) 80,000


= 2,275.30
Therefore, Net present value of project A is 2,275.30
b. Project B
Year

Payback capital

Discounted rate

Present value

(r = 15%)

(PV)

0
1

80,000
29,000

(1+15 )1

25,217.39

26,000

(1+15 )

19,659.74

24,000

(1+15 )3

15,780.39

24,000

(1+15 )

13,722.08

19,000

(1+15 )5

9,446.36

In project B:
NPV = (PV1 + PV2 + PV3 + PV4 + PV5) C0
= (25,217.39 + 19,659.74 + 15,780.39 + 13,722.08 + 9,446.36) 80,000
= 3,825.96
Therefore, Net present value of project B is 3,825.96
Conclusion: It can be seen that NPV of two projects is higher than 0. However, the company
should choose project B because project Bs NPV (3,825.96) is higher than project As
(2,275.30)
3.3.3: Summary for the capital investment committee, advising it on the relative merits of the
two projects
ARR has some of advantages as focus on return, flexible time frame, Simple
Comparison(Hartman, 2012). This calculation is quiet easy for investors to understand, it clearly
shows what they get if they invest in projects. However, the ARRhas disadvantages,
(Accountingexplained ,2012):

Ignoring time value of money.

Due to various ways of calculation, the results do not unify.

OWLISH GROUP F05A

Page | 16

Should not be used in big projects because it uses accounting income instead of

cash flow data.


NPV helps company compare the value of money at the present time and the future(Thomason,
2012). However, NPV needsplenty of information. With many projects to consider, when the
information is not completed and accurate, it will directly influence the analysis tool.
Based on advantages and disadvantages of both ARR and NPV, investor should use NPV method
in estimating the effectiveness of projects. Therefore, project B is better.

TASK 3: Ability of evaluating the financial performance of a business


Outcome 4.1: Discussion of the main financial statements
4.1.1: Balance sheet
a. Definition
A balance sheet is a financial report stating the total assets, liabilities, and owners' equity of an
organization at a given date, usually the last day of the accounting period. The credit side of the
balance sheet states assets, while the debit side states liabilities and equity, and the two sides
must be equal, or balance(Riley, 2012).
b. Contents
According to Riley(2012)

Assets include cash in hand and cash anticipated (receivables), inventories of supplies
and materials, equipment, and whatever else the company uses to conduct business.
Assets also need to reflect depreciation in the value of equipment such as machinery that

has a limited expected useful life.


Liabilities include pending payments to suppliers and creditors, outstanding current and
long-term debts, taxes, interest payments, and other unpaid expenses that the company

has incurred.
Owners' Equity consists of capital invested by owners over the years and profits (net
income) or internally generated capital, which is referred to as "retained earnings".

OWLISH GROUP F05A

Page | 17

4.1.2: Income statement


a. Definition
An income statement isa historical record of the trading of a business over a specific period
(normally one year). It shows the profit or loss made by the business which is the difference
between the firms total income and its total costs (Riley, 2012).
b. Contents
According to (Riley, 2012), an income statement includes:

Revenue: The revenues (sales) during the period are recorded here. Sometimes referred

to as the top line revenue shows the total value of sales made to customers.
Cost of sales: The direct costs of generating the recorded revenues go into cost of sales.
This would include the cost of raw materials, components, goods bought for resale and

the direct labour costs of production.


Gross profit: The difference between revenue and cost of sales and is used to calculate the

gross profit margin (%).


Operating profit: A key measure of profit which records how much profit has been made
in total from the trading activities before any account is taken of how the business is

financed.
Finance expenses: Interest paid on bank and other borrowings, less interest income

received on cash balances, is shown here.


Profit before tax: Calculated as operating profit less finance expenses
Tax: An estimate of the amount of corporation tax that is likely to be payable on the
recorded profit before tax

4.1.3: Cash flow statement


a. Definition:
A cash flow statement is a statement specifying the cash inflows and cash outflows arising from
the Operating, Investing and Financing activities during the two successive balance sheets
explaining the difference between the opening and closing cash balance (Gupta, 2008).
b. Contents:
There are three main parts of a cash flow statement (Gupta, 2008):
OWLISH GROUP F05A

Page | 18

From operating activities:Operating activities are main revenue-generating activities and

other activities that are not investing or financing activities.


From investing activities:Investing activities are the acquisition and disposal of long-term

assets and other investments not included in cash equivalents.


From financing activities:Financing activities are activities causing changes in the size
and composition of owners capital including preference share capital in the case of a
company and borrowings of the enterprise.

Outcome 4.2: Difference among formats of financial statements for different types of
business
4.2.1: Balance Sheet
The main differences among different types of business in balance sheet are assets and owners
equity (Anthony, 2012)

Assets: Assets are shown on the top half of balance sheet, including fixed assets, current
asset and net current assets. However, the company has to comply with layouts of
Company Act, and use particulars wordings. Sole traders and partnership are quite free

when presenting balance sheet. They can present it as they wish.


Owners equity: For sole trader, owners equity is quite simple, including opening capital,
profit, and closing capital, whereas equity for partnership, capital accounts are presented
according to partners. Companys profit is presented in form of retained earnings,
whereas it is reported as net profit for sole trader and partnership.

4.2.2: Income Statement


In income statement, the expenditure of company is quite different from sole trader and
partnership (DIYAccounting, 2012). Company has to spend money on corporate tax and
dividends. Instead of paying corporate tax, sole trader and partnership has to pay personal
income tax on their profits and it is not presented on income statement.
4.2.3: Statement of Cash Flows
There are three main types of business activities, including operating, investing and financing.
Investment is only from one person for sole trader, few people for partnership, but many for

OWLISH GROUP F05A

Page | 19

company. Financing activities includes offering preference share capital, which two other types
do not have.
Outcome 4.3: Interpretation of financial statements using appropriate ratios and
comparisons both internal and external
4.3.1 Profitability and return on capital
a. Profit before interest and taxes (PBIT)
PBIT represents earnings (income) of the company from its on-going operations,

leaving out interest income and tax expenses (Murray, 2012)


Formula
PBIT = Revenue Cost of goods sold Selling, general, and administrative
expenses
Burberrys PBIT

2008
201.7 million
-

2009
(9.9) million
(4.9%)

2010
216.5 million
2,286.9%

2011
302.1 million
139.5%

2012
376.9 million
124.8%

PBIT illustrates an increase of 186.6% over the last five years. Except for 2009, Burberry
increases its PBIT every year.
b. Return on capital employed (ROCE)
ROCE is a profitability or performance ratio that measures how much investors in
a business are earning on the capital they have invested in that business (Peavler,

2012)
Formula

Capital employed = Total assets Total current liabilities


Burberrys ROCE

PBIT
ROCE = Capital employed

OWLISH GROUP F05A

Page | 20

Year
Total assets (m)
Total current liabilities (m)
Capital employed (m)
PBIT (m)
ROCE

2008
953.2
457.9
495.3
201.7
40.72%

2009
1,125.70
581.8
543.9
-9.9
-1.82%

2010
1,139.60
501.8
637.8
216.5
33.94%

2011
1,364.40
534.3
830.1
302.1
36.39%

2012
1,610.60
596.8
1013.8
376.9
37.18%

Burberrys ROCE decreases over the five years even though the ROCE is pretty high. This
shows that Burberry has been earning profits.
c. Profit margin and asset turnover
These two factors contribute towards a ROCE
Profit margin gives the business owner a lot of important information about the
firm's profitability, particularly with regard to cost control(Peavler, 2012).
- Formula
PBIT
Profit margin = Revenue
Year
Revenue (m)
PBIT (m)
Profit margin

Burberrys profit margin


2008
995.4
201.7
20.3%

2009
1201.5
-9.9
-0.8%

2010
1279.9
216.5
16.9%

2011
1501.3
302.1
20.1%

2012
1857.2
376.9
20.3%

Asset

turnover measures the ability of a company to use its assets to efficiently generate
sales (Peavler, 2012).
- Formula
Asset turnover =
-

Revenue
Capital employed

Burberrys asset turnover

Year
Revenue (m)
Capital employed (m)
Asset turnover

2008
995.4
495.3
2.0

2009
1201.5
543.9
2.2

2010
1279.9
637.8
2.0

2011
1501.3
830.1
1.8

2012
1857.2
1013.8
1.8

4.3.2 Borrowings
a. Liabilities ratio: shows how much a business is in debt (Ward, 2012).
Formula
OWLISH GROUP F05A

Page | 21

Liabilities ratio =

Total liabilities
Total assets

Burberrys liabilities ratio

Year

Total

Total assets

Liabilities ratio

2008
2009
2010
2011
2012

debts
million
457.9
581.8
536.1
630.7
719.2

million
953.2
1,125.70
1,139.60
1,364.40
1,610.60

48.0%
51.7%
47.0%
46.2%
44.7%

The liabilities ratio is pretty safe for Burberry because its liabilities do not exceed its assets.
However, it should try to lower the liabilities ratio to make sure the company does have too
many liabilities.
b. Interest cover ratio is a measure of the adequacy of a company's profits relative to interest
payments on its debt (Pietersz, 2012)
Formula
Interest cover =

PBIT
Interest paid

Burberrys interest cover

Year

PBIT

Interest paid

Interest
cover

2008
2009
2010
2011
2012
OWLISH GROUP F05A

million
201.7
-9.9
216.5
302.1
376.9

million
11.8
13.6
6.1
5.1
3.3

17.09
(0.73)
35.49
59.24
114.21
Page | 22

Overall, Burberrys interest cover is high. It illustrates that Burberry can easily meet its interest
obligations from its profits. It can make enough profits to pay for its interest.
4.3.3 Liquidity and working capital ratios
a. Liquidity ratios
Current ratio is an excellent diagnostic tool as it measures whether or not a
business has enough resources to pay its bills over the next 12 months(Ward,
2012)
- Formula
Current ratio =
-

Current assets
Current liabilities

Burberrys current ratio

Year

Current assets

Current liabilities

Current
ratio

2008
2009
2010
2011
2012

million
588.4
742.4
767
870.1
1024.8

million
436.2
546.8
501.8
630.7
596.8

134.89%
135.77%
152.85%
137.96%
171.72%

The current ratios are good. It shows that the company can manage to pay the due liabilities.
Quick (acid-test) ratio, is a more stringent test of liquidity than the current
ratio(Peavler, 2012)
- Formula
Quick ratio =
-

Year

Current assetsStocks
Current liabilities

Burberrys quick ratio

Current assets

million
2008
588.4
OWLISH GROUP
2009 F05A
742.4
2010
767
2011
870.1
2012
1024.8

Current

Stocks

liabilities
million
436.2
546.8
501.8
630.7
596.8

million
268.6
262.6
166.9
247.9
311.1

Quick ratio

73.31%
87.75% Page | 23
119.59%
98.65%
119.59%

The quick ratios are high, especially in 2010 and 2012. This indicates that Burberry can pay its
due debts more easily.
b. Efficiency ratios
Trade debtors day is the number of days the debtors take to pay (Pietersz, 2012)
- Formula
Trade debtors
Trade debtors day =
x 365 days
Sales
-

Burberrys trade debtors day

Year

Trade

Sales

Trade debtors day

2008
2009
2010
2011
2012

debtors
million
141.3
154.1
109.1
100.7
103

million
995.4
1201.5
1279.9
1501.3
1857.2

days
51.8
46.8
31.1
24.5
20.2

The trade debtors day decreases over the last five years. It shows that Burberrys management
has been getting better because it can make the debtors take less time to pay.

Stock turnover period indicates the number of days the stocks are held for
- Formula

OWLISH GROUP F05A

Page | 24

Stock turnover period =


-

Stocks
Cost of sales x 365days

Burberrys stock turnover period

Year

2008
2009
2010
2011
2012

Stock

Cost of

Stock turnover

million
268.6
262.6
166.9
247.9
311.1

sales
million
377.7
535.7
475.9
491.6
558.3

period
days
259.6
178.9
128.0
184.1
203.4

The periods are long. The reason for the long period may be Burberrys stocks are luxurious;
therefore, they take longer time to be sold than other goods.
Creditors turnover indicates the number of days the company take to pay its bills
- Formula
Trade creditors
Creditors turnover =
x 365 days
Cost of sales
-

Year

Burberrys creditors turnover

Cost of sales
million

2008
377.7
2009
535.7
2010
475.9
OWLISH
F05A
2011GROUP491.6
2012
558.3

Trade creditors

Creditors

million

turnover
days

62.5
54.8
62.1
85.8
118.8

60.4
37.3
47.6
63.7
77.7

Page | 25

The company takes more days to pay its bills in 2008, 2011, and 2012 than in 2009 and 2010.
This might be because of the lack of long-term finance, which leads to the use of extended credit
from suppliers, bank overdraft.

OWLISH GROUP F05A

Page | 26

CONCLUSION
In general, the report has successfully met all of its goals and completed three tasks properly. In
task 1, it provided the flexible budget and budgetary control with variance analysis and possible
causes of them. We also specified costs for the given companies and explained them in detail. In
task2, we computed average return rates and net present values for the two given projects and
have made decision to choose one of them based on those statistics. And finally, in task 3,
Burberrys main financial statements were discussed. Important ratios were calculated and
compared with five previous years to give the general ideas of the companys business
performance.
The report was thorough and detailed. However, it has some drawbacks. Because there is a lack
of statistics from the same industry as Burberry, we could not make comparisons externally. Next
time, if we have sufficient sources of information, this report will be improved much better.

OWLISH GROUP F05A

Page | 27

APPENDICES
A. REFERENCES

Anthony, L., 2012. Chron. [Online] Available at: http://smallbusiness.chron.com/formatfinancial-statement-3768.html [Accessed 2 January 2013].
Assar, R., 2012. Publish Your Articles. [Online] Available at:
http://www.publishyourarticles.net/knowledge-hub/cost-accounting/what-do-you-meanby-direct-materials.html [Accessed 26 December 2012].
Assar, R., 2012. PublishYourArticles. [Online] Available at:
http://www.publishyourarticles.net/knowledge-hub/cost-accounting/what-are-theoverheads.html [Accessed 7 January 2013].
Bizfinance, 2012. Bizfinance. [Online] Available at:
http://bizfinance.about.com/od/glossaryo/g/opportunity-cost-definition.htm [Accessed 1
January 2013].
BPP, 2010. Managing Financial Resources and Decisions. BPP.
DIYAccounting, 2012. DIY Accounting. [Online] Available at:
http://www.diyaccounting.co.uk/SoletraderaccountsincomeandexpenditurebasictaxArticle.do [Accessed 2 January 2013].
Gartenstein, D., 2012. eHow. [Online] Available at:
http://www.ehow.com/about_6160746_define-labor-cost.html [Accessed 26 December
2012].
Gupta, N., 2008. slideshare. [Online] Available at: http://www.slideshare.net/nitinji1980/Cashflow-statement-763366 [Accessed 2 January 2013].
Hafeezrm, 2012. HubPages. [Online] Available at:
http://hafeezrm.hubpages.com/hub/Managerial-Accounting-Decision-Making-RelevantCosts-Benefits [Accessed 27 December 2012].
Hartman, D., 2012. Chron. [Online] Available at: http://smallbusiness.chron.com/advantagesaverage-rate-return-method-21482.html [Accessed 28 December 2012].
Investopedia, 2012. Investopedia. [Online] Available at:
http://www.investopedia.com/terms/p/production-cost.asp [Accessed 26 December 2012].
OWLISH GROUP F05A

Page | 28

Johnson, S., 2012. eHow. [Online] Available at: http://www.ehow.com/how_6834182_calculateeconomic-rate-return.html [Accessed 1 January 2013].
Keythman, B., 2012. eHow. [Online] Available at:
http://www.ehow.com/how_2187130_calculate-net-present-value-npv.html [Accessed 1
January 2013].
Money Terms, 2012. Money Terms. [Online] Available at: http://moneyterms.co.uk/debtor_days/
[Accessed 28 December 2012].
Murray, J., 2012. About.com. [Online] Available at:
http://biztaxlaw.about.com/od/glossarye/g/ebitdef.htm [Accessed 30 December 2012].
NASDAQ, 2012. NASDAQ. [Online] Available at:
http://www.nasdaq.com/investing/glossary/e/earnings-before-interest-and-taxes
[Accessed 28 December 2012].
Peavler, R., 2012. About.com. [Online] Available at:
http://bizfinance.about.com/od/yourfinancialposition/f/what-is-return-on-investedcapital.htm [Accessed 30 December 2012].
Peavler, R., 2012. About.com. [Online] Available at:
http://bizfinance.about.com/od/financialratios/f/Operating_Profit_Margin.htm [Accessed
30 December 2012].
Peavler, R., 2012. About.com. [Online] Available at:
http://bizfinance.about.com/od/financialratios/f/Total_Asset_Turnover.htm [Accessed 30
December 2012].
Peavler, R., 2012. About.com. [Online] Available at:
http://bizfinance.about.com/od/financialratios/f/finratioanal4.htm [Accessed 30
December 2012].
Pietersz, G., 2012. Money Terms. [Online] Available at: http://moneyterms.co.uk/interest_cover/
[Accessed 30 December 2012].
Pietersz, G., 2012. Money Terms. [Online] Available at: http://moneyterms.co.uk/debtor_days/
[Accessed 28 December 2012].
Rawes, E., 2012. eHow. [Online] Available at: http://www.ehow.com/info_10017656_causesvariances-budgeting.html [Accessed 26 December 2012].
Riley, J., 2012. Tutor2u. [Online] Available at:
http://www.tutor2u.net/business/accounts/balance_sheet.htm [Accessed 11 December
2012].
OWLISH GROUP F05A

Page | 29

Riley, J., 2012. tutor2u. [Online] Available at:


http://www.tutor2u.net/business/accounts/profit_loss_account.htm [Accessed 31
December 2012].
Riley, J., 2012. tutor2u. [Online] Available at:
http://www.tutor2u.net/business/accounts/profit_loss_account.htm [Accessed 2 December
2012].
Thomason, K., 2012. eHow. [Online] Available at:
http://www.ehow.com/info_8636982_advantages-present-value-project-selection.html
[Accessed 28 December 2012].
W.Lee, L., 2012. eHow. [Online] Available at: http://www.ehow.com/facts_6892981_meaningdirect-expenses.html [Accessed 26 December 2012].
Ward, S., 2012. About.com. [Online] Available at:
http://sbinfocanada.about.com/od/management/a/3ratios.htm [Accessed 30 December
2012].
YCharts, 2012. YCharts. [Online] Available at: http://ycharts.com/glossary/terms/profit_margin
[Accessed 28 December 2012].

OWLISH GROUP F05A

Page | 30

B. FINANCIAL STATEMENTSOF BURBERRY CORPORATION

OWLISH GROUP F05A

Page | 31