Question A1
Below are extracts from the financial statements of a listed company which operates a chain of bakery and sandwich retail outlets in the United Kingdom.
Required:
a) Prepare a report describing how the liquidity and working capital management of the company has changed between 2014 and 2015. Comment on why these changes may have occurred. What possible changes in the business's activities and /or efficiency may have had an effect on the changes in liquidity? You should use appropriate ratios in your analysis.
(b) Imagine you are a prospective investor in this company's shares. Calculate 4 ratios on the company's overall performance for each of 2015 and 2014 which would help you to decide whether to invest, briefly explain the meaning of each ratio, and interpret the implications of the changes between the years.
Notes:
- The market value of the company's shares at the 2015year end was £4.37 (2014: £3.50).
- Share capital consists of 104 million shares with a nominal value of 2p per share.
Commenting on the ratios
You need to:-
- discuss the ratios and relate them to each other
- also refer to absolute numbers where relevant e.g. cash balance , whether cash inflows or outflows from operations, investing and financing
- comment on the implications of these cash inflows and outflows and relate them to other aspects of the financial statements
A brief discussion of the limitations of the analysis, and further information which might be needed, will also enhance your answer.
b) Imagine you are a prospective investor in this company's shares. Calculate 4 ratios on the company's overall performance for each of 2015 and 2014 which would help you to decide whether to invest, briefly explain the meaning of each ratio, and interpret the implications of the changes between the years.
Question B2
Explain the costing system that Wilkerson (the case study that you studied) currently use, and evaluate how far it is adequate to support management decisions. Suggest an alternative costing system that you consider might generate more decision-relevant information, and assess which system is likely to be most appropriate for Wilkerson's business.
Question B3
Explain why the management of Borealis (the case study that you studied) were dissatisfied with their budgeting system. Explain the alternative approach to planning and control that they introduced in its place, and evaluate the results that this new approach produced.
Section C
Question C.4
(a) explain the process which a business can follow to set its budget for the forthcoming year, identifying the main inputs and outputs of the budget-setting process.
(b) distinct from the process which you have explained in part (a), explain the main options open to a business in the managerial approach it takes towards setting its budget and evaluate the advantages and disadvantages of each.
(c) how can a business use a system of budgetary control based on regular variance analysis to help to control its operations through the year, and what are the strengths and weaknesses of this type of approach to management control?
Some suggested points for answers
(a) explain the process which a business can follow to set its budget for the forthcoming year, identifying the main inputs and outputs of the budget-setting process.
(b) distinct from the process which you have explained in part (a), explain the main options open to a business in the managerial approach it takes towards setting its budget and evaluate the advantages and disadvantages of each.(c) Explanation of budgetary control:- how can a business use a system of budgetary control based on regular variance analysis to help to control its operations through the year, and what are the strengths and weaknesses of this type of approach to management control?
Question C.5
A friend who owns shares in a few companies has asked you for your help in understanding their financial statements, and for you to explain a few points that are puzzling him:-
(a) Why is the amount of the final profit which is shown in the income statements for 2014 and 2015 respectively not equal to the year-on-year change in the final cash balances shown in each year' balance sheet? What is the difference between profits and cash, and what do the income statement and cash flow statement respectively indicate about the company's performance during a period?
11 marks
(b) One of the companies is a large advertising agency which has grown rapidly in recent years by acquisition (i.e. by taking over other companies). Your friend has noted that unlike several other companies in his investment portfolio, the advertising agency's balance sheet shows very little property, plant and equipment but a high amount of goodwill. He is concerned that this might mean that the other companies' customers do not hold it in as high regard as do the advertising agency's clients.
Explain to him:-
- what goodwill in company financial reports represents
- how it arises and is accounted for in subsequent years after it has first arisen
- why different companies' balance sheets should differ so significantly in this respect
- how he should take goodwill into account when calculating ratios from the quantities in the financial reports.
12 marks
(c) He has also observedfrom a third company's financial statements, in its Accounting Policies Note, that the amount stated in its balance sheet for property plant and equipment includes not only those properties which the company itself legally owns, but also several which are owned by another party but which the company occupies on a leasing arrangement. He cannot understand why it should be correct to include as an asset in a balance sheet something which the company itself does not actually own.
Explain the relevant rules on leasing as stated by IFRS, citing any accounting principles which are relevant and explaining why these rules were considered necessary.
10 marks
(a) why is the final profit as per the income statements not reflected in the changes in the final cash balances as per the balance sheets? How do profits and cash differ, and what do the income statement and cash flow statement respectively indicate about performance?
(b) Explain:-
- what goodwill in company financial reports represents
- how it arises and is accounted for in subsequent years after it has first arisen
- why the two companies' respective balance sheets should differ so significantly in this respect
- how he should take goodwill into account when calculating ratios from the quantities in the financial reports.
(c) Explain the relevant rules on leasing as stated by IFRS, citing any accounting principles which are relevant and explaining why these rules were considered necessary.