ASSIGNMENT I (INDIVIDUAL)

max mark 20%

1. What is finance? Define business finance.
2. Explain the types of finance.
3. Discuss the objectives of financial management.
4. Critically evaluate various approaches to the financial management.
5. Explain the scope of financial management.
6. Discuss the role of financial manager.
7. Explain the importance of financial management.

8.What is financial statement?

9. What is financial statement analysis?

10. Discuss various types of financial statement analysis.

11.Explain various methods of financial statement analysis.

12.What are the differences between fund flow and cash flow?

13. What is ratio analysis? Explain its types.

14. Outline the factors that should be taken into consideration when examining a firm's ROCE.

15.Explain the primary efficiency ratio for a firm.

16. Explain the differences between profit and profitability.

17.Discuss how a short term or a long term approach to business influences the level of ROCE
that will be considered acceptable by a firm and its stakeholders.

18.Explain why stock is not included as a current asset in the acid test ratio.

19.Distinguish between the current ratio and the acid test ratio.

20.Analyse methods by which a firm can improve its acid test ratio.

21.Explain why a large cash holding in a company can be considered inadvisable and even
potentially dangerous.

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22.Examine the following table of data, and then answer the question that follows.

23.Explain why the 'cost of sales' is used to determine stock turnover.

24.Describe why a high stock turnover is considered to be a good thing.

25.Define the term 'bad debt'. Explain how the recognition of bad debts will affect the debtors
days ratio for a firm.

26.Explain why a high debtor days' ratio figure is considered a bad thing for a company.

27.'Ratios are symptoms of a situation'. Discuss.

28.Distinguish between share and equity capital.

29.Explain why share capital is considered as free capital.

30.Explain what is meant by a 'bad' gearing ratio.

31.Examine whether a company can be under geared.

32.Explain the term 'sale and leaseback'.

Extract from the accounts of Sherston Logistics plc

(Units $k)

Year 2007 2008 2009 2010 2011

Stock 100 120 140 160 160
Creditors 60 70 80 80 90
Cash 100 70 60 80 100
Overdrafts 60 80 100 110 120
Debtors 100 130 100 80 70
Short-term 40 40 30 40 60
loans

For each year, calculate and comment on the firm's acid test ratio.

Frank Wright runs a small bakery. He is concerned with the liquidity position of his firm as he has heard
that liquidity problems are one of the most frequent explanations for business failure. The following
data is available:

$
Stock 14500
Debtors 8409

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Bank 3200

Creditors 9310

Required

(a) Calculate the current ratio and liquidity (acid test) ratio based on the above data.
(b) Give a brief evaluation of the liquidity position of Frank Wright's bakery

Question 3

Hi-Sounds, a small audio equipment retailer, has just completed the second year of trading. Profits are
up, but the manager is slightly concerned. She feels that the firm could face liquidity problems in the
near future. The data for this claim is as follows:

As at 31 December: 2010 2011

$ $
Stock 14500 7568
Debtors 6662 9871
Bank 3200

Creditors 9310 7845

Bank overdraft 2489

Required

(a) Calculate the current ratio and liquidity ratio based on the above data.
(b) Should the manager be concerned with the liquidity position? Give a balanced argument.

The following data has been extracted from the accounts of a company.

Year ($k) 1 2 3 4 5
Net capital 2,000 2,200 2,000 2,500 2,700
employed
Sales revenue 10,000 11,000 11,000 10,000 12,000
Cost of sales 6,000 6,500 7,000 5,500 6,000
Stocks 1,000 1,000 1,500 1,000 800
Debtors 1,500 1,500 1,800 2,000 1,500

1. Calculate the asset turnover ratio, the stock turnover ratio, and debtor's days for the
company over the five year period.
2. Analyse the results and comment on your findings.

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Question 2

The following information is available for the last two years.

For year For year

ended 31 ended 31
March 2010 March 2011
$ $
Turnover 125,000 160,000
Purchases 80,000 128,000
As at 31 As at 31
March 2010 March 2011
Trade debtors 13,500 31,000
Balance at bank 8,000 4,000
Trade creditors 11,800 15,600

1. Calculate both the debtors' collection period and the creditors' payment period for each of
the two years. State the formulae used.
2. Calculate the acid test ratio for each of the two years. State the formulae used.

Question 1

Examine the data below, which is extracted from the accounts of Forlorn Holdings plc. (Units;
$k)

Year 2005 2006 2007 2008 2009 2010 2011

Overdrafts 100 120 140 100 80 100 120

Short-term 200 150 200 250 250 300 250

loans

Debtors 300

Long-term 200 200 150 200 250 300 400

loans

Share capital 500 500 500 500 550 550 550

Revaluation 200 200 200 200 200 250 250

reserve

Retained profits 200 220 200 250 270 300 300

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Calculate the gearing ratio for each of the years, and then try to explain what may be behind the
changes.

Produce a short report outlining three limitations of ratios. Credit will be given if the limitations are
illustrated with an example.

Question 1

Consider the accounts of Hope Ltd.

Hope Ltd - profit & loss

account for year ended 31
December 2011

$000

Turnover 400

Gross profit 280

Net profit 120

Dividends 80

Hope Ltd - balance sheet as at 31 December 2011

$000 $000

Fixed assets 1,200

Current assets 620

Creditors (amounts falling due within one

year) 310

Net current assets 310

Total assets less current liabilities 1,510

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Creditors (amounts falling due after more
than one year)

Debentures 560

950

Ordinary shares of $1 each 500

Reserves 250

950

Additional information:

1. The value of closing stock as at 31 December 2011 was $250,000.

2. The market price of an ordinary share on 31 December 2011 was $2.25.

From the above information, calculate the following ratios:

 Gross profit margin

 Net profit margin

 Return on capital employed

 Acid test

 Current ratio

 Dividend yield

 Price earnings ratio

 Gearing

Question 2

Consider the accounts of Harker Ltd.

Harker Ltd - profit & loss

account for year ended 31
December 2011

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 $000

Turnover 320

Gross profit 195

Net profit 54

Dividends 26

Harker Ltd - balance sheet as at 31 December 2011

$000 $000

Fixed assets 420

Current assets 175

Creditors (amounts falling due within one

year) 140

Net current assets 35

Total assets less current liabilities 455

Creditors (amounts falling due after more

than one year)

Debentures 100

355

Ordinary shares of $1 each 280

Reserves 75

355

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Additional information:

1. The value of closing stock as at 31 December 2011 was $48,000.

2. The market price of an ordinary share on 31 December 2011was $1.12.

From the above information, calculate the following ratios:

 Gross profit margin

 Net profit margin

 Return on capital employed

 Acid test

 Current ratio

 Dividend yield

 Price earnings ratio

 Gearing

Ratio analysis - case study - Stortford Yachts Limited

This case study is intended as a self-test exercise on all of ratio analysis. The answers are given
as popup boxes to each question. However, do try to work through them all first before
submitting to temptation. The more you practise calculating ratios, the easier it gets - we
promise!

Paul Marriot is the director of Stortford Yachts Ltd. The company has traded for 30 years and
has in the past achieved very good levels of growth and return on capital, but this is now
changing. In recent time it has failed to introduce new product lines, relying on traditional
products and little has been invested in Research or Product Development.

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You are a business planning consultant for a firm of Management Consultants. Stortford Yachts
is one of your clients. In recent times the business has experienced increased turnover but a
downturn in overall performance.

Paul Marriot has had a meeting with your Director and he has stated that he wants to introduce
tighter management control within the company by introducing a system of responsibility
accounting.

You receive the following memo from your Director, Pauline Changer, regarding this case.

Memorandum

To: Business Planning Assistant

Date: 21st May 2011

From: Pauline Changer, Director

Subject: Stortford Yachts Ltd. - accounts information

You are aware that I met with Paul Marriot yesterday and that he is concerned with the latest
results shown in the final accounts that have recently been prepared at year end.

The file attached contains a summary of the company's abbreviated profit statements and balance
sheets for the past three years; together with additional information and performance indicators
for their business sector as a whole for the period under review.

I would like you to examine this information and meet with me on Friday morning to discuss the
form and presentation of a detailed financial analysis of the company over the three-year period.

Signed: P. Changer

Financial information on Stortford Yachts Ltd.

1. Summary profit statements

$m $m $m

2009 2010 2011

Sales turnover 4.90 5.30 6.60

Operating costs 4.17 4.43 5.82

Operating profit before tax 0.73 0.87 0.78

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Taxation 0.24 0.30 0.27

Profit after tax 0.49 0.57 0.51

Dividends 0.12 0.16 0.16

Retained profit 0.37 0.41 0.35

N.B. The firm's detailed breakdown of costs is as follows:

Years 2009 2010 2011

Labour costs 0.93 0.98 1.25

Distribution costs 0.44 0.49 0.61

Administration costs 0.19 0.22 0.27

2. Summary balance sheets

$m $m $m

2009 2010 2011

Fixed assets 2.40 2.77 2.88

Current assets

Stocks:

Raw materials 0.09 0.12 0.15

Finished goods 0.40 0.43 0.45

Debtors 1.14 1.32 1.84

Bank 0.03 0.04 0.05

1.66 1.91 2.49

Less Current liabilities 1.35 1.56 1.90

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Net current assets 0.31 0.35 0.59

2.71 3.12 3.47

Capital and reserves 0.5 0.91 1.26

Bank loans 2.21 2.21 2.21

2.71 3.12 3.47

3. Yacht Builders Federation

Average ratios for federation members 2011

% Return on capital employed 26.0%

Asset turnover 1.79 times

Net profit margin 14.5%

Current ratio 1.5:1

Acid test ratio 1.03:1

Debtors collection period 83 days

Gearing ratio 32.0%

Labour cost % of sales 18.1%

Operating cost % of sales 85.5%

Distribution costs % of sales 9.5%

Admin costs % of sales 4.5%

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Questions

In your role of planning assistant you are to prepare an analysis of the company's figures over the
three-year period using the performance criteria listed in the inter-firm comparison table.

1. Calculate all the ratios given in the average ratios for federation members for 2009, 2010 and
2011.

2. Prepare a detailed report on the company's performance in terms of profitability and liquidity
compared with the average of the sector over the period.

1. Calculate all the ratios given in the average ratios for federation members for 2009, 2010 and
2011.

2. Prepare a detailed report on the company's performance in terms of profitability and liquidity
compared with the average of the sector over the period.

Summary of ratios

Ratio 2009 2010 2011 Industry

Average

% Return on capital employed 26.9 27.9 22.5 26%

Asset turnover (times) 1.81 1.70 1.90 1.79 times

Net profit margin (%) 14.9 16.4 11.8 14.5%

Current ratio 1.23:1 1.22:1 1.3:1 1.5:1

Acid test ratio 0.87:1 0.87:1 0.99:1 1.03:1

Debtors collection period (days) 85 91 102 83 days

Gearing ratio (%) 81.5% 70.8% 63.7% 32%

Labour costs as % of sales 18.9 18.5 18.9 18.1%

Operating costs as % of sales 85.1 83.6 88.2 85.5%

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Distribution costs as % of sales 8.98 9.24 9.24 9.5%

Administration costs as % of sales 3.87 4.15 4.09 4.5%

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