Question1:
XYZ Ltd. is a group of doctors, dentists, professional sports players and celebrities with excess funds who wish to find small companies with great innovative ideas and invest in them. Several of the small companies present their idea to XYZ under a televised show broadcasted on national TV.
The following information has been derived from 3 years' financial statements of ABC Ltd., one of the small companies looking for investment from XYZ.
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Balance Sheets, December 31
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|
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2015
|
2014
|
2013
|
|
Current assets
|
|
|
|
|
Cash
|
50,000
|
45,000
|
94,000
|
|
Account receivable, net
|
130,000
|
120,000
|
110,000
|
|
Merchandise inventories
|
250,000
|
230,000
|
195,000
|
|
Other current assets
|
45,000
|
53,000
|
42,000
|
|
Total current assets
|
475,000
|
448,000
|
441,000
|
|
Property, plant & equipment, net
|
196,000
|
191,000
|
175,000
|
|
Total assets
|
671,000
|
639,000
|
616,000
|
|
Current liabilities
|
|
|
|
|
Accounts payable
|
175,000
|
195,000
|
185,000
|
|
Accrued liabilities
|
1,000
|
6,500
|
21,000
|
|
Total current liabilities
|
176,000
|
201,500
|
206,000
|
|
Long-term liabilities
|
230,000
|
250,000
|
295,000
|
|
Total liabilities
|
406,000
|
451,500
|
501,000
|
|
Shareholders' equity
|
|
|
|
|
Common shares
|
110,000
|
95,000
|
65,000
|
|
Preferred shares, note 5
|
25,000
|
25,000
|
25,000
|
|
Retained earnings
|
130,000
|
67,500
|
25,000
|
|
Total shareholders' equity
|
265,000
|
187,500
|
115,000
|
|
Total liabilities and shareholders' equity
|
671,000
|
639,000
|
616,000
|
|
Income statements
|
2015
|
2014
|
|
Net sales
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£723,700
|
£694,000
|
|
Cost of goods sold
|
347,350
|
344,500
|
|
Gross margin
|
376,350
|
349,500
|
|
Operating expenses
|
183,500
|
179,750
|
|
Income from operations
|
192,850
|
169,750
|
|
Interest expense
|
37,525
|
39,450
|
|
Income before income tax
|
155,325
|
130,300
|
|
Income tax expense
|
38,831
|
32,575
|
|
Net income
|
£116,494
|
£97,725
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Additional information:
1. The common shares are traded on the stock exchange. At the end of 2015, the value of the share was £15.00, and at the end of 2014, the value per share was £14.00.
2. The number of shares outstanding on the market is as follows:
1. 2015: 25,000
2. 2014: 15,000
3. 2013: 10,000
3. All sales are made on credit.
4. The company's income tax rate is 25%.
5. The preferred shares are cumulative, no par value, £2.50, 10,000 shares authorised and 2,000 shares issued and outstanding.
To answer this question:
Assume that you, the consultant, have been hired by XYZ to assist in the analysis of the financial statements and provide a recommendation whether XYZ should invest or not invest in this company. Justify your recommendation based on the calculation of the following financial ratios:
• Current ratio (liquidity)
• Operating profit margin (profitability)
• ROSF (profitability)
• Average settlement period for trade receivables (efficiency)
• Earnings per share (investment)
Question 2:
Bulls Corporation has a December 31 fiscal year end. The controller of the company is currently completing the financial statements of the company in order to present them at the next board meeting. He completed most of the work but did not get around to finishing the cash flow statement. He gives you the following financial information in order for you to help him with the preparation of the cash flows.
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Balance Sheet
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2015
|
2014
|
|
Cash
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£38,500
|
£8,000
|
|
Accounts receivable, net
|
20,000
|
29,500
|
|
Merchandise inventory
|
37,000
|
38,000
|
|
Prepaid insurance
|
9,500
|
15,000
|
|
Land
|
54,500
|
40,600
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|
Equipment, at cost
|
104,500
|
90,700
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|
Less: accumulated amortisation
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(30,500)
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(15,500)
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|
Patent
|
49,000
|
53,200
|
|
Total assets
|
£282,500
|
£259,500
|
|
Accounts payable
|
£ 58,500
|
£ 42,000
|
|
Income taxes payable
|
16,500
|
11,500
|
|
Advertising payable
|
5,000
|
-
|
|
Dividends payable
|
40,000
|
10,000
|
|
Notes payable
|
40,000
|
83,000
|
|
Share capital
|
93,000
|
78,500
|
|
Retained earnings
|
29,500
|
34,500
|
|
Total liabilities and shareholders' equity
|
£282,500
|
£259,500
|
|
Sales
|
£1,090,000
|
|
Cost of goods sold
|
672,000
|
|
Gross profit
|
418,000
|
|
Operating expense
|
|
|
Salaries expense
|
195,000
|
|
Advertising expense
|
35,000
|
|
Rent expense
|
67,500
|
|
Insurance expense
|
34,500
|
|
Amortisation expense
|
25,000
|
|
Total operating expenses
|
357,000
|
|
Income from operations
|
61,000
|
|
Interest expense
|
2,500
|
|
Gain on sale of equipment
|
7,500
|
|
Income before income taxes
|
66,000
|
|
Income tax expense
|
4,000
|
|
Net income
|
£62,000
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Additional information:
1. Bulls Corp. purchased equipment for £36,300 in cash during the year.
2. Bulls Corp. sold equipment for cash during the year.
3. No patent has been purchased nor sold in the year.
4. Accounts payable relates solely to transactions with suppliers for inventory.
To answer this question
1. Prepare a complete cash flow statement using the indirect method for the 2015 fiscal year.
2. Compute the following amounts:
1. Cash collected from clients during the year.
2. Cash paid for advertising expense.
3. Cash paid to suppliers for inventory