QUESTION 1

An extract from XYZ plc’s Statement of Comprehensive Income for the year ended 30 April
2018 was as follows:
$000 $000
Operating profit 1 000
Debenture interest (12.5%) (250)
750
Ordinary dividend paid and proposed 350
Preference dividend paid and proposed 120
Transfer to General Reserve 200 (670)
Retained profit for the year 80

XYZ plc’s issued share capital and reserves at 30 April 2018 consisted of:
$000
Ordinary shares of $10 4 000
8% Preference shares of $5 1 500
Capital and revenue reserves 900
The market price of the ordinary shares at 30 April 2018was $30.
REQUIRED
(a) Calculate the following ratios for XYZ plc.
(i) interest cover
(ii) dividend cover
(iii) earnings per share
(iv) price earnings ratio
(v) dividend yield
(vi) gearingk

(b) Explain why each of the ratios in (a) is important for investors in ordinary shares in the
company.

XYZplc’s accounting ratios at 30 April 2017 were as follows:

interest cover 5.5 times
dividend cover 2.5 times
price earnings ratio 22
gearing (calculated as a percentage of long term
debentures and preference share capital
to total long term capital) 36%

REQUIRED
(c) Compare the ratios for 2017 with the same ratios in 2018 as calculated in (a), and comment
on the changes that you find.
(d) State, with reasons, any further information you might require and what other documents
you might wish to see to enable you to assess the likely future performance of XYZ plc. [6]

QUESTION 2
The following information is available about XYZ plc:

- In 2010 it issued at $0.75 a number of ordinary shares with a nominal value of $0.50
each. At the same time it issued at par a number of 5% preference shares of $1 each.
- During 2018 XYZ Ltd issued $200 000 6% debentures repayable in 2018.
- On 1 January 2018 the balance on the profit and loss account was $62 000.
- On 31 December 2018 the non-current (fixed) assets had a value of $610 000.

Further information relating to 2018 is as follows:

1. Interest cover was 16 times.

2. The tax charge for the year was calculated as 20% of profit before tax.
3. The ordinary dividends paid during the year were $54 000.
4. Earnings per share were $0.22.
5. Dividend per share was $0.09.
6. The directors decided to create a general reserve of $30 000.
7. The market value of the ordinary shares was $2.50.

REQUIRED
(a) Prepare a Statement of Changes in Equity for the year ended 31 December 2018.

(b) Giving as much detail as possible, prepare the balance sheet at 31 December 2018

(c) Calculate:

(i) the dividend cover

(ii) the price earnings ratio

(iii) the dividend yield

(iv) the gearing ratio

(v) the return on capital employed.

ABC Pvt Ltd is a company in the same line of business as XYZ plc and is in a similar location.
The following ratios have been calculated for XYZ plc:

Gearing ratio 63.8%

Return on capital employed 22.1%

Dividend cover 1.8 times

REQUIRED

(d) Compare and comment on the performance of XYZ plc and ABC plc in the light of these
ratios.

QUESTION 3
The Summarised Statement of Financial Position at 30 April 2018 of CBD Pvt Ltd was as
follows:

Total assets $000

PPE 2550

Net current assets 950

Total assets 3500

3350

Total equity and Liabilities

Ordinary shares of $1 2500

10% redeemable preference shares of $1 300

Share Premium account 200

Profit and Loss Account 350

6% debentures 150

Total equity and Liabilities 3500

Further information:

1. The market price of the ordinary shares at 30 April 2018 was $1.60.
2. The dividend yield on ordinary shares was 2 1/2 per cent.
3. The creditor for taxation at 30 April 2017 was $25 000. Taxation paid in the year ended
30 April 2018 amounted to $22 000. The liability for taxation on the profit of the year
ended 30 April 2018 is $31 000 and is carried forward on the Taxation account.
4. The retained profit for the year ended 30 April 2018 was $60 000.
5. The debentures were issued in 2017. The preference shares were issued at par.

REQUIRED

(a) Prepare CBD Pvt Ltd’s Statement of comprehensive income for the year ended 30 April
2018 in as much detail as possible. It should commence with the operating profit.

QUESTION 4
The following are the summarised Statement of Comprehensive Income and Statement of
Financial Position for Greens Pvt Ltd, a manufacturing company, and Reds Ltd, a retailer.
Greens Ltd Reds Ltd
Statement of Comprehensive Income for the years ended 31 March
2017 2018 2017 2018
$000 $000 $000 $000
Sales 500 610 425 460
Cost of sales (245) (355) (210) (230)
Operating costs (225) (230) (190) (200)
Loan interest paid (7) (10) (7) (3)
 Net profit 23 15 18 27

Statement of Financial Position at 31 March

Assets
PPE 150 225 220 175
Inventory 50 60 27 20
Receivables 20 30 – –
Bank 10 (35) 13 57

Total assets 230 280 260 252

Equity & Liabilities

Share capital 50 50 50 50
Retained profit 95 110 100 127
Long term loans 60 100 75 25
Payables 25 20 35 50
Total equity & Liabilities 230 280 260 252

REQUIRED
(a) Use six ratios to compare the management’s performance from 2017 to 2018 for each
company. Use year end figures, not averages, to calculate ratios.
Give answers to a maximum of one decimal place. Show all workings.
(b) Comment on your findings.
(c) State six shortcomings or dangers in using ratio analysis.

QUESTION 5
Several different categories of users are traditionally considered as having an interest in the financial
statements of a company. The importance of the financial statements to each category will vary with
the nature and size of the company and with the type of use made of the company's accounts by that
category.
Required:
Describe the ways in which the needs of users of the financial statements vary with the size of the
company, for each of the following categories of user:
(a) Investors and their advisers
(b) Loan creditors
(c) Employees
(d) Customers, suppliers and other business contacts
(e) The Government
(f) The public.

QUESTION 6
You are the management accountant of SR. PQ is a competitor in the same industry and it has
been operating for 20 years. Summaries of PQ’s statement of profit or loss and statement of
financial positions for the previous three years are given below:
Summarised statement of profit or loss for year ended 31 December
2017 2018 2019
$m $m $m
Revenue 840 981 913
Cost of sales 554 645 590
–––– –––– ––––
Gross profit 286 336 323
Selling, distribution and administration expenses 186 214 219
–––– –––– ––––
Profit before interest 100 122 104
Interest 6 15 19
–––– –––– ––––
Profit before tax 94 107 85
Tax 45 52 45
–––– –––– ––––
Profit for the year 49 55 40
–––– –––– ––––
Summarised statement of financial positions at 31 December
2017 2018 2019
$m $m $m
Non-current assets:
Intangibles 36 40 48
Property, plant and equipment 176 206 216
–––– –––– ––––
212 246 264
––––
Current assets:
Inventory 237 303 294
Receivables 105 141 160
Bank 52 58 52
–––– –––– ––––
394 502 506
–––– –––– ––––
Total assets 606 748 770
–––– –––– ––––
 Ordinary shares 100 100 100
Retained earnings 299 330 346
–––– –––– ––––
Equity 399 430 446
–––– –––– ––––
Non-current liabilities:
Long-term loans 74 138 138
–––– –––– ––––

Current liabilities:
Trade payables 53 75 75
Other payables 80 105 111
–––– –––– ––––
133 180 186
–––– –––– ––––
Total equity and liabilities 606 748 770
–––– –––– ––––
Each year PQ has declared and paid an annual dividend of $24 million.
Required:
Write a report to the finance director of SR:
(a) analysing the performance of PQ and showing any calculations in an appendix to this
report
(b) summarising five areas which require further investigation, including reference to other
pieces of information which would complement your analysis of the performance of
PQ.
QUESTION 7
The following information relates to the draft financial statements of Regis for the year to
31 March 2019 together with the comparative figures for the year to 31 March 2018:
Statement of profit or loss for the year to: 31 March 2019 31 March 2018
$000 $000 $000 $000
Revenue 2,400 2,500
Cost of sales (1,440) (1,800)
––––– –––––
Gross profit 960 700
Research and development costs (300) (80)
Selling and distribution costs (195) (95)
Administration (125) (620) (85) (260)
––––– ––––– ––––– –––––
340 440
Profit on sale of property 50 Nil
Interest expense (70) (80)
––––– –––––
320 360
Taxation – on income (200) (120)
– deferred tax 190 (10) (30) (150)
 ––––– ––––– ––––– –––––
Profit for the year 310 210
––––– –––––

Statement of financial position as at: 31 March 2019 31 March 2018

$000 $000 $000 $000
Non-current assets:
Property, plant and equipment 950 1,250
Goodwill 200 200
Development costs Nil 280
––––– –––––
200 480
––––– –––––
1,150 1,730
Current assets:
Inventory 450 800
Accounts receivable 190 470
Bank 210 Nil
––––– –––––
850 1,270
––––– –––––
Total assets 2,000 3,000
––––– –––––

31 March 2017 31 March 20X0

$000 $000 $000 $000
Equity and liabilities
Share capital and reserves:
Shares of $1 each 600 600
Reserves:
Retained earnings 410 180
Less dividends (150) (80)
––––– –––––
260 100
––––– –––––
860 700
Non-current liabilities
8% Convertible loan note 400 Nil
12% Debenture Nil 500
Deferred tax 110 300
Provision for plant renovation Nil 370
––––– –––––
510 1,170
Current liabilities
Accounts payable 330 620
Dividends 90 60
Taxation 210 115
Overdraft Nil 335
 ––––– –––––
630 1,130
––––– –––––
Total equity and liabilities 2,000 3,000
––––– –––––
The convertible loan note was issued on 1 April 2019 at par and will be redeemed at par or
exchanged for equity shares on the basis of one equity share for each $1 nominal value of the
loan note in 2023 at the option of the holders. Assume an income tax rate of 30%.
The share price of Regis fell considerably in June 2019 in reaction to adverse press comment
concerning the operating performance and financial position of the company as revealed by the
publication of the company’s consolidated financial statements for the year ended 31 March
2019. The main performance areas criticised were:
(i) a gross profit ratio below that of the market sector
(ii) a lack of expenditure on research and development
(iii) a disappointing EPS
(iv) low utilisation of the property, plant and equipment (there have been no acquisitions of
non-current assets in the year to 31 March 2019)
(v) poor control of accounts receivable
(vi) inefficient inventory turnover
(vii) long payment period for trade payables
(viii) poor liquidity ratios
(ix) statement of financial position gearing (debt/capital employed) too high.
In order to address these problems Regis commissioned consultants to recommend possible
strategic actions with a view to improving the statement of profit or loss and statement of
financial position.
The Board acted quickly on many of the consultants’ recommendations and is pleased with the
overall position revealed by the consolidated financial statements for the year to
31 March 2019. Due to over-capacity in the industry the directors of Regis negotiated a contract
for an external company to manufacture one of its products that had previously been
manufactured internally. This allowed Regis to dispose of some inefficient furnaces that were
included in plant. These furnaces had required major renovation consisting of re-lining them
with new material every five years. Regis had been providing for this on an annual basis, but
due to the sale of the furnaces, the provision was no longer required and was released to cost
of sales. Regis had also been engaged in a research and development project to revise the
design of this type of furnace in order to avoid the expensive re-lining costs. This project was
abandoned when the furnaces were sold. The sale of the property was not related to the
outsourcing decision.
Required:
(a) Appraise the performance of Regis for the year to 31 March 2019 in the specific areas
((i) to (ix) above) where its performance was criticised by the press in the previous year.
Note: Your answer should include an appendix of ratios (for both years) relevant to each
of the nine areas reviewed.
QUESTION 7
You are the accountant of Acquirer. Your company has the strategy of growth by acquisition
and your directors have identified an entity, Target, which they wish to investigate with a view
to launching a takeover bid. Your directors consider that the directors of Target will contest any
bid and will not be very co-operative in providing background information on the entity.
Therefore, relevant financial information is likely to be restricted to the publicly available
financial statements.
Your directors have asked you to compute key financial ratios from the latest financial
statements of Target (for the year ended 30 November 2018) and compare the ratios with those
for other entities in a similar sector. Accordingly, you have selected ten broadly similar entities
and have presented the directors with the following calculations:
Spread of ratios for comparative
Ratio for
Ratio Basis of calculation entities
Target
Highest Average Lowest
Gross profit Gross profit
42% 44% 38% 33%
margin Revenue
Operating profit Profit from operations
29% 37% 30% 26%
margin Revenue
Return on total Profit from operations
73% 92.5% 69% 52%
capital Total capital
Profit from operations
Interest cover 1.8 times 3.2 times 2.5 times 1.6 times
Finance cost
Debt capital
Gearing 52% 56% 40% 28%
Total capital
Profit after tax
Dividend cover 5.2 times 5 times 4 times 3 times
Dividend
Inventory Cost of sales
4.4 times 4.5 times 4 times 3.2 times
turnover Closing inventory
Trade receivables
Receivables days 51 days 81 days 62 days 49 days
1 day' s sales revenue

Assume that it is now November 2019.

Required:
(a) Using the ratios provided, write a report that compares the financial performance and
position of Target to the other entities in the survey. Where an issue arises that reflects
particularly favourably or unfavourably on Target, you should assess its relevance to a
potential acquirer. (10 marks)
(b) Identify any reservations you have regarding the extent to which the ratios provided
can contribute to an acquisition decision by the directors of Acquirer. You should
highlight the extent to which the financial statements themselves might help you to
overcome the reservations you have identified. (5 marks)
(Total: 15 marks)