J Plc is a medium-sized company producing a range of toys which it sells to wholesale distributors. Recently, its sales have begun to rise rapidly following a general recovery in the economy as a whole. The following information was extracted from the accounts of J Plc at the 31st January 2007
J Plc
Profit and Loss Account
For the year ended d=31/01/2007
2007
£
Turnover 7,172,160
Cost of sales -5,095,820
Gross profit 2,076,340
Administrative and distribution expenses -1,424,490
Other income 0
Operating profit 651,850
Income from fixed assets investments 0
Other interest receivable and similar income 0
Profit on ordinary activities before interests and tax 651,850
Interest payable 0
Profit on ordinary activities before tax 651,850
Taxation -195,000
Profit on ordinary activities after tax 456,850
Dividends -50,000
Retained profit for the year 406,850
Retained profit brought forward 1,614,790
P&L reserve carried forward 2,021,640
J Plc
Balancesheet
As at 31/01/2007
£ £
Fixed assets
Machinery 358,660
Premises 1,273,900
Investments 0
Current assets
Stocks 423,700
Debtors and prepayments 820,260
Short-term investment 0
Cash at bank and in hand 132,220
1,376,180
Creditors (amount falling due within one year) -637,100
Net current assets 739,080
Creditors (amount falling due after one year) -150,000
2,221,640
Capital and reserves
Issued share capital 200,000
Share premium account 0
Revaluation reserve 0
Other reserves 0
Profit and loss account 2,021,640
2,021,640
Shareholders funds 2,221,640
• Additional information:
Face value per share = £1
Market value per share on 31 January 2007= £2.20
Number of share outstanding on 31 January 2007 = 200,000 shares
Requirement 1:
1.1 Identify the main financial statements and explain their purpose. [Pass-P11]
1.2 Describe the differences between the formats of financial statements for different types of business. Comment on the format of J Plc’s profit and loss account and balance sheet. [Pass-P12]
1.3 Calculate eight ratios that will help in assessing the profitability, liquidity, efficiency and investment ratios of J Plc. [Pass-P13]
1.4 In question 1.3, analyse the results of ratios and draw valid conclusions. [Merit-M2]
1.5 In question 1.4, critically evaluate the availability of information that facilitates the calculation of ratios. [Distinction-D1]
Requirement 2:
J Plc is considering investing £1m in a new project to manufacture and sell a brand new toy. The following estimates have been made:
Sales (number of units) 50,000 in the first year, rising by 10,000 units per annum
Life of project 4 years
Unit information: £
Price 25
Material cost 10
Labour and variable overheads 8
In addition, fixed overheads relating to the project are expected to be £90,000 per annum. The investment is expected to have no residual value.
2.1 Calculate the NPV (assuming a cost of capital of 8%.), IRR, Payback period, ARR of the project [Pass-P10]
2.2 Advise either to accept or reject the project based on your findings in requirement 2.1. [Merit-M3]
Requirement 3:
“The methods used to raise long term finance have implications for the capital gearing of a company and the returns to equity holders.”
3.1 Identify the sources of finance available to a business [Pass-P1]
3.2 Assess the implications regarding tax effect, ownership and control of the different sources [Pass-P2]
3.3 Assess and compare the costs of different sources of finance [Pass-P4]
3.4 Describe the impact of finance on the financial statements [Pass-P7]
3.5 Suggest the best method of raising £1 million for the above project. [Pass-P3]
3.6 Critically explain why you have selected the method (or combination of methods) in question 3.5. [Merit-M1]
3.7 Apply creative thinking to assess the implications/limitations/impacts of the selection you have made in requirement 3.6 [Distinction-D3]
Requirement 4:
4.1 Explain the importance of financial planning. [Pass-P5]
4.2 Describe the information needs of different decision makers [Pass-P6]
Based on the information provided under the requirement 2,
4.3 Calculate unit costs of making a toy and identify the profitability margin for each toy. [Pass-P9]
4.4 Do you think it is possible to prepare a cash budget for the new project to manufacture a brand new toy? Explain why. [Pass-P8]
Requirement 5:
You must produce a business report to the managing director of J Plc incorporating all the above requirements. Your report must contain the following chapter:
• Introduction,
• Findings and analysis
• Conclusions and recommendations