For your Assignment

For your Assignment, you will apply the fundamental concepts of accounting and finance that you are studying to complete several problems indicative to real-world business scenarios and challenges. For this Assignment, there will be two questions to answer. Both questions should be submitted together as one document.

 

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.

Balance Sheets, December 31

 

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

£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

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.

Balance Sheet

2015

2014

Cash

£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

Equipment, at cost

104,500

90,700

Less: accumulated amortisation

(30,500)

(15,500)

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

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