Interpretation of the statement of financial position

Assignment Help Financial Management
Reference no: EM131776823

Assessment Brief

Case Study Background - Mycroft plc

Mycroft plc is a manufacturer of computer hardware and accessories (Information Technology or IT from now on).

It was established in the UK in 1975 and has become a well-established supplier to IT retailers particularly in Western Europe and North America (but has begun to make progress in selling to the African, Asian, Middle Eastern and South American markets).

This growth into a multi-national company (based from the UK) was supported by becoming a publicly listed company (plc) in 1995, listed on the London Stock Exchange.

The present Chairman of the company is Mary Morstan, who has been with Mycroft since 1988 and is the daughter of the company's founder, John Watson, who died in 2004, after which Mary became Chairman.

Mycroft's product range

The three core products for Mycroft have followed the general evolution in IT.

The company still manufactures desktop computers, although the demand for this product has been in general decline. It has a customer base which tends to be businesses, who need the higher processing power and the larger hard drive space.

For customers buying computers for personal use, the laptop has generally replaced the desktop computer in the last 10 years as the main device for IT purposes. There is a wide range of laptop manufacturers in the market but it is the product which presently makes the highest contribution to Mycroft's revenue.

The last core product is the tablet representing the shift to more mobile IT devices. This is a growth area in both the personal and business IT market and is expected to become Mycroft's main product by 2019.

Mycroft also sells a number of accessories to complement the above products including keyboards, mice, printers, laptop cases and tablet covers.

Mycroft has also been focusing on the development and launch into the market of two types of new products, which are based on making use of the increasing trends in the use of mobile IT. These are:

A hybrid (combination) of two core products, the tablet and laptop, which allows the consumer to enjoy the advantages of both products. Sales of the hybrid have been good and presently have not impacted on the sales of either laptops or tablets in their separate form.

Mycroft has also been focused on wearable technology which includes products like smart watches, and digital eyewear. These products have been popular with consumers who like to possess the latest IT products, but have also developed specific groups of consumers. For instance, the smart watches are popular with consumers who enjoy running and the digital eyewear is frequently used by surgeons in the medical sector.

Mycroft's expansion

Mycroft plc is in a two-phase expansion strategy

- Phase one - which commenced at the start of 2016 is based around supplying a new range of products to the market. (Noted above)

- Phase two - In 2018 Mycroft is seeking to take this wider range of products to make further progress in the African, Asian, Middle Eastern and South American Markets.

- The company is considering the possible options for this overseas expansion. One option would be for the company to develop production capability either in or close to these new markets. Alternatively the company could either take over a local company (through a merger or acquisition), or act in conjunction with a local company through a joint venture or alliance. All these options will be extremely expensive, and they therefore need to secure external finance. They have approached your bank (Hudson Bank) to support them.

Your role
You are Michael Lestrade, a financial analyst working for the Hudson Bank in their Loans department.

Mycroft's Chief Financial Officer (CFO), Molly Hooper, has approached your bank about giving them financial support (in the form of a loan) for phase two of the expansion strategy set out above.

The CFO has had some discussions with Irene Adler, the Head of Hudson's Loan department (set out in Exhibit 4) and presently the Bank is considering whether to initially approve the application. This is where the bank will decide in principle whether or not to lend the money. The next stage, where the amount of financing required by Mycroft is agreed with the Bank, is not relevant to this assignment.

You have been asked to analyse the financial performance and position of Mycroft and produce a report for the Head of the Loans department Irene Adler, which sets out your findings and makes a recommendation as to whether Mycroft's application for long-term borrowing should be given initial approval. This will form your UFS assignment.

You have also been asked to produce a separate report for the Head of Loans department which will focus on the operations of the company, including its management and corporate governance, its strategic plans, and the possible methods that could be adopted for overseas expansion. You will make a recommendation as to whether the company is well-run and how the loan (if approved) might best be used in the overseas expansion. This will form your Commercial Awareness assignment.

Questions

You are Michael Lestrade, a financial analyst within Hudson's Loans department and you have been asked to analyse the financial performance and position of Mycroft and produce a report for Irene Adler, the Head of the Loans department, which sets out your findings (based on the questions below) and makes a recommendation as to whether Mycroft's application for long-term borrowing should be given initial approval.

The report will help support the overall recommendation and should be structured as set out in the question requirements below.

1. Key features of Mycroft's Financial Statements

The table below is relevant to question 1a

Description 1

The audit fees from the external auditor were £3million for their audit of the 2017 financial statements.

Description 2

Mycroft purchased 100 3D printers for £15 million which will produce the plastic moulds for desktops, laptops and tablets sold across the next five years.

Description 3

Mycroft received a statement from a microchip supplier indicating that they owed the company £34 million as at 31 December 2017.

a. For Mycroft Plc, consider the THREE descriptions above and FOR EACH OF THEM state whether it would be shown as a transaction in the Statement of Profit or Loss (SPL) or a balance in the Statement of Financial Position (SOFP) (3 marks), and under what heading(s)

b. All three of the primary financial statements are linked together, with transactions or balances from one statement feeding into one or both of the other two. Using figures in Exhibits 1 and 2, give ONE specific example FOR EACH of how:

i. Mycroft's Statement of Profit or Loss and other Comprehensive income (SPLOCI) feeds into the Statement of Financial Position (SOFP);

ii. Mycroft's SOFP feeds into the Statement of Cash flows (SOCF); and

iii. Mycroft's SPLOCI feeds into the SOCF.

Please note that you should have a different example for each of these, and that the figure itself from the first statement might not be separately identifiable in the second statement as it might be part of a larger balance.

c. "If Mycroft consider the £300 million receivable from Great Computers to be a bad debt, the receivable will be reduced to zero, effectively no longer recognised as an asset."

Using the criteria from the CONCEPTUAL FRAMEWORK for recognising an asset, explain why the £300 million receivable due from Great Computers Ltd fails these criteria and is therefore not recognised as an asset. It will help in this question if you state the definition of an asset and the recognition criteria from the FRAMEWORK.

2. Interpretation of the Statement of Profit or Loss and other Comprehensive Income

Use the case study information to analyse and comment on the following FIVE movements in Mycroft's Statement of Profit or Loss (financial performance) in Exhibit 1 during the year 2017 compared to 2016, as required below:

- Revenue
- Gross Profit
- Other Operating Income
- Administration Expenses
- Operating Profit

Ignore the revised statements in Exhibit 5 in answering this question.

Use the additional financial information in Exhibit 2 and the relevant ratios shown in Exhibit 3 to enhance the quality of your analysis.

Taking each item in turn:

i. For revenue, other operating income and administration expenses calculate the percentage movement (trend) between 2017 and 2016. For gross profit and operating profit, compare the movement in the margin for each, as shown in Exhibit 3.

ii. Comment upon whether the movement is a positive or negative indicator of financial performance; and

iii. Use the narrative in the case study to identify and explain at least ONE reason why each movement analysed in part 3a(i) has happened.

3. Interpretation of the Statement of Financial Position

a. Use the case study information to analyse and comment on THREE movements in Mycroft's Statement of Financial Position in Exhibit 1 during the year 2017 compared to 2016. You may use the ratios in Exhibit 3 to enhance your answer.

Ignore the revised statements in Exhibit 5 in answering this question.

Taking each item in turn, for each item you select:

i. Use an appropriate financial technique (Ratio or trend analysis) to quantify the movement between 2017 compared to 2016;

ii. Comment upon whether the movement could have a positive or negative impact on the bank's decision to initially approve Mycroft's request for finance to support their expansion; and

iii. Use the case study to identify and explain at least ONE reason why each movement analysed in part 3a(i) has happened.

b. "Mycroft was unable to pay a dividend to shareholders. Instead of this payment, Mycroft made a 1 for 2 shares bonus issue". Explain the following:

i. In which TWO accounts has the Bonus issue been reflected in Mycroft's financial statements in 2017? (You may need to refer to note 2 in Exhibit 2 to help you with this question)

ii. What are the shareholders receiving instead of a dividend?

iii. Describe ONE key difference between a bonus issue and a rights issue.

c. Using the revised financial statements set out in Exhibit 5:

i. Explain how the solvency ratios (gearing and interest cover ratios) help us assess a company's financial solvency;

ii. Calculate revised liquidity and gearing ratios using the new figures in Exhibit 5; and

iii. Compare your calculation in 3c(ii) with the present liquidity and solvency ratios (Exhibit 3) and discuss whether the revised information is likely to have an impact on the bank's decision to provide financial support to Mycroft.

4. Interpretation of the Statement of Cash Flows

Consider this quote from the meeting notes in Exhibit 4:

"In previous years Mycroft has been known to be a cash-rich business (generating lots of positive cash flow from their trade) and a regular payer of dividends to shareholders. However in 2017 the company experienced a shortage of cash, which meant that it was unable to pay a dividend to shareholders."

i. Identify THREE entries in the Statement of Cash flows which indicate Mycroft is no longer cash-rich, and is experiencing an outflow of cash.

ii. Using the ratios in Exhibit 3, calculate Mycroft's Operating Cash Cycle (OCC) for 2016 and 2017

iii. Briefly explain why the OVERALL movement in the OCC calculated in 4a(ii) contributes to Mycroft's cash shortage; and

iv. Use the case study to identify and explain at least TWO reasons why the OCC movement (identified in part 4a(ii)) has occurred.

5. Professional report format
Marks are allocated for setting out your answer in the format of a professional business report.

Reference no: EM131776823

Questions Cloud

What is the annual ordering cost of the post card inventory : It costs $27 to place and ship each order and $9.71 per year for each box held as inventory. The company is using Economic Order Quantity model in placing.
Prepare a retained earnings statement : Prepare a retained earnings statement - Alpha Centuri Corporation has retained earnings of $3,100,000 on January 1, 2010
What the researchers report about limitations of the study : By indicating what the researchers report about limitations of the study? The ability of the study to draw conclusions about causality.
Segment of its original target market : A smaller 2-year old emerging venture is set to enter a new segment of its original target market, with a modified version of very popular product
Interpretation of the statement of financial position : Interpretation of the Statement of Financial Position - Interpretation of the Statement of Profit or Loss and other Comprehensive Income
Which three rights are the most important to you and why : What are the three "Rs"all about? What are they and what purpose do they serve. Which 3 rights are the most important to you? Why?
How to calculate malin aviation current : How to calculate Malin Aviation's current monthly operating result?
Cost volume profit analysis : With this regards, highlight the distinctive assumptions required in Cost Volume Profit analysis.
Data displayed under analysis : Most of the times management finds it to be apparent that there is a strong seasonal element in the usual data displayed under analysis under the times series

Reviews

len1776823

12/21/2017 7:29:20 AM

(b) Numeric analysis that is complete and free from errors with application of methods that may be insightful or original (b) Numeric analysis that is complete and mostly free from errors with fluent and appropriate application of methods. (b) Numeric analysis that is complete and mostly free from errors with relevant and effective application of methods. (b) Numeric analysis that is mostly complete and free from significant or critical errors with appropriate application of methods. (b) Numeric analysis that is mostly complete but contains errors with significant effect, or methods that are applied inappropriately (b) Numeric analysis that is incomplete or contains errors which have critical effect, or methods that are applied inappropriately

len1776823

12/21/2017 7:28:59 AM

Argument (a) Analysis, Synthesis & Evaluation (b) Numerical Analysis (c) Argumentation (d) Independent Research (a) Consistently precise, accurate and reasoned analysis, synthesis and/or evaluation; addressing issues with insight or originality (a) Consistently precise, accurate and reasoned analysis, synthesis and/or evaluation addressing all issues, some with creativity (a) Precision, accuracy and clear reasoning throughout the analysis, synthesis and/or evaluation addressing all issues appropriately (a) Broad levels of precision, accuracy and reasoning in analysis, synthesis and/or evaluation, and addresses all key issues (a) Errors which affect the consistency of the analysis, synthesis or evaluation and/or key gaps in the issues addressed (a) A lack of precision, accuracy or reasoning in analysis, synthesis or evaluation with significant gaps in the issues addressed

len1776823

12/21/2017 7:28:48 AM

Criteria Pass Grades Fail Grades High Distinction 85-100% Distinction 70-84% Merit 60-69% Pass 50-59% Fail 30-49% Low Fail 0-29% The work displays: The work displays: The work displays: The work displays: The work displays: The work displays: Knowledge & Understanding (a) Systematic Understanding (b) Emerging Thought (a) Strong evidence of a comprehensive and systematic understanding of an extensive range of appropriate issues, concepts, theories and research (a) Clear evidence of a comprehensive and systematic understanding of a considerable variety of issues, concepts, theories and research (a) Clear evidence of a comprehensive and systematic understanding of all major - and some minor - issues, concepts, theories and research (a) Evidence of a systematic understanding, which may contain some gaps, of all major - and some minor - issues, concepts, theories and research (a) Evidence of an understanding of an appropriate range of issues, concepts, theories and research but has significant gaps or misunderstandings. (a) Evidence of a limited understanding of issues, concepts, theories and research either major and/or minor.

len1776823

12/21/2017 7:28:25 AM

Q3 Interpretation of the Statement of Financial Position (SOFP) There are a lot of requirements in this section, so it is important to approach them systematically and ensure you cover ALL the requirements. The content from weeks 2,3,7 and 8 will help with this question. The skills required to help answer Q2 will be of assistance in this question as well, but in addition: • A sound understanding of share issues and dividends (week 2). • An understanding of solvency and what the ratios are telling you and an understanding of how these ratios will change if the company has to write off a bad debt (Week 8).

len1776823

12/21/2017 7:28:17 AM

Q2 Interpretation of the Statement of Profit or Loss (SPL) It is important to approach this section systematically and ensure you cover ALL the requirements. The content from weeks 1, 7 and 8 will particularly help with this question. You will need to be comfortable with the following to answer the questions in this section • Calculating trends and ratios using financial data • Reviewing case study narrative to explain why movements in figures have occurred

len1776823

12/21/2017 7:28:08 AM

Assessment Marking Scheme (Student Version) The assignment is marked out of 100. The following table shows the mark allocation and the approach required. Assignment Part Mark Approach Q1 Features of the Financial Statements A good knowledge of the content from weeks 1- 4 will help with parts a and c. A good knowledge from the lectures and webinars of the ways in which the financial statements link together will help with part b. You will also require the ability to apply the conceptual framework to a particular balance/transaction. We considered the Framework in week 4, and a question in the Formative assignment was similar to this question.

len1776823

12/21/2017 7:27:48 AM

• For coursework, please use font size 12 for body text and the typeface (font) should be Arial or Times New Roman with minimum 1.5 spacing. • For headers and titles, please use font size 14. Your submission must have standard margins and page numbers. • Please use English (UK) as your language in the submission. • Do not put your name or contact details anywhere on your submission. You should only put your student registration number (SRN) which will ensure your submission is recognised in the marking process. • A total of 100 marks are available for this module assessment and you are required to achieve minimum 40% to pass this module. • You are required to use only Harvard Referencing System in your submission. Any content which is already published by other author(s) and is not referenced will be considered as a case of plagiarism.

len1776823

12/21/2017 7:27:39 AM

• Your summative assessment for Understanding Financial Statements is a Coursework submission. • The deadline for submission is 23:59 hrs. Please note late submissions will not be marked. • You are required to submit your assessment via Turnitin online access. Only submissions made via the specified mode will be accepted and hard copies or any other digital form of submissions (like via email or pen drive etc.) will not be accepted. • For coursework, the submission word limit is 1,500 words. You must comply with the word count guidelines. You may submit LESS than 1,500 words but not more. Cover sheet, numerical Tables, diagrams, bibliography, appendices, annex and headings are NOT included within word count calculations. You must specify total word count on the front page of your report.

Write a Review

Financial Management Questions & Answers

  Foreign company acquisition

Acquisition by a foreign company and the effects of that decision and the results of foreign exchange in Euro and the exchange rate differences.

  Financial management for profit and non profit organizations

In this essay, we are going to discuss the issues of financial management in a non-profit organisation.

  Method for estimating a venture''s value

Evaluate venture's present value, cash and surplus cash and basic venture capital.

  Replacement analysis

This document show the Replacement Analysis of modling machine. Is replacement give profit to company or not?

  Business finance task - capital budgeting

Your company is considering using the payback period for capital-budgeting. Discuss the advantages and disadvantages of this technique.

  Analysis of the investment

In this project, you will focus on one of these: the additional cost resulting from the purchase of an apple press (a piece of equipment required to manufacture apple juice).

  Conduct a what-if analysis

Review the readings and media for this unit, including the Anthony's Orchard case study media. Familiarise yourself with the Anthony's Orchard company and its current situation.

  Determine operational expenditures

Organisations' behaviour is guided by financial data. In the short term, such data will help determine operational expenditures; in the long term, historical data may help generate forecasts aimed at determining strategic plans. In both instances.

  Personal financial management

How much will you have left over each half year if you adopt the latter course of action?

  Sources of finance for expansion into new foreign markets

A quoted company is considering several long-term sources of finance for expansion into new foreign markets.

  Long term financial planning

This assignment is designed for analyze Long term financial planning begins with the sales forecast and the key input in the long term fincial planning.

  Explain the role of fincial manager

This assignment explain the role of fincial manager, function of manger. And what are the motives of financial manager.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd