Perform a vertical analysis on the income statement

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Reference no: EM132977725

BBF 211 Financial Reporting and Analysis

SECTION A (Compulsory)

Question .1

You are provided with Gregg's Trial balance for the period ended 31 March 2011.

	Dr, $000	Cr, $000
Revenue		5,300
Cost of sales	1,350
Dividends received		210
Administration expenses	490
Distribution costs	370
Interest paid	190
Prepayments	25
Dividends paid	390
Property, plant and equipment	4,250
Short-term investments	2,700
Inventory at 31 March 2011	114
Trade receivables	418
Cash and cash equivalents	12
Trade payables		136
Long-term loans (repayable 2019)		1,200
Share capital		1,500
Share premium		800
Retained earnings at 31 March 2010		1,163
Total	10,309	10,309

The following information should also be taken into account;

i) The tax charge for the year has been estimated at $470,000.

Required:
In accordance with IAS1 and common rules (GAAP), Prepare, in a form suitable for publication;
a) An Income Statement for the period ended 31 March 2011.
b) Statement of Owners' Equity for the period ended 31 March 2011.
c) Statement of financial position as at 31 March 2011.
d) Statement of cash flow for the period ended 31 March 2011.
e) Perform a vertical analysis on the income statement prepared in question (a) above, and comment on the profitability levels.

SECTION B

Question 2

Consider the following financials for Cloud Corporation

Comparative balance sheet for Cloud Corporation as at December 31, 2019 and 2020.

	2019	2020
Cash	$51,000	$75,000
Receivables	39,000	48,000
Inventory	60,000	54,000
Prepaid expenses	9,000	6,000
Plant assets	350,000	440,000
Accumulated depreciation	(125,000)	(145,000)
Intangible assets	58,000	51,000
Total assets	$442,000	$529,000

Accounts payable	$56,000	$51,000
Accrued expenses	14,000	18,000
Long-term notes payable	0	30,000
Mortgages payable	150,000	0
Preferred stock	0	175,000
Common stock	200,000	200,000
Retained earnings	22,000	55,000
Total liabilities & owners' equity	$442,000	$529,000

Cloud Corporation Income Statement for period ended December 31, 2020

Sales	$660,000
Cost of sales	(363,000)
Gross profit	297,000
Operating expenses	(183,000)
Depreciation and amortization	(35,000)
Gain on sale of asset	5,000
Net income	$84,000

Required,
a) Perform a horizontal analysis on Cloud Corporation's balance sheets and comment on the assets performance.
b) Perform a vertical (common size) analysis on Cloud Corporation's balance sheets and comment on the assets and liabilities performance of individual years.
c) Perform a vertical (common size) analysis on Cloud Corporation's income statement and comment on the profitability levels.

Question .3

Some companies, like Apple, like to sit on colossal amounts of cash. Their strategy is to have this money built up so that they can remain financially solvent even if some pretty catastrophic things happen to the economy. However, other companies prefer to invest their money if they can do so by buying stocks, acquisitions or mergers while remaining financially healthy. For example, computer chipset manufacturers like Intel upgrade their factories and equipment on a regular basis. These upgrades are extremely expensive, and while they are a good long-term investment, the company in question must make sure they have the short-term cash flow to support these kinds of moves.

a) Do you think a company like apple would require financial reporting or financial analysts?

b) In your opinion, do you think companies carry out financial reporting the same way?

c) Suggest steps that should be taken while conducting financial statements analysis.

Question 4

£m

Profit before taxation (after interest)

Depreciation charged in arriving at operating profit

Interest expense

185

At the beginning of the year:

Inventories

Trade receivables

Trade payables

At the end of the year:

Inventories

Trade receivables

Trade payables

The following further information is available about payments during last year:

Taxation paid

Interest paid

Dividends paid

Required;

a) Using indirect method, what figure should appear in the statement of cash flow for ‘Cash flows from operating activities'?
b) As a finance manager, how would you use a cash flow statement?
c) In your own opinion, critic IAS7.

Question .5

You are given below, in summarized form, the accounts of Algernon PLC, for 2016 and 2017.

	2016	2017
	Amount ($)	Amount ($)
Plant	6,000		6,000
Buildings	40,000		79,000
Investments	50,000		80,000
Land	43,000		63,000
Inventory	55,000		65,000
Receivables	40,000		50,000
Cash	3,000		4,000
Total assets	237,000		347,000
Shares of $1 each	40,000		50,000
Share premium	12,000		14,000
Revaluation reserve -land	-		20,000
Retained profit	45,000		45,000
10% loan notes	100,000		150,000
Payables	40,000		60,000
Bank	-		8,000
Total liabilities & O.E	237,000		347,000

Income statement

	2016	2017
	$	$
Sales	200,000	200,000
Cost of sales	(100,000)	(120,000)
Gross profit	100,000	80,000
Expenses	(50,000)	(47,000)
EBIT	50,000	33,000
Interest	(10,000)	(13,000)
Net profit	40,000	20,000

Required

Calculate the following ratios for both years and comment on each ratio calculated to advise management of Algernon PLC.
(i) Current ratio
(ii) Quick ratio
(iii) Inventory turnover ratio
(iv) Days' sales in inventory ratio
(v) Accounts receivable turnover ratio

Attachment:- Financial Reporting and Analysis.rar

Reference no: EM132977725

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