Reference no: EM133065307

Question 1

The following information is the preliminary trial balance of King's Construction Company Ltd for year ending of 31st of December 2021:

	Debits (£)	Credits (£)
Sales Revenue		230,000,000
Short-Term Marketable Securities	14,500,000
Property	52,000,000
Building Machinery - Historic Cost	25,000,000
Building Machinery - Accumulated Depreciation		5,000,000
Inventories (at the 1st of January 2021)	18,000,000
Purchases	80,000,000
Lease Liabilities (due in more than one year)		6,500,000
Land	12,000,000
Staff Wages	42,000,000
Accrued Staff Wages		2,000,000
Office Equipment - Historic Cost	16,500,000
Office Equipment - Accumulated Depreciation		10,000,000
Bank Interest Expense	4,000,000
Construction Vehicles - Historic Cost	10,000,000
Construction Vehicles - Accumulated Depreciation		2,000,000
Trade Receivable	28,200,000
Goodwill	44,000,000
Trade Payable		4,000,000
Bank Loan		40,000,000
Share Premium		30,000,000
Rental Income (from non-core operations)		7,000,000
Asset Revaluation		2,000,000
Lease Expense (on retail shops)	3,500,000
Lease Liabilities (due in less than one year)		1,200,000
Share Capital (£100)		50,000,000
Retained Earnings		45,000,000
Administrative Expense	45,000,000
Pension Liability		15,000,000
Cash and Cash Equivalents	55,000,000
	449,700,000	449,700,000

Adjustments
Closing inventories was £12,000,000 on the 31st of December 2021.
Corporation tax is 20% for the year, half due now and should be paid in cash and half due in April 2022.
3) Land was revalued from £12,000,000 to £15,000,000.
A court case is currently going through the courts in which King's Construction Company Ltd is being sued by an employee due to an injury at work in 2021, in which the solicitors estimate they will have to payout £1,000,000 and that it is probable it will lose the court case.
A court case is currently going through the courts in which King's Construction Company Ltd is suing its biggest competitor for
£4,000,000 due to copyright infringement, which the outcome of winning the court case is considered probable.
Depreciation (all based on reducing balance):
Office Equipment - 20%
Building Machinery - 15%
Construction Vehicles - 10%
£6,000,000 of the trade receivable figure is considered unrecoverable and should be written-off as bad debts.
£5,000,000 of administrative expenses included in the trial balance is actually a prepayment for 2022 financial year.
Dividends were distributed to shareholders during the financial year to a value of £4,000,000 in cash.
A 1 for 2 bonus issue was given to shareholders. The bonus issue was conducted before the rights issue. The bonus issue should be made using a revenue reserve.
A rights issue of 3 for 2 basis, at £500 per share, with 75% of shares bought by shareholders, conducted after the bonus issue.

REQUIRED
Please prepare a balance sheet and income statement for 31st December 2021 using the trial balance presented on the previous page, ensuring that you make all the requested adjustments. Please also ensure to add notes of any contingent assets and/or contingent liabilities if you consider such an event to have arisen.

Section B

Question 2
The following are key extracts from the financial statements and market data of King's Motors PLC and its competitor LSE Motors PLC for financial years ending 31st of December 2020 and 2021:

King's Motors PLC			LSE Motors PLC
	2020 £	2021 £		2020 £	2021 £
Revenue	26,000,000	132,000,000	Revenue	900,000,000	950,000,000
Gross Profit	15,000,000	80,000,000	Gross Profit	300,000,000	320,000,000
Operating Profit	(35,000,000)	12,000,000	Operating Profit	120,000,000	160,000,000
Interest Expense	(2,000,000)	(8,000,000)	Interest Expense	(20,000,000)	(30,000,000)
Profit for The Year	(37,000,000)	4,000,000	Profit for The Year	100,000,000	130,000,000
Trade Receivables	3,000,000	19,000,000	Trade Receivables	25,000,000	30,000,000
Inventories	5,000,000	12,000,000	Inventories	80,000,000	90,000,000
Cash	36,000,000	60,000,000	Cash	50,000,000	60,000,000
Trade Payable	5,000,000	18,000,000	Trade Payable	120,000,000	150,000,000
Long term Loan	4,000,000	35,000,000	Long term Loan	250,000,000	400,000,000
Share Capital (£100)	5,000,000	25,000,000	Share Capital (£1)	250,000,000	300,000,000
Retained Earnings	7,000,000	11,000,000	Retained Earnings	200,000,000	285,000,000
Dividends (Total Payout)	0	0	Dividends (Total Payout)	30,000,000	45,000,000
Share Price (per share)	20	100	Share Price (per share)	670	650
Cash from operations	2,000,000	6,000,000	Cash from operations	(35,000,000)	(50,000,000)

a) Discuss three financial ratios you might consider if you were a supplier to King's Motors Ltd and they asked for £10,000,000 of purchases on credit in 2021. Please ensure to justify your chosen ratios and state whether you agree to this deal? Please ensure in your answers to make clear what insights can be drawn from each of your chosen ratios. Please also discuss what further information you would request from or about King's Motors PLC's before offering your product or services on credit?

b) Ensuring your answer is different to the ratios used in answer to part a, assume the role of a management consultant and suggest at least two improvements you would advise King's Motors makes to its business based upon conducting ratio analysis. Please in your answer ensure to justify why you believe your chosen recommendations are important. Please also discuss what further information you would request from or about King's Motors to support you in your recommendations.

c) Adopting the perspective of a financial analyst, evaluate the performance of King's Motors PLC and its biggest competitor LSE Motors PLC. Please advise on which of the two companies you would invest in given the information above and why? Please state your rationale behind your chosen investment. In your answer, please also discuss what further information you might seek to support your decision.

Question 3

The following are key extracts from the financial statements of King's Aerospace PLC for financial years ending 31st of December 2020 and 2021:

King's Aerospace PLC
	2020 £	2021 £
Revenue	175,000,000	200,000,000
Opening Stock	20,000,000	25,000,000
Purchases	80,000,000	100,000,000
Closing Stock	(25,000,000)	(45,000,000)
Cost of Sales	(75,000,000)	(80,000,000)
Gross Profit	100,000,000	120,000,000
Depreciation	(10,000,000)	(15,000,000)
Other Operating Expenses	(50,000,000)	(40,000,000)
Operating Profit	40,000,000	65,000,000
Interest Expense	(2,000,000)	(5,000,000)
Profit Before Tax	38,000,000	60,000,000
Corporation Tax	(7,600,000)	(12,000,000)
Profit for The Year	30,400,000	48,000,000
Non-Current Assets	45,000,000	55,000,000
Prepayments Other Operating Expenses	2,000,000	4,000,000
Trade Receivables	15,000,000	55,000,000
Inventories	25,000,000	45,000,000
Cash	10,000,000	?
Trade Payable	55,000,000	50,000,000
Accrued Tax Liability	26,000,000	7,600,000
Long term Loan	30,000,000	50,000,000
Share Capital (£1)	10,000,000	40,000,000
Share Premium	20,000,000	30,000,000
Retained Earnings	15,000,000	43,000,000

Further to the information contained in the financial statements above during the 2021 financial year a dividend to ordinary shares was paid of £20,000,000 and the interest payable expense was fully paid up in cash at £5,000,000.

Using the income statement and balance sheet provided above, please draw up the statement of cash flows for the financial year ending the 31st of December 2021 and state what the cash figure should be for 2021 (please note the balance sheet above should not be used to calculate cash, as only extracts are shown above to provide sufficient information to complete the statement of cashflows).

Adopt the role of a financial analyst and reflect upon each of the three sections of the statement of cashflows. Based upon the income statement and balance sheet, as well as the cashflow statement you've drawn up in answer to part a, state whether you would consider investing in King's Aerospace PLC and any concerns you might have about this investment given the information provided. What further information would you request from or about King's Aerospace PLC's before making any investment?

Assume that King's Aerospace PLC is looking to expand the business and needs to raise £300,000,000 to do so. State firstly whether you would recommend they raise this capital by equity or by debt. Secondly, discuss the rationale behind your recommendation weighing up the advantages and disadvantages.

If they were to raise the £300,000,000 by equity finance, offer your recommendation on whether they should consider a private placement or public offering to raise this capital. Discuss the rationale behind your recommendation weighing up the advantages and disadvantages.

Section C - Testing your understanding of financial reporting in in the business world

Question 4

What is meant by creative accounting? Using examples, please state where you might expect to see creative accounting within the financial statements. Please as part of your answer offer a critical debate on why accounting standards provide some level of choice in how they present some elements within the financial statements given this discretion can lead to creative accounting. In your answer, also consider why accounting standard setters are willing to forgo some of the qualitative characteristic of comparability to achieve increased levels of faithful representation for the users of financial statements.

Question 5

Why is offering management commentary alongside the preparation of the financial statements a legal requirement in most countries when a company exceeds a certain size? In your answer, ensure to explain why narrative reporting such as the directors' strategic report is offered from a capital providers' perspective. Discuss with examples what insights can be drawn from the narrative reports which cannot be obtained from the financial statements. In your answer, also ensure to critically discuss the limitations of the narrative reporting and the potential causes of these limitations, yet even with these limitations why company law still considers this commentary important within the annual report.