Reference no: EM132623655
ABC is an international supermarket chain selling food, clothes and household appliances with a 31 December year end. The finance director would like you to prepare some financial data and analysis to present to the board. He has provided the extracts from the financial statements to assist you in your analysis.
EXTRACTS FROM THE STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 20X9 (WITH COMPARATIVES)
20X9 20X8
$m $m
Revenue 20,510 17,835
Cost of Sale 18,970 16,835
Gross Profit 1,540 1,000
Operating Profit 650 530
Finance Costs 200 130
EXTRACTS FROM THE STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X9 (WITH COMPARATIVES)
20X9 20X8
$m $m
Non Current Assets 9,100 8,390
Inventories 850 1,000
Total Current Assets 1,570 1,610
Equity 5,050 4,935
Non Current Liabilities 3,250 2,530
Trade Payables 2,100 2,280
Total Current Liabilities 2,920 2,650
You are provided with accounting ratios for 20X8:
Gross profit margin 5.6%
Operating profit margin 3.0%
ROCE 7.1%
Current ratio 0.61
Inventory days 22 days
Payable days 49 days
Interest cover 4.08
In addition, the finance director has also supplied the following information regarding events in the year ended 31 December 20X9:
(1) Online food home delivery increased by 25%.
(2) The number of stores grew by 10% in the year. This was financed by long term borrowings.
(3) In the year ended 31 December 20X9, 40% of customers purchased at least one clothing item during the year whereas in the year ended 31 December 20X8, only 20% of customers did.
(4) A strong marketing campaign took place during the year.
(5) The new strengthened Grocery Supplier Code of Practice came into force to improve grocery retailers' treatment of suppliers.
Required:
Question 1: Calculate the ratios below for the year ended 31 December 20X9 and state whether it has improved or deteriorated:
- Gross profit margin
- Operating profit margin
- Return on capital employed
- Current ratio
- Inventory holding period
- Payables payment period
- Interest cover
Question 2: Provide one possible reason for the movement in each ratio.
Question 3: Explain what is meant by the underlying assumption 'Going concern' when preparing financial statements.