What is meant by the underlying assumption going concern

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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:

  1. Gross profit margin
  2. Operating profit margin
  3. Return on capital employed
  4. Current ratio
  5. Inventory holding period
  6. Payables payment period
  7. 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.

Reference no: EM132623655

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