Case Study 1 The CEO of Tromerag Plastics Limited (TPL) stared across the table at his accountant with the Income Statement for the year to 31 July 2021 and the Statement of Financial Position at 31 July 2021 (These can be found in Appendix 1). “Well, then, Sally. What’s been happening to the cash position? Can you explain to me why it has deteriorated over the last year? After all, there have been two major cash injections.” Sally Farmer had worked for TPL as the accountant since she left college four years ago. She had inherited some old manual accounting systems and had been progressively introducing a new computer system with an integrated accounting software package to ensure that management information was available as quickly as possible after each accounting period. One area which still had to be addressed, however, was the management of cash. Unfortunately for Sally, this was one of the accounting areas in which the new CEO, Michael James, was showing a very keen interest. Michael continued, “We need to improve the management information on cash flow. The current management accounts do not include any details on cash flow at all. At my last company, we concentrated almost exclusively on cash flow management, virtually ignoring the Income Statement.” Sally replied, “I have got plans to introduce a proper cash reporting system. Regrettably, the software supplier says a standard package will require to be modified to meet our needs and it will be two months before the software will be ready.” Michael interrupted, “The Board of Directors cannot wait until then. All the Board needs just now is a straightforward historic Cash Flow Statement, like the one you would find in a set of annual financial statements. The Board needs to understand what has been going on. At the same time, the Marketing Director has asked if you could provide some key profitability ratios for the Board, identifying any trends and provide a commentary on the results for the year to 31 July 2021.” Appendix 1 Income Statements for the year to 31 July 2021 2020 £'000 £'000 Revenue 13,000 11,500 Cost of sales 7,100 5,500 Gross profit 5,900 6,000 Administrative costs (see note 1) 1,230 2,005 Marketing and development costs (see note 2) 1,000 200 Distribution costs 725 800 Depreciation (see note 3) 245 195 Operating profit 2,700 2,800 Interest payable 125 25 Profit before taxation 2,575 2,775 Corporate taxation on profit 425 460 Profit after taxation 2,150 2,315 Dividends 400 300 Retained profit for financial year 1,750 2,015 Statements of Financial Position at 31 July 2021 2020 £'000 £'000 Non-current assets Production machinery 2,700 1,240 Delivery vehicles (see note 4) 300 360 3,000 1,600 Current assets Inventory 2,300 1,700 Receivables 8,000 3,200 Cash at bank 170 500 10,470 5,400 Current liabilities Bank overdraft 120 100 Creditors (see note 5) 4,900 3,400 5,020 3,500 Net current assets 5,450 1,900 Non-current liabilities Long-term loans 2,500 500 5,950 3,000 Capital and reserves Share capital 1,000 600 Share premium 800 - Profit and loss account 4,150 2,400 5,950 3,000 Appendix 1 (continued) Notes to the Accounts Note 1 Administrative costs include directors' remuneration of £375,000 in 2021 and £240,000 in 2020. Note 2 Marketing and development costs includes £700,000 spent on new product development in 2021. Note 3 Depreciation in year to 31 July 2021 £'000 Production machinery 190 Delivery vehicles 55 245 Note 4 Delivery vehicles with a net book value of £50,000 were sold during the year to 31 July 2021 at no gain/no loss. Note 5 Analysis of creditors: 2021 2020 £'000 £'000 Trade creditors 3,950 2,300 Corporate taxation payable 650 750 Dividends payable 300 350 4,900 3,400 Required: 1. Prepare a Cash Flow Statement for the year ended 31 July 2021. Show all workings. 2. Prepare a memorandum to the Board of Directors explaining the key movements ofcash over the year. 3. Analyse the Income Statement, calculating whatever profitability ratios that you think appropriate for the Board to evaluate the 2021 results and provide a brief memorandum including your ratio analysis and any other comments on the figures. Show all workings.
Case Study 1
The CEO of Tromerag Plastics Limited (TPL) stared across the table at his accountant with
the Income Statement for the year to 31 July 2021 and the
31 July 2021 (These can be found in Appendix 1).
“Well, then, Sally. What’s been happening to the cash position? Can you explain to me why
it has deteriorated over the last year? After all, there have been two major cash injections.”
Sally Farmer had worked for TPL as the accountant since she left college four years ago.
She had inherited some old manual accounting systems and had been progressively
introducing a new computer system with an integrated accounting software package to
ensure that management information was available as quickly as possible after each
accounting period.
One area which still had to be addressed, however, was the management of cash.
Unfortunately for Sally, this was one of the accounting areas in which the new CEO, Michael
James, was showing a very keen interest.
Michael continued, “We need to improve the management information on
current
company, we concentrated almost exclusively on cash flow management, virtually ignoring
the Income Statement.”
Sally replied, “I have got plans to introduce a proper cash reporting system. Regrettably, the
software supplier says a standard package will require to be modified to meet our needs and
it will be two months before the software will be ready.”
Michael interrupted, “The Board of Directors cannot wait until then. All the Board needs just
now is a straightforward historic Cash Flow Statement, like the one you would find in a set of
annual financial statements. The Board needs to understand what has been going on. At the
same time, the Marketing Director has asked if you could provide some key profitability
ratios for the Board, identifying any trends and provide a commentary on the results for the
year to 31 July 2021.”
Appendix 1
Income Statements for the year to 31 July
2021 2020
£'000 £'000
Revenue 13,000 11,500
Cost of sales 7,100 5,500
Gross profit 5,900 6,000
Administrative costs (see note 1) 1,230 2,005
Marketing and development costs (see note 2) 1,000 200
Distribution costs 725 800
Operating profit 2,700 2,800
Interest payable 125 25
Profit before
Corporate taxation on profit 425 460
Profit after taxation 2,150 2,315
Dividends 400 300
Retained profit for financial year 1,750 2,015
Statements of Financial Position at 31 July
2021 2020
£'000 £'000
Non-current assets
Production machinery 2,700 1,240
Delivery vehicles (see note 4) 300 360
3,000 1,600
Current assets
Inventory 2,300 1,700
Receivables 8,000 3,200
Cash at bank 170 500
10,470 5,400
Current liabilities
Bank overdraft 120 100
Creditors (see note 5) 4,900 3,400
5,020 3,500
Net current assets 5,450 1,900
Non-current liabilities
Long-term loans 2,500 500
5,950 3,000
Capital and reserves
Share capital 1,000 600
Share premium 800 -
5,950 3,000
Appendix 1 (continued)
Notes to the Accounts
Note 1
Administrative costs include directors' remuneration of £375,000 in 2021 and £240,000 in
2020.
Note 2
Marketing and development costs includes £700,000 spent on new product development
in 2021.
Note 3
Depreciation in year to 31 July 2021
£'000
Production machinery 190
Delivery vehicles 55
245
Note 4
Delivery vehicles with a net book value of £50,000 were sold during the year to 31 July
2021 at no gain/no loss.
Note 5
Analysis of creditors:
2021 2020
£'000 £'000
Trade creditors 3,950 2,300
Corporate taxation payable 650 750
Dividends payable 300 350
4,900 3,400
Required:
1. Prepare a Cash Flow Statement for the year ended 31 July 2021. Show all workings.
2. Prepare a memorandum to the Board of Directors explaining the key movements ofcash over the year.
3. Analyse the Income Statement, calculating whatever profitability ratios that you think appropriate for the Board to evaluate the 2021 results and provide a brief memorandum including your ratio analysis and any other comments on the figures. Show all workings.
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