Julyfest Limited Financial Analysis - Assignment Example

Julyfest Limited Financial analysis Task One a) Trial Balance Julyfest Limited Trial Balance as at 31st May Account Debit(£) Credit (£) Sales 352,000 Purchases 150,000 Opening Inventory 65,000 Property 102,000 Cost of plant and equipment 98,000 Accumulated depreciation 1/6/2011 Property 20,000 Plant and equipment 10,000 Administrative expenses 38,000 10% Bonds 65,000 Equity shares (£1 each) 100,000 Share premium 30,000 Distribution costs 58,000 Trade receivables 87,000 Trade payables 37,000 Retained profits 1/1/2010 59,500 Cash and cash equivalents 63,500 Dividends paid 12,000 Total 673,500 673,500 Task Two b) Income Statement Julyfest Limited Income Statement For the year ended 31st May 2012 Sales £352,000 Purchases £150,000 Opening Inventory £65,000 Cost of Goods Available for Sale £215, 000 Less Closing inventory £70, 000 Cost of Goods Sold £145, 000 Gross Profit £207, 000 Property depreciation (5% using straight line method) £5100 Plant and equipment depreciation (20% ) £19500 Distribution cost £58,000 Dividends paid £12, 000 Administrative expenses outstanding £4,500 Less distribution costs prepaid £10, 000 Total Expenses £77100 Net Profit before Tax £129900 Corporation tax (22%) £17500 Net Income £112,400 c) Statement of financial position Julyfest Limited Balance Sheet for the year ended 31st May 2012 ASSETS Current Assets Inventory 70,000 Cash and cash equivalents 63,500 Account Receivables 87,000 Prepaid distribution cost 10,000 Total Current Assets 230,500 Fixed Assets Property 102,000 Cost of plant and equipment 98,000 Less Accumulated Depreciation 30,000 Total Fixed Assets 170,000 TOTAL ASSETS 400,500 LIABILITIES Current Liabilities Trade payables 37,000 Interest Unpaid Bond 6,500 Taxes 17,500 Purchases 150,000 SHAREHOLDERS’ EQUITY Equity shares 100,000 Retained Profits 59,500 Share premium 30,000 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 400,500 Task Two Statement of cash flows provides important information to those using it as it provides information about the out flows and inflows that have taken place in a certain financial year or within a specific period of time (Baker 2005). The main importances of statement of cash flow are as discussed below. First statement of cash flows enables users to identify as well as understand the sources from which the funds used in the business during a specific period as the uses into which these funds were used (Philips 2008). Other financial statements such as balance sheet and trial balances are not able show sources of funds as well uses into which these finances were put into use (Baker 2005). Statement of cash flow also plays an important role in enhancing management of businesses as well as management of business resources (Baker 2005). It also enhances planning of business funds as well as ensuring that business cash flows (outflows and inflows) conform to each other (Tailor 2003). This is as opposed to other financial statements such as balance sheet which only shows assets and liabilities of business. Balance sheet cannot account for both cash outflows and cash inflows. Another importance of statement of cash flow is that it shows how efficient an organization is able to generate income (cash inflows) from its operation (Baker 2005). Other financial statements such as balance sheet which only shows assets and liabilities of business but cannot show shows how efficient an organization is able to generate income (cash inflows) from its operation (Philips 2008). Another importance of cash to those whose use it is that it is a report of funds that have been used during a specific period of time for various business activities (both short term and long term) such organization’s long term investment (Baker 2005). This information can also be shown by balance sheet. Another importance of cash to those whose use it is that it is a report of funds that have been received by the business during a specific period of time from various business activities such as debentures, share issue and loans among others (Baker 2005). These information can also be shown by balance sheet. Statement of cash flow also plays an important role in enhancing and appraising business capital investment among other investments in order to determine profitability of programs supporting these capital investments (Baker 2005). Task three PART A Return on capital employed (abbreviated as ROCE) is calculated using the formula below: Net profit before tax and interest = £129900 Total Assets = £400,500 Current Liabilities = £211,000 Therefore, = 68.54% Acid Test Ratio is normally calculated using the formula below: Total Assets = £230,500 Current Liabilities = £211,000 Inventories = £70,000 Therefore, = 0.76 Current Ratio is calculated using the formula below: Current Liabilities = £211,000 Current Assets = 230,500 Therefore, = 1.092 Trade Payables was calculated using the equation below: Trade Payables = 37,000 Cost of sales = 145, 000 = 93 days Earnings per Share Net Profit after tax = 112,400 Number of ordinary share issue = 100,000 = 112.4% PART B: Financial position of Julyfest Limited Financial Position by use of Current Ratio Current ratio is normally used to show ability of organizations to pay their current liabilities (short term liabilities) by using their current assets (also known as short term assets) (Brigham & Ehrhardt 2011). This ratio should be maintained at values or one or more than one. If this ratio less than one, it means that the organization is not able to pay its current liabilities using its assets (Brigham & Ehrhardt 2011). As for the Julyfest Limited this ratio was 1.8 in the financial year ending 31st May 2011, and 1.092 in the financial year ending 31st May 2012. Even though this value was more than 1 in the financial year ending 31st May 2012, it is clear that the ability of the business paying for its current liabilities by using its current assets has reduced greatly. Financial Position by use of Acid test ratio The use current liabilities to determine ability of ability of organizations to pay their current liabilities (short term liabilities) by using their current assets (also known as short term assets) is insufficient since converting inventories into cash may not be easy; therefore, may be misleading (Thukaram 2007). Acid test ratio ignores inventory. Just as in Current ratio, acid test ratio should be maintained at values or one or more than one. If it is less than one, it means that the organization is not able to pay its current liabilities using its assets (Brigham & Ehrhardt 2011). As for the Julyfest Limited this ratio was 1.2 in the financial year ending 31st May 2011, and 0.76 in the financial year ending 31st May 2012. It is clear from this ratio that the Julyfest Limited was not able to pay for its current liabilities by using its current assets in the financial year ending 31st May 2012. Financial Position by use of Earnings per Share Earnings per share indicates how profitable an organization is (Brigham& Ehrhardt 2011). As for the Julyfest Limited this ratio was 60 percent in the financial year ending 31st May 2011, and 112.4 percent in the financial year ending 31st May 2012. It is, therefore, clear from this ratio that the Julyfest Limited was more profitable in the financial year ending 31st May 2012 than in the financial year ending 31st May 2012. Financial Position by use of Payable period This ratio is used to determine number of days an organization is able to pay its suppliers for the supplies and purchases (Brigham& Ehrhardt 2011). As for the Julyfest Limited this ratio was 70 days in the financial year ending 31st May 2011, and 93 days t in the financial year ending 31st May 2012. It is clear from this ratio that the Julyfest Limited would take more time to pay its suppliers the financial year ending 31st May 2012 than in the financial year ending 31st May 2012. Therefore, it was financially sound in the financial year ending 31st May 2011 than in the financial year ending 31st May 2012. Financial Position using Return on capital employed This ratio how an organization is benefiting from the assets it has (Baker 2002). It may also show how an organization is losing from the liabilities it has (Baker 2002). As for the Julyfest Limited this ratio was 25% in the financial year ending 31st May 2011, and 68.54% in the financial year ending 31st May 2012. It is clear from this ratio that the Julyfest Limited is benefiting more from its assets in the financial year ending 31st May 2012 than in the financial year ending 31st May 2011. References Baker, R., 2002. Project Financing Guide. The Journal of Bank Cost & Management Accounting, 5(7), p. 5. Brigham, E., & Ehrhardt, M., 2011. Financial Management. London: Springer. Philips, M., 2008. Rights Issue as source of business financing. Manson: Canage Learning. Tailor S., 2003. Sources of organizations Finances. The Journal of Bank Cost & Management Accounting, 7(17), p. 22 Thukaram, R., 2007. Management Accounting. New York: New Age International. Read More