Accounting Records of Stewie Ltd, Bryan Ltd and Peter Ltd - Case Study Example

FINANCIAL ACCOUNTING REPORT The following details are taken from the accounting records of Stewie Ltd, Bryan Ltd and Peter Ltd. as at 30 June 2009: This part of the assignment requires you to prepare consolidated financial statements for the group of companies consisting Stewie Ltd, Bryan Ltd and Peter Ltd. Your answer should be prepared on the basis of the following information. The profit and loss account and financial position for each company as at the 30 June 20X9 is given below. STEWIE BRYAN PETER Sales 305,000 91,000 49,000 Cost of Sales Opening Stock 96,000 8,000 10,000 Purchases 140,000 30,000 22,000 Closing Stock 125,000 30,000 12,000 111,000 8,000 20,000 Manufacturing Expense 41,000 3,000 2,000 Depreciation on Plant 30,000 8,000 14,000 Gross Profit 123,000 72,000 13,000 (contd) Expenses Management and consulting - 10,000 10,000 Financial 12,000 6,000 2,000 Selling 14,000 2,000 - Other Revenue Interest Revenue from inter-company loans 5,500 - - Disposal PPE (net) 10,500 6,000 5,000 Management and Consulting Fees 12,000 5,000 - Dividends 19,000 - - Operating Profit before Tax 144,000 65,000 6,000 Income Tax Expense 50,000 26,000 2,000 Operating Profit after tax 94,000 39,000 4,000 Retained Profits (1/7/X8) 125,000 15,000 2,000 219,000 54,000 6,000 Dividends Paid 35,000 15,000 4,000 Dividends Declared 35,000 20,000 nil Retained Profits (30/6/X9) 149,000 19,000 2,000 General Reserve 30,000 24,000 14,000 Share Capital 400,000 100,000 80,000 579,000 143,000 96,000 Bank Loan 100,000 - - Loan Payable to Stewie 50,000 5,000 Dividends Payable 35,000 20,000 - Other Liabilities 105,000 40,000 6,000 819,000 253,000 107,000 Accounts Receivable 23,000 16,000 15,000 Shares in Bryan 120,000 - - Shares in Peter 91,000 - - Plant (Cost) 100,000 50,000 50,000 Accumulated Depreciation (45,000) (25,000) (20,000) Inventory 125,000 30,000 12,000 Loan Receivable 55,000 - - Land 350,000 182,000 40,000 Goodwill nil - 10,000 819,000 253,000 107,000 Corporate Performance The long-term goals prefer mostly companies with a solid past performance and continued good performance in future. Such companies are called growth companies, or Blue Chip Companies. Of the factors which influence the share prices, the most important one is corporate fundamentals, namely, company's intrinsic worth, net asset value or book value. The corporate performance is thus the single largest force, influencing share price. This is studied by the ratio analysis referred to below, funds flow analysis — namely sources and use of funds — and trend analysis of growth rates of important parameters like sales, gross block etc Corporate performance depends on a number of variables, both internal and external to the company. The major internal factors are: (i) efficiency of capital use (it) productivity of total capital employed (Hi) Growth of Gross Block and its capacity utilization (iv) Sales turnover and operational efficiency (v) Profitability of the operations (vi) return on capital employed (vii) expansion plans and internal reserves built tip and (riii) Tax planning and accounting practices etc. All the above factors are reflected and measured in Financial Ratios referred to below — growth rates of major assets and liabilities and operational ratios . Balance Sheet Analysis Overall Performance of Companies Gross Block Sales Net Profits Net Profits Equity Gross Block Sales Equity (Capital use) (Turnover (Profitability) = Return on Efficiency) Investment Comparison of Growth Rates of Gross Block, Sales, Gross Profits, etc. so as to know the efficient use of Capital and die Growth of Capital relative to sales reflecting the optimal use of capacity and profitability of operations. Investor Valuation of Company Earnings per share, Book value per share, Net Asset value per share, break down value of Equity Share, P/E Ratio, or payback period of Investments. Management Rating Measured by their honest)', integrity, keeping up to schedules of project construction or fulfilling die sales target or Gross Profit margin. Consistency in dividend distribution bonus payments, expansion plans and Tax Planning. There' are different phases in the economy such as boom, depression, recession, etc. The performance of the economy in India is not cyclical as in the case of developed countries exhibiting business cycles, as the Indian economy depends basically on the monsoon and die growth rate of agriculture) Besides, with a huge public sector in our mixed economy, the performance of the five-year plan, yearly public investment, government expenditure and a host of other factors influence the economy, industry and company. Thus one important factor is die fiscal policy which incorporates government expenditure and taxation, borrowing, deficit financing etc. which influences. both the public and private sectors in the economy. The industrial growth in general norm Particular influence he corporate performance. The following events/transactions are not reflected in the trial balance above On 30 June 2009 the directors decided to: transfer $460,000 from retained earnings to a general reserve propose a final dividend of 9c per share 1 On 20 July 2009 the government introduced new legislation in relation to employment contracts. Many of the company’s employees are on individual work contracts that have been negotiated with the company. The changes mean that the company will be required, from 1 September 2009, to increase payments to a number of its employees. It is expected that these changes will increase wages and salaries costs by 25%. 2 The company has been involved in a lengthy legal dispute with one of its customers who are claiming that a defect in their product caused them physical injury in May 2008. The company lawyers had previously advised that there was a 60% chance that the company would be found liable and required to pay damages. As a result in the year ending 30 June 2008 the company recognized a provision and related expense for $1,200,000 The case was decided in a court hearing in June 2009. The court found the company not liable and so the company is not required to pay any amounts to this customer. 3 The company has entered into a contract with Stewie Ltd, Bryan Ltd and Peter Ltd. Ltd on 1 June 2009 to build a new head office building on some land that the company already owns. Construction is expected to begin in August 2009. The total amount payable is $5,000,000 with $2,000,000 payable on 1 December 2009 and the final payment of $3,000,000 payable on 1 December 2010 when the building is expected to be completed. 4 The company tax rate is 30%. Ignore tax-effect accounting. Tax expense should be based on 30% of the accounting profit before tax. No tax expense has yet been recorded. On the 1 July 20X5, Stewie Ltd acquired 100% of the share-holding in Bryan Ltd and at the same time acquired 100% of the share-holding in Peter Ltd. All of the identifiable net assets of Bryan Ltd were valued at their fair value except for the following assets: Carrying Amount Fair Value Plant $10,000 $8,000 Land $60,000 $80,000 Inventory $9,000 $12,000 The plant has a remaining useful life of 10 years from which depreciation will be charged accordingly. The inventory was sold during the period ended 30 June 20X8. Equity in Bryan Ltd at the time of acquisition was: Share Capital $100,000 Retained Earnings $11,000 General Reserve $3,000 Shares in Bryan Ltd were purchased by Stewie Ltd cum div and at the time of the acquisition Bryan Ltd had a liability for dividends payable of $5,000. Assets, where possible, are revalued to their fair values on consolidation. All assets of Peter Ltd were recorded at fair value at the time of acquisition by Stewie Ltd. It has always been a policy of the management of Peter Ltd to ensure that assets are recorded at fair value. Goodwill of $10,000 was recorded in the books of Peter Ltd at the time of the acquisition. Equity in Peter Ltd at the time of acquisition was: Share Capital $80,000 Retained Earnings $10,000 General Reserve $5,000 Income and Expenditure Statement (For the Year Ended ....) Income Expenditure Sales Materials consumed Other Income + Excise Duty Total + Manufacturing Expenses + Other Factory Expenses Like Factor) Wages Total Factory Cost Sales - Factory Cost = Gross Operating Profit Gross Operating Profit Salaries & Wages of Staff + Administrative Expenses + Selling and Distribution Expenses Total Non-Factory Cost or Selling Expenses Gross Operating Profit - Non-Factory Costs = Earnings Before Interest, Depreciation and Taxes (EBIDT) = Gross Profit Gross Profits (EBIDT) = Profits after meeting Factory Cost and Non-Factory Expenses Net Profit (PAT) = EBIDT - Interest, Depreciation and Taxes. On June 30 of every year Peter Ltd declares a 5% dividend. Dividends are allocated from profits of Peter Ltd on a First In First Out basis. Bryan Ltd paid an equivalent dividend on June 30, 20X6 & X7. The dividend paid in 20X6 was from pre-acquisition profits whilst the 20X7 dividend was not. Inter-company sales for the current period included: Seller Purchaser Amount Stewie Bryan $15,000 Bryan Stewie $20,000 Bryan Peter $5,000 Peter Bryan $10,000 All sales of stock are sold at a 40% mark up on cost to seller. Inventory of Stewie Ltd on hand 1 July 20X8 to the value of $10,000 had been sold by Bryan Ltd the previous period. Half of this stock was still on hand at 30 June 20X9. . The following amounts represent unsold stock as at 30 June 20X9 arising from all current period inter-company transfers. Sold by Stewie Sold by Bryan Sold by Peter Closing stock of Stewie $14,000 Closing stock of Bryan $10,000 $5,000 Closing stock of Peter $2,000 It was also learned that Stewie Ltd had sold to Bryan Ltd an item from its inventory for $5,000 on 1 January 20X7. Bryan Ltd had treated this item as an addition to its plant and machinery and depreciated it at 20% pa on cost. The item originally cost Stewie Ltd $4,000 and was subsequently sold by Bryan Ltd to an outside party on 30 June 20X9 for $4,500. On 1 July 20X6, Bryan Ltd sold an item of plant to Peter Ltd for $7,000. The carrying amount at the time of sale was $5,500. Peter Ltd intends to use the asset evenly over its expected useful life of 10 years and charges depreciation accordingly. Bryan had 5 years remaining in which to depreciate the plant at the time of sale. On 1 July 20X5, Bryan Ltd had sold an item of plant to Stewie Ltd for $10,000. Bryan had purchased this item of plant 3 years earlier prior to the sale and had been depreciating it at the rate of 10% pa on cost. Accumulated depreciation on the plant at the time of sale was $6,000. Stewie Ltd purchased the plant with the intention of using it for a further 5 years. Management and consulting fees charged for the group are as follows: Fees charged by Fees charged to Bryan Peter Stewie $10,000 $2,000 Bryan nil $5,000 Ratio analysis is a quick and easy way to analyze different companies’ financial performance. Ratio analysis can be used to look into group performance and market trends. There are many users of financial statements and for each one of them there is a different area of performance in a company they are interested in. The dividend cover ratio indicates the proportion of available profit which is distributed by the organization. As the dividend cover has increased, this shows that the company can easily afford to pay the dividend. The earnings per share are concerned with the profit available to ordinary shareholders after tax and extraordinary items. It tells an investor how much profit each share has earned during an accounting period. From this ratio, we see that there is an improvement in the profit performance in shareholders. (DRUCKER F. 2003. Management challenges for the 21st century. Oxford: Butterworth-Heinemann.) Performance of the company As far a the performance of the company is concerned, both of them show equal status and performance appraisal level regarding the sales, turn over, customer satisfaction. Chairman’s Statement regarding the financial performance Weighing the Pros and CONS of the analysis, PMI method can be used very effectively. By this stage it may already be obvious whether or not should implement the decision. If it is not, consider each of the points written down and assign a positive or negative score to it appropriately. The scores assign may be quite subjective. Chief Executive’s Report regarding sales According to the Chief Executive’s Report regarding sales, Growth firms provide value for money to their customers. They provide so much value to the customers compared to the cost involved that the customers are promoted to buy the product or service repeatedly and/or in larger quantities. For instance, here the 2 companies started and grew very fast to become the largest retailers in the city mainly because they always provided very high quality products to customers. They always wanted such products and were willing to pay a little more for better quality products. This new entrepreneurship was tried first to notice this as an opportunity and exploit it. What they did was to give value for money to his customers. It is not the absolute amount or money, but the value relation to the price they pay that matters. This is applicable both to manufacturing and service sectors. There is , a significant number of the urban customers are not happy with many of the things they buy or the service they get. They are willing to pay a little more, if the product or service is worth it. Growth entrepreneurs keep exploiting such opportunities. Here we can see the sales of the two companies in the previous years. Year Sales in Stewie Ltd Sales in Bryan Ltd Peter Ltd. 1991 507 10156 10663 1992 1807 10741 12548 1993 2832 11715 14547 1994 4158 13271 17429 1995 5603 14031 19634 1996 6944 15052 21996 1997 7502 15355 22857 1998 9158 16727 25885 1999 10555 17169 27724 2000 11852 17610 29462 2001 11850 17479 29329 2002 14029 18718 32747 2003 15525 19136 34661 2004 16863 19425 36288 2005 16982 18253 35235 2006 19491 19160 38651 2007 20238 19182 39420 Growth of an entrepreneur depends on the satisfaction and growth of his customers. This is especially so in intermediate products or services. Similarly, here these textile processing entrepreneurs built up their customer base by giving useful suggestions to them on color and shade combinations for fabrics. All these helped them to boost u other sales figures up. Directors’ Report regarding physical performance As clear from the definition, both these firms mainly focused on the eight elements or variables. Here they have, the class of product clearly defined. Then there are various sizes and other features in each class. Opportunities available to the manufacturer differ according to the exact nature and specifications of the product. All these are well attracted to the customers. Total volume: Both these firms have the question of how total volume is measured. It can be measured in terms of physical volume (i.e. in terms of units sold), in monetary terms, or both. It can also be measured in terms of per cent of total market, i.e., in relative terms. As an illustration, a demand analysis for textiles may reveal that in one particular region, the number of clothes sold is 1000, valued at 50,000pounds. In another region, the number may be 750, valued at 150,000 pounds. It is evident that depending upon our requirement; the data on total volume must be in appropriate units. Bought: They have assessed the volume ordered or booked, despatched, paid for, received, or consumed. The figures may vary according to the basis used .Here the sales in the previous years were well structured and relatively very encouraging. (CUSUMANO MA & MARKIDES CC 2001. Strategic thinking for the next economy. San Francisco: Jossey-Bas) Audit Report As per the audit of the Profit and Loss Account and also the Cash Flow Statement for the year ended it is very crystal clear to analyses the performance level of both the companies. After evaluating the overall financial statement presentation, the audit includes assessing the accounting principles used and significant estimates made by management as well. The audit report says that it appears from examination of those books the companies are maintaining proper books of account as required by law. The auditors certify that the report is dealing with the Profit and Loss Account, Balance Sheet, and Cash Flow Statement are correct. The books dealt with by this report are in agreement with the books of account. CONCLUSION To summarize, there was slight decrease over the past two years in gross margin and net profit margin. This means that these 2 companies had competition with others retail sectors which affected their sales. Moreover, the return on capital employed and return on shareholders’ equity have been increased. This shows the success of the company in using the funds to provide new health by shareholders to generate profit. According to the financial annual report the administrative and distribution expenses have increased so it will cause the operating profit to fall. This is one of the problems that may affect their profit. Furthermore, the efficiency ratio reveals that there is a problem on the repayment of credits; the ratio should not be more than 30 days in both these firms.. This is again due to a heavy cost of goods in both years. As far as the debtors’ collection is concern, the ratio reveals that there was no improvement of control in their debtors. Therefore, the company will take longer in receiving their money from debtors. On the other hand, there was decrease in stock turnover; goods have been sold more quickly. As a result, it will help them to prevent liquidity problems. In the same way, Interest cover is both very high in 2007 and 2008. The operating profit covered the interest 24.31 times and 21.8 times in 2008. These figures mean that the company had no problems in paying the interest obligation. It is one of the advantages that helped these two companies to improve their profit. Last but not least, the investment ratio helps investors to look into the company’s performance via to look at the dividend, price earnings ratio and the earning per share. Therefore, this ratio is a main important ratio to help investor to decide on how to make an investment. There has been an increase in earnings per share. It is a great advantage for the company’s performance because it will tell us that the company has improved their profit, therefore investors can earn more money. RECOMMENDATIONS According to the details, we can see that these three firms had improved their performance over the period of ten years. We believe that they will get better in the future. For example, the revenue over the 10 year period shows that they have increased each year. This is an important factor, as it shows that they are making a profit. On the other hand, there is some disadvantage that we will recommend: As we analyzed the liquidity ratio above, both have a problem with increasing their debtor over the two year previous. Therefore, they need to improve their liquidity position by controlling their debtor. The efficiency ratio reveals that there is a problem on the repayment of credits; the ratio should not be more than 30 days. This is again due to a heavy cost of goods in both years. There is an operating risk that exists, where there is factor which could cause sales to fluctuate. However, I think that both these companies do have a great performance that shows the profit increasing in year to year. This is a benefit which attracts more investors who decides to make an investment. References 1. (Biz/ed (2008), Financial Ratio Analysis [www] Available from: http://www.bized.co.uk/compfact/ratios/index.html [Accessed: 30April 2008) 2. (DRUCKER F. 2003. Management challenges for the 21st century. Oxford: Butterworth-Heinemann.) 3. (CUSUMANO MA & MARKIDES CC 2001. Strategic thinking for the next 4. Economy San Francisco: Jossey-Bas) 5. Droms, W., & Walker, D. A. (2001). Persistence of fund operating characteristics: Returns, turnover rates, and expense ratios. Applied Financial Economics, 11, 457-466. 6. Golec, J. (2003). Regulation and the rise in asset-based fund management fees. Journal of Financial Research, 26, 19-30. 7. Latzko, D. A. (1999). Economies of scale in the fund industry, Journal of Financial Research, 22, 331-340. 8. World Bank and International Monetary Fund (2001) Guidelines for Public Fund Management. 9. World Bank and International Monetary Fund (2002) Accompanying Document to the Guidelines for Public Fund Management: A Book of Case Studies. 10. World Bank (2007) Managing Public Debt: From Diagnostics to Reform Implementation. 11. Barro, Robert (1999) "Notes on Optimal Fund Management", Harvard University, May. 12. Calvo, Guillermo and Mervyn King (Eds.) (1998) "The Fund and its Consequences for Monetary Policy", IEA Conference Proceedings, St Martins Press. 13. Chrystal, K. Alec (Ed.) (1999) Government Fund Structure and Monetary Conditions, A Conference Organized by the Bank of England, June 18-19, 1998. 14. Missale, Alessandro (2000) Corporate Fund Management. Oxford: Oxford University Press. APPENDIX Ten year History     1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Revenue £m 1,177 1,239 1,425 1,588 1,872 2,203 2,516 2,858 3,106 3,284 Profit before tax £m 184 167 195 218 266 301 358 424 449 478 Taxation £m (47) (43) (55) (61) (76) (91) (108) (119) (136) (147) Profit after tax £m 137 124 140 157 190 210 250 305 313 331 Shareholders’ funds £m 490 543 607 500 547 275 155 276 256 189 Earnings per share pence 36.9 33.9 38.4 46.8 58.1 68.7 93.9 120.2 127.4 146.1 Dividends pence 18.0 19.1 21.0 24.0 27.5 31.0 35.0 41.0 44.0 49.0 Share price pence 733 638 491 778 949 760 1,292 1,592 1,698 1,946 Shares in issue millions 374 374 374 337 331 287 265 261 246 227 Shares repurchased millions - - - (37) (6) (44) (22) (4) (15) (19) Cost of shares repurchased £m - - - (192) (54) (392) (209) (57) (218) (316) Market capitalization £m 2,746 2,391 1,840 2,622 3,138 2,179 3,425 4,157 4,179 4,418 Read More