Keele PLC Balance Sheet and Income Statement - Report Example

FINANCIAL AND MANAGEMENT ACCOUNTING ASSIGNMENT Name: Instructor: Institution: City: Date: QUESTION ONE Keele PLC Balance Sheet as at 31 Dec, 2012 and 31 Dec, 2013 Noncurrent assets 2012 2013 (2013-2012) Fixed assets, cost 30,000 35,000 5,000 Less depreciation 3,000 3,500 500 Fixed assets, net 27,000 31,500 4,500 Current assets Inventories 5,000 4,000 (1,000) Trade receivables 13,000 15,000 2,000 Cash and cash equiv. 5,000 4,346 (654) 23,000 23,346 Total assets 50,000 54,846 Current liabilities Trade payables 2,544 3,790 1,246 Taxes 500 300 (200) 3,044 4,090 Noncurrent liabilities Long-term loans 2,500 4,800 2,300 Total liabilities 5,544 8,890 Equity Ordinary Shares 34,000 34,300 300 Share premium 500 600 100 Retained earnings 9,956 11,056 1,100 44,456 45,956 1,500 Total liab. and equity 50,000 54,846 0 0 0 Keele PLC Income statement for the year ended 31/12/2013 Sales 32,120 Cost of sales 26,000 Gross profit 6,120 Operating expenses 3,200 Operating profit 2,920 Interest expense 810 Income before taxes 2,110 Taxes payable 910 Net profit 1,200 Plus beg retained earnings 9,956 Less dividends (100) Ending retained earnings 11,056 Keele PLC Cash Flow Statement for the Year ended 31st Dec, 2013 Cash flows from operating activities Notes Operating profit 2,920 Plus depreciation 500 Minus increase in inventories 1,000 Plus decrease in trade receivables (2,000) Minus decrease in trade payables 1,256 Cash generated from operations 3,676 Taxation paid (1,110) Net cash from operating activities 2,566 Cash flows from financing activities Proceeds from long-term borrowing 2,300 Share issue 400 Dividends paid 100 Net cash used in financing activities 2,800 Net increase in cash and cash equivalents 654 Cash and cash equivalents at 1/1/13 5,000 Cash and cash equivalents at 31/12/13 4,346 QUESTION TWO Ratios: 2012 2013 Profitability Ratios: Return on shareholder’s equity Return on capital employed Operating profit margin Gross profit margin Total assets usage Liquidity Ratios: Current Ratio Acid Test Efficiency Ratios: Inventories turnover period Average settlement period for trade receivables Average settlement period for trade payables Working capital cycle Gearing Ratios: Debt/ Equity Ratio Interest Cover QUESTION THREE The Return on Shareholder’s Equity is usually compared against the previous values of the same parameter for the same company. In the case of Keele PLC, the Return on Shareholder’s Equity for 2012 was 11.13% against the current year of 2013 of 3.44%. This can be interpreted to mean that in 2012, it was a lot easier for Keele PLC to start a similar business all parameters remaining constant than it is now. The higher the Return on Shareholder’s Equity, the lower the amount of capital invested. The figures (11.13% and 3.44%) may also mean that the company still needs quite some injection of both capital as well as infrastructure for it to gain more profitability and revenue. In the simplest terms, Return on Capital Employed is usually used to provide an understanding of the extent to which a given company is able to make profits arising from the capital it employed into the firm. This is done by making a comparison of net operating profit against the capital employed. In Keele PLC’s case, its values for this in 2012 and 2013 were 11.29% and 5.75% respectively. This drop in this value can be interpreted to mean that Keele PLC’s ability to make profits from the employed capital has significantly reduced. It is advisable, therefore, that the firm maintains a lower asset level for it to achieve a higher Return on Employed Capital. The firm’s Operating Profit Margin has seemingly reduced from 17.32% to 9.09%. It is favorable for a company to have a higher Operating Profit Margin since this shows that the company is making enough profits arising from its operations in the current times. Keele PLC should therefore look for ways of improving their profitability. Gross Profit margins for Keele in 2012 and 2013 were 24.84% and 19.05% respectively. The lower Gross Profit Margin in 2013 is an indication that the firm’s ability to make profits from the sale of its inventory is significantly reduced. The firm should, therefore, look for better ways of paying its operating expenses such as salaries, etc. The Current Ratio has reduced from 7.56 in 2012 to 5.7 in 2013 indicating that the firm’s ability to pay for its current debts has reduced slightly in 2013. In this case, therefore, Keele would be advised to reduce its uptake of liabilities as opposed to assets. The Acid Test Ratio having reduced from 5.91 to 4.73 in 2013 is an indication that the firm’s ability to use the short term assets to meet its short term liabilities has reduced by a margin of 1.18. The firm should consider either lowering its short term liabilities or increasing its short term assets so as to reverse the situation. The Debt to Equity Ratio for the firm has increased from 16.07% to 25.47% in 2013. This shows that there was 16.07% as much liabilities as assets in 2012 while increasing to 25.47% as much liabilities as assets in 2013. The firm should then either reduce its liabilities or increase its assets. The Interest Cover reduced from 11.78% in 2012 to 3.60% in 2013 meaning a reduction in the firm’s ability to pay its interest expenses. The best thing, under these circumstances, for the firm to do is to borrow only to fund activities that are generally productive to the company. From the Cash Flow Statement for the Year Ended 31st December 2013, it can be seen that the Cash and Cash Equivalents as at 1st January 2013 was higher at £5000 million compared to £4346 million as at 31st December 2013. This is no different from the indications that the ratios calculated have made. They all point to the fact that Keele PLC is experiencing a continuous downward trend in as far as its profitability is concerned. Many of the figures in the Cash Flow Statement for the company in 2013 have insinuated that the firm’s liability status is extremely high. I would, therefore, be advisable for the company to consider going slow on its borrowing behavior unless it is absolutely necessary. Read More