J Plc is a medium-sized company producing a range of toys which it sells to wholesale distributors. Recently, its sales have begun to rise rapidly following a general recovery in the economy as a whole. The following information was extracted from the accounts of J Plc at the 31st January 2007
J Plc
Profit and Loss Account
For the year ended d=31/01/2007
2007
£
Turnover 7,172,160
Cost of sales -5,095,820
Gross profit 2,076,340
Administrative and distribution expenses -1,424,490
Other income 0
Operating profit 651,850
Income from fixed assets investments 0
Other interest receivable and similar income 0
Profit on ordinary activities before interests and tax 651,850
Interest payable 0
Profit on ordinary activities before tax 651,850
Taxation -195,000
Profit on ordinary activities after tax 456,850
Dividends -50,000
Retained profit for the year 406,850
Retained profit brought forward 1,614,790
P&L reserve carried forward 2,021,640
J Plc
Balancesheet
As at 31/01/2007
£ £
Fixed assets
Machinery 358,660
Premises 1,273,900
Investments 0
Current assets
Stocks 423,700
Debtors and prepayments 820,260
Short-term investment 0
Cash at bank and in hand 132,220
1,376,180
Creditors (amount falling due within one year) -637,100
Net current assets 739,080
Creditors (amount falling due after one year) -150,000
2,221,640
Capital and reserves
Issued share capital 200,000
Share premium account 0
Revaluation reserve 0
Other reserves 0
Profit and loss account 2,021,640
2,021,640
Shareholders funds 2,221,640
• Additional information:
Face value per share = £1
Market value per share on 31 January 2007= £2.20
Number of share outstanding on 31 January 2007 = 200,000 shares
Requirement 1:
1.1 Identify the main financial statements and explain their purpose. [Pass-P11]
1.2 Describe the differences between the formats of financial statements for different types of business. Comment on the format of J Plc’s profit and loss account and balance sheet. [Pass-P12]
1.3 Calculate eight ratios that will help in assessing the profitability, liquidity, efficiency and investment ratios of J Plc. [Pass-P13]
1.4 In question 1.3, analyse the results of ratios and draw valid conclusions. [Merit-M2]
1.5 In question 1.4, critically evaluate the availability of information that facilitates the calculation of ratios. [Distinction-D1]
Requirement 2:
J Plc is considering investing £1m in a new project to manufacture and sell a brand new toy. The following estimates have been made:
Sales (number of units) 50,000 in the first year, rising by 10,000 units per annum
Life of project 4 years
Unit information: £
Price 25
Material cost 10
Labour and variable overheads 8
In addition, fixed overheads relating to the project are expected to be £90,000 per annum. The investment is expected to have no residual value.
2.1 Calculate the NPV (assuming a cost of capital of 8%.), IRR, Payback period, ARR of the project [Pass-P10]
2.2 Advise either to accept or reject the project based on your findings in requirement 2.1. [Merit-M3]
Requirement 3:
“The methods used to raise long term finance have implications for the capital gearing of a company and the returns to equity holders.”
3.1 Identify the sources of finance available to a business [Pass-P1]
3.2 Assess the implications regarding tax effect, ownership and control of the different sources [Pass-P2]
3.3 Assess and compare the costs of different sources of finance [Pass-P4]
3.4 Describe the impact of finance on the financial statements [Pass-P7]
3.5 Suggest the best method of raising £1 million for the above project. [Pass-P3]
3.6 Critically explain why you have selected the method (or combination of methods) in question 3.5. [Merit-M1]
3.7 Apply creative thinking to assess the implications/limitations/impacts of the selection you have made in requirement 3.6 [Distinction-D3]
Requirement 4:
4.1 Explain the importance of financial planning. [Pass-P5]
4.2 Describe the information needs of different decision makers [Pass-P6]
Based on the information provided under the requirement 2,
4.3 Calculate unit costs of making a toy and identify the profitability margin for each toy. [Pass-P9]
4.4 Do you think it is possible to prepare a cash budget for the new project to manufacture a brand new toy? Explain why. [Pass-P8]
Requirement 5:
You must produce a business report to the managing director of J Plc incorporating all the above requirements. Your report must contain the following chapter:
• Introduction,
• Findings and analysis
• Conclusions and recommendations
To complete this task, you will need to analyze the financial statements provided and perform calculations using the given financial data. Here's a breakdown of the steps you can take to address each requirement:
Requirement 1:
1.1. The main financial statements are the Profit and Loss Account and the Balance Sheet. The purpose of the Profit and Loss Account is to show the company's revenue, expenses, and profit for a specific period. The Balance Sheet provides a snapshot of the company's assets, liabilities, and equity at a specific point in time.
1.2. Different types of businesses may have different formats for financial statements, but they generally follow the same structure. In the case of J Plc, the format of the Profit and Loss Account and Balance Sheet appears to be standard.
1.3. Calculate eight ratios that will help assess profitability, liquidity, efficiency, and investment ratios. Examples of ratios you can calculate include gross profit margin, return on assets, current ratio, and debt-to-equity ratio.
1.4. Analyze the results of the ratios calculated and draw valid conclusions. For example, if the gross profit margin is increasing over time, it indicates improved profitability.
1.5. Critically evaluate the availability of information that facilitates the calculation of ratios. Consider whether all the necessary information is provided or if additional data is required to calculate certain ratios.
Requirement 2:
2.1. Using the given estimates, calculate the Net Present Value (NPV), Internal Rate of Return (IRR), Payback period, and Average Rate of Return (ARR) of the new project. You will need to use the cost of capital (8%) to calculate the NPV.
2.2. Based on your findings in requirement 2.1, advise whether to accept or reject the project. Consider factors such as positive NPV, IRR above the cost of capital, shorter payback period, and favorable ARR.
Requirement 3:
3.1. Identify different sources of finance available to a business, such as equity financing, debt financing, and internal financing.
3.2. Assess the implications regarding tax effect, ownership, and control of different sources of finance.
3.3. Assess and compare the costs of different sources of finance, including interest rates, dividend payments, and other associated costs.
3.4. Describe the impact of finance on the financial statements, such as debt affecting the debt-to-equity ratio or interest payments affecting the profitability.
3.5. Suggest the best method of raising £1 million for the new project and justify your selection.
3.6. Provide a critical explanation of why you have selected the method (or combination of methods) in question 3.5.
3.7. Apply creative thinking to assess the implications, limitations, and impacts of the selection made in requirement 3.6.
Requirement 4:
4.1. Explain the importance of financial planning, such as setting goals, managing cash flow, and making informed decisions.
4.2. Describe the information needs of different decision-makers, such as shareholders, managers, and creditors.
4.3. Calculate the unit costs of making a toy and identify the profitability margin for each toy using the given unit price, material cost, labor, and overheads.
4.4. Discuss whether it is possible to prepare a cash budget for the new project to manufacture a brand new toy and explain why or why not.
Requirement 5:
Prepare a business report to the managing director of J Plc incorporating all the above requirements. The report should include an introduction, findings and analysis section, and conclusions and recommendations section.
Please note that this breakdown provides a general guideline for addressing each requirement. It is important to carefully review the provided information and adapt the steps according to the specific details and calculations required for each question.