Section C

234 Bengal (6/11 amended) 39 mins

Bengal is a public company. Its most recent financial statements are shown below:
STATEMENTS OF PROFIT OR LOSS FOR THE YEAR ENDED 31 MARCH
20X1 20X0
$'000 $'000
Revenue 25,500 17,250
Cost of sales (14,800) (10,350)
Gross profit 10,700 6,900
Distribution costs (2,700) (1,850)
Administrative expenses (2,100) (1,450)
Finance costs (650) (100)
Profit before taxation 5,250 3,500
Income tax expense (2,250) (1,000)
Profit for the year 3,000 2,500

STATEMENTS OF FINANCIAL POSITION AS AT 31 MARCH

20X1 20X0
$'000 $'000 $'000 $'000
Non-current assets
Property, plant and equipment 9,500 5,400
Intangibles 6,200 nil
15,700 5,400
Current assets
Inventory 3,600 1,800
Trade receivables 2,400 1,400
Bank nil 4,000
Non-current assets held for sale 2,000 8,000 nil 7,200
Total assets 23,700 12,600
Equity and liabilities
Equity
Equity shares of $1 each 5,000 5,000
Retained earnings 4,500 2,250
9,500 7,250
Non-current liabilities
5% loan notes 2,000 2,000
8% loan notes 7,000 nil
Current liabilities
Bank overdraft 200 nil
Trade payables 2,800 2,150
Current tax payable 2,200 5,200 1,200 3,350
Total equity and liabilities 23,700 12,600

Questions 75
 Additional information:
(i) There were no disposals of non-current assets during the period; however Bengal does have some non-
current assets classified as 'held for sale' at 31 March 20X1.
(ii) Depreciation of property, plant and equipment for the year ended 31 March 20X1 was $640,000.
A disappointed shareholder has observed that although revenue during the year has increased by 48%
(8,250 / 17,250 × 100), profit for the year has only increased by 20% (500 / 2,500 × 100).
Required

(a) Comment on the performance (including addressing the shareholder's observation) and financial position of
Bengal for the year ended 31 March 20X1. Up to five marks are available for the calculation of appropriate
ratios. (15 marks)
(b) Explain the limitations of ratio analysis. (5 marks)

(20 marks)

235 Woodbank (6/14 amended) 39 mins

Shown below are the financial statements of Woodbank for its most recent two years:
STATEMENTS OF PROFIT OR LOSS FOR THE YEAR ENDED 31 MARCH:
20X4 20X3
$'000 $'000
Revenue 150,000 110,000
Cost of sales 117,000 (85,800)
Gross profit 33,000 24,200
Distribution costs (6,000) (5,000)
Administrative expenses (9,000) (9,200)
Finance costs – loan note interest (1,750) (500)
Profit before tax 16,250 9,500
Income tax expense (5,750) (3,000)
Profit for the year 10,500 6,500

STATEMENTS OF FINANCIAL POSITION AS AT 31 MARCH

20X4 20X3
$'000 $'000
ASSETS
Non-current assets
Property, plant and equipment 118,000 85,000
Goodwill 30,000 -
148,000 85,000
Current assets
Inventory 15,500 12,000
Trade receivables 11,000 8,000
Bank 500 5,000
27,000 25,000
Total assets 175,000 110,000

76 Questions
EQUITY AND LIABILITIES
Equity
Equity shares of $1 each 80,000 80,000
Retained earnings 15,000 10,000
95,000 90,000
Non-current liabilities
10% loan notes 55,000 5,000
Current liabilities
Trade payables 21,000 13,000
Current tax payable 4,000 2,000
25,000 15,000
Total equity and liabilities 175,000 110,000

The following information is available:

(i) On 1 January 20X4, Woodbank purchased the trading assets and operations of Shaw for $50 million and, on
the same date, issued additional 10% loan notes to finance the purchase. Shaw was an unincorporated entity
and its results (for three months from 1 January 20X4 to 31 March 20X4) and net assets (including goodwill
not subject to any impairment) are included in Woodbank's financial statements for the year ended 31 March
20X4. There were no other purchases or sales of non-current assets during the year ended 31 March 20X4.
(ii) Extracts of the results (for three months) of the previously separate business of Shaw, which are included in
Woodbank's statement of profit or loss for the year ended 31 March 20X4, are:
$'000
Revenue 30,000
Cost of sales (21,000)
Gross profit 9,000
Distribution costs (2,000)
Administrative expenses (2,000)

(iii) The following six ratios have been correctly calculated for Woodbank for the years ended 31 March:
20X3
Return on capital employed (ROCE) 10.5%
(profit before interest and tax/year-end total assets less current liabilities)
Net asset (equal to capital employed) turnover 1.16 times
Gross profit margin 22%
Profit before interest and tax margin 9.1%
Current ratio 1.7:1
Gearing (debt/(debt + equity)) 5.3%

Required
(a) Calculate the ratios in (iii) above for Woodbank for the year ended 31 March 20X4. (5 marks)
(b) Calculate for the year ended 31 March 20X4 equivalent ratios to the first FOUR only for Woodbank excluding
the effects of the purchase of Shaw. (4 marks)
(c) Assess the comparative financial performance and position of Woodbank for the year ended 31 March 20X4.
Your answer should refer to the effects of the purchase of Shaw. (11 marks)

(20 marks)

Questions 77
 236 Greenwood 39 mins
Greenwood is a public listed company. On 31 March 20X7 Greenwood sold its 80% -owned subsidiary – Deadwood -
for $6 million. The directors have been advised that the disposal qualifies as a discontinued operation and it has been
accounted for accordingly. The disposal proceeds were not collected until after the year end.
Extracts from Greenwood's financial statements are set out below.
CONSOLIDATED STATEMENTS OF PROFIT OR LOSS FOR THE YEAR ENDED 31 MARCH
20X7 20X6
$'000 $'000
Revenue 27,500 21,200
Cost of sales (19,500) (15,000)
Gross profit 8,000 6,200
Operating expenses (2,900) (2,450)
5,100 3,750
Finance costs (600) (250)
Profit before taxation 4,500 3,500
Income tax expense (1,000) (800)
Profit for the year from continuing operations 3,500 2,700
Profit/(loss) from discontinued operations (1,500) 320
Profit for the year 2,000 3,020
Profit attributable to:
Owners of Greenwood 2,300 2,956
Non-controlling interest (300) 64
2,000 3,020

Analysis of discontinued operation:

Revenue 7,500 9,000
Cost of sales (8,500) (8,000)
Gross profit/(loss) (1,000) 1,000
Operating expenses (400) (550)
Profit/(loss) before tax (1,400) 450
Tax (expense)/relief 300 (130)
(1,100) 320
Loss on measurement to fair value of disposal group (500) –
Tax relief on disposal group 100 –
Profit/(loss) from discontinued operations (1,500) 320

STATEMENTS OF FINANCIAL POSITION AS AT 31 MARCH

20X7 20X6
$'000 $'000 $'000 $'000
Property, plant and equipment 17,500 17,600
Goodwill 1,500
Current assets
Inventory 1,500 1,350
Trade receivables 2,000 2,300
Due on sale of subsidiary 6,000 nil
Bank nil 9,500 50 3,700
Total assets 27,000 22,800

78 Questions
 20X7 20X6
$'000 $'000 $'000 $'000
Equity and liabilities
Equity shares of $1 each 10,000 10,000
Retained earnings 4,500 2,750
14,500 12,750
Non-controlling interest 1,250
14,000
Non-current liabilities
5% loan notes 8,000 5,000
Current liabilities
Bank overdraft 1,150 nil
Trade payables 2,400 2,800
Current tax payable 950 4,500 1,000 3,800
Total equity and liabilities 27,000 22,800

Note: the carrying amount of the assets of Deadwood at 31 March 20X6 was $6·25 million. Greenwood measures
non-controlling interest at share of net assets.
Required

Analyse the financial performance and position of Greenwood for the two years ended 31 March 20X7. (Ignore
working capital and gearing).
Note: Your analysis should be supported by appropriate ratios (up to 6 marks available) and refer to the effects of the
disposal. (20 marks)

MCQ bank – limitations of financial statements and

interpretation techniques
237 An entity carries its property at revalued amount. Property values have fallen during the current period and an
impairment loss has been recognised on the property, however its carrying amount is still higher than its
depreciated historical cost.
What is the effect of the impairment on these ratios?
ROCE Gearing
A Decrease Decrease
B Decrease Increase
C Increase Decrease
D Increase Increase (2 marks)

238 A company has a current ratio of 1.5, a quick ratio of 0.4 and a positive cash balance. If it purchases
inventory on credit, what is the effect on these ratios?
Current ratio Quick ratio
A Decrease Decrease
B Decrease Increase
C Increase Decrease
D Increase Increase (2 marks)

Questions 79