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Financial Performance of a Business

Be able to evaluate the financial performance of a business 1 Discuss the main financial statements 2 Compare appropriate formats of financial statements for different types of business and AC 4.3 Interpret financial statements using appropriate ratios and comparisons, both internal and external. Note: This part consists of two case studies CASE STUDY 1: R Riggs and J & B Associates R Riggs and J & B Associates are two retailers in the fashion industry whose final drafts of financial statements are represented below. (a) What type of business are R Riggs and J & B Associates operating (e.g. Limited Liability Company, etc)? For each business, justify your answer by identifying at least 3 factors that motivated your choice. (b) Which business appears to be the most profitable? Justify your answer. (c) Which business appears to be less liquid? Justify your answer. R Riggs Profit and Loss Account for the year ended 28 February 2007 œ œ Sales 157,165 Less Cost of goods sold: Opening stock 4,120 Add Purchases 92,800 96,920 Less Closing stock 2,400 94,520 Gross profit 62,645 Add discounts received 160 62,805 Less Expenses: Wages and salaries 31,740 Rent 3,170 Discounts allowed 820 Van running costs 687 Bad debts 730 Doubtful debt provision 91 Depreciation 1,630 38,868 Net Profit 23,937 J & B Associates Profit and Loss Account for the year ended 30 March 2007 œ œ Sales 363,111 Less Cost of goods sold: Opening stock 62,740 Add purchases 210,000 272,740 Less closing stock 74,710 198,530 Gross profit 164,581 Add Reduction in provision for doubtful debt 150 164,731 Less Expenses: Salaries 58,529 Office expenses 4,975 Carriage outwards 3,410 Discounts allowed 620 Bad debts 1,632 Loan interest 3,900 Depreciation 5,600 78,666 Net Profit 86,065 Add Interest on drawings: J 900 B 600 1,500 87,565 Less Interest on capital: J 5,000 B 3,750 8,750 Salary: J 30,000 38,750 48,815 Shared: J 29,289 B 19,526 48,815 ÿ R Riggs Balance Sheet as at 28 February 2007 œ œ œ Fixed assets Office furniture 2,900 Less depreciation 380 2,520 Delivery van 3,750 Less depreciation 1,250 2,500 5,020 Current Assets Stock 2,400 Debtors 12,316 Less provision for doubtful debts 496 11,820 Prepaid expenses 230 Cash at bank 4,100 Cash in hand 324 18,874 Less current liabilities Creditors 5,245 Expenses owing 412 5,657 Net current assets 13,217 Net assets 18,237 Financed by Capital Opening balance 11,400 Add net profit 23,937 35,337 Less drawings 17,100 18,237 J & B Associates Balance Sheet as at 30 March 2007 œ œ œ Fixed assets Buildings 155,000 Fixtures 3,400 158,400 Current assets Debtors 60,150 Stock 74,210 Bank 6,130 140,490 Current liabilities Creditors 26,590 Accruals 935 27,525 Net current assets 112,965 271,365 Less loan from P Prince 65,000 Net assets 206,365 Financed by Capital accounts: J 100,000 B 75,000 175,000 Current accounts: J B Opening balance 4,100 1,200 Add Interest on capital 5,000 3,750 Salary 30,000 Balance of profit 29,289 19,526 68,389 24,476 Less drawings 31,800 28,200 Interest on drawings 900 600 35,689 (4,324) 31,365 206,365 CASE STUDY 2: Staton plc. david has œ40 000 to invest and is considering buying some ordinary shares in Staton plc. The current market price of the ordinary shares is 80p. The following information has been extracted from the published accounts of Staton plc. for the year ended 30 April 2008. œ Operating profit for the year 1,144,000 Interest payable 394,000 Net profit for the year 750,000 Total dividends for the year 200,000 Fixed assets: net book value 13,800,000 Stock 478,600 Other current assets 597,680 Creditors: amount falling due within one year 1,187,600 Creditors: amounts falling due after more than one year 7,880,000 Issued ordinary shares of œ1 each fully paid 5,000,000 Reserves 808,680 Additional information: The following ratios relate to Staton plc for the year ended 30 April 2007. Gearing 68.65% Earnings per share 12p Dividend per share 3.75p Dividend yield 6.25% Dividend cover 3.2 times Price/earnings ratio 5 (a) You are required to calculate the following ratios for the year ended 30 April 2008. State the formulae used. (i) Gearing (ii) Earnings per share (EPS) (iii) Dividend per share (iv) Dividend yield (v) Dividend cover (vi) Price/earnings ratio (b) Write a report to Jane advising, with reasons, whether or not she should invest in Staton plc

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