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Drywall Ltd Drywall Ltd. is a new business that started trading on 1 January 2014

Part A – Drywall Ltd Drywall Ltd. is a new business that started trading on 1 January 2014. You have recently been appointed as an account manager within the accounting department and have been presented with the following summary of transactions that have occurred during the first year of trading:

1) The owners introduced £90,000 of equity, which was paid into a bank account opened in the name of the business. 2) Premises were rented from 1 January 2014 at an annual rate of £40,000. During the year, rent of £50,000 was paid to the owner of the premises. 3) Rates (a tax on business premises) were paid during the year as follows: For the period 1 January 2014 to 31 March 2014 £1,000 For the period 1 April 2014 to 31 March 2015 £1,800 4) A delivery van was bought on 1 January 2014 for £25,000. This is expected to be used in the business for four years and then to be sold for £5,000. 5) Wages totaling £46,000 were paid during the year. At the end of the year, the business owed £950 of wages for the last week of the year. 6) Electricity bills for the first three quarters of the year were paid totaling £2,200. After 31 December 2014, but before the financial statements had been finalized for the year, the bill for the last quarter arrived showing a charge of £700. 7) Inventories totaling £199,000 were bought on credit. 8) Inventories totaling £27,000 were bought for cash. 9) Sales revenue on credit totaled £267,000 (cost of sales £99,000). 10) Cash sales revenue totaled £56,000 (cost of sales £22,000). 11) Receipts from trade receivables totaled £177,000. 12) Payments to trade payables totaled £154,000. 13) Van running expenses paid totaled £14,000. At the end of the year it was clear that a credit customer (trade receivables) who owed £800 would not be able to pay any part of the debt. All of the other trade receivables were expected to settle in full. The business uses straight-line depreciation for non-current assets.

Required: Prepare a statement of financial position as at 31 December 2014 and an income statement for the year to that date. (20 marks)


Part B – Goldwing Ltd Goldwing Limited manufactures electrical components, which are sold to industrial users. The abbreviated financial statements for each of the last two years are as follows: Income Statement for the year ended 31 December 2014 2015 £000 £000 Revenue 1,490 1,550 Cost of sales (890) (990) Gross profit 600 560 Operating expenses (230) (258) Depreciation (76) (90) Operating profit 294 212 Interest (-) (13) Profit before taxation 294 199 Taxation (96) (54) Profit for the year 198 145 Statements of financial position as at 31 December 2014 2015 £000 £000 ASSETS Non-current assets Property, plant, and equipment 742 714 Current assets Inventories 149 266 Trade receivables 106 172 Cash 7 9 262 447 Total assets 1,004 1,161 EQUITY AND LIABILITIES Equity Ordinary Share Capital: (£1 shares fully paid) 500 500 Retained earnings 264 325 764 825 Non-current liabilities Borrowings – bank loan 0 70 Current liabilities Trade payables 70 88 Other payables and accruals 19 18 Taxation 48 27 Short-term borrowing (all overdraft) 103 133 240 266 Total equity and liabilities 1,004 1,161 Dividends were paid on ordinary shares of £80,000 and £84,000 in 2014 and 2015, respectively. Required: a. Calculate the following financial ratios for both years (using year-end figures for statement of financial position items): i. Return on capital employed. ii. Operating profit margin. iii. Gross profit margin. iv. Current ratio. v. Acid test ratio. vi. Settlement period for trade receivables. vii. Settlement period for trade payables. viii. Inventories turnover period. (8 marks) b. Produce a report for the Board of Directors of Goldwing Ltd. that evaluates the performance of Goldwing across the two years within the areas of profitability, liquidity, and efficiency. Part C – Smithlock Ltd. You have recently joined the finance team at Smithlock Ltd. a manufacturer of components for the home security industry. On the first day you hear a few colleagues talking about a potential investment of a new machine, and request to be part of the project that assesses it’s viability. You are provided with the following details: The purchase cost of the new machine is £24,000,000. The machine will produce an expected annual cash inflow of £7,000,000, with an annual cash outflow of £1,200,000. It is expected the machine will have a useful life of 6 years after which it can be sold for £6,000,000. The machine will be depreciated using the straight-line method. Smithlock Ltd. currently has a cost of capital of 6%. Smithlock Ltd. currently has retained earnings of £7,000,000 and is considering what other sources of finance could be used to enable it to acquire the machine. Required: a. Calculate the Payback Period, the Accounting Rate of Return, and the Net Present Value of the machine, and provide recommendations as to whether the machine should be bought. (10 marks) b. Produce a report that explains and analyses the key benefits and limitations of the differing investment appraisal techniques. (20 marks) c. Identify and explain the differing sources of finance that may be available to Smithlock Ltd. to finance the machine, ensuring the response draws upon the key merits and limitations of the range of sources of finance available to business. (20 marks)

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