5.

Financial Statements-Summary
5.1 Review of Accounting Policies
The financial statements of Creightons Plc are prepared in accordance with the International Financial
Reporting Standards adopted by the European Union. There Financial Statements are prepared on
historical cost basis. Financial statements of Creightons Plc were audited by BDO LLP and they have
given an unqualified audit report. There has been no creative accounting and all transactions have been
accounted for by the company in accordance with IFRS. Moreover, there are no off-balance sheet items
of Creightons Plc.
5.2 Review of Balance Sheet
Creightons Plc. Financial statements are prepared in statement form rather than T-account form. While
the standalone financials of the company contain no debts, the group financial depict that group has 21
times more assets than its debts and has no liquidity issues. Some of the relevant notes of the balance
sheet are as follows;

— Note-14 (Goodwill)
— Note-15 (Other intangible assets)
— Note-16 (Property, plant and equipment)
— Note-17 (Investment in subsidiaries)
— Note-18 (Inventories)
— Note-19 (Trade and other receivables)
— Note-20 (Cash and cash equivalents)
— Note-23 (Obligations under finance leases)
— Note-24 (Bank overdrafts and loans)
— Note-25 (Share capital)
— Note-26 (Other reserves)
For fixed assets, following are the accounting policies being followed by the company;
Goodwill and other intangibles: Intangible assets are not amortized but are reviewed for impairment at
least annually. For the purposes of impairment testing, these assets are allocated to each of the Group’s
cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to
which goodwill has been allocated are tested for impairment annually, or more frequently when there is
an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less
than the carrying amount of the unit, the impairment loss is first allocated to reduce the carrying amount
of the goodwill allocated to the unit and then to the other assets of the unit on a pro-rata basis of the
carrying amount of each asset in the unit. An impairment loss recognized for goodwill is not reversible in
subsequent periods. On disposal of a subsidiary, the attributable amount of goodwill is included in the
determination of the profit or loss on disposal.
Depreciation methods: Property, plant and equipment is stated at cost less accumulated depreciation and
any recognized impairment loss.
Depreciation is charged to write off the cost of the assets less any residual values over their estimated
useful lives using the straight-line method on the following basis:

— Plant and machinery-10% - 20% per annum

— Fixtures and fittings-10% - 20% per annum
— Computers-20% - 33% per annum
Impairment: At each balance sheet date, the Group reviews the carrying amount of its tangible and
intangible assets to determine whether there is any indication that those assets suffered an impairment
loss. If any such indication exists, the recoverable amount of the asset is estimated to determine the extent
of the impairment loss, if any. Where the asset does not generate cash flows that are independent from
other assets, the Group estimates the recoverable amount of the cash generating unit to which the asset
belongs.
Recoverable amount is the higher of the fair value less cost to sell and value in use. In assessing value in
use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that
reflects the current market assessment of the time value of money and the risk specific to the asset for
which the asset for which the estimates of future cash flows have not been adjusted.
Working Capital
Working capital of company:
Working Capital=Total assets- Total liabilities

Working Capital= £2,674,000- £ 35,000,000

Working Capital=£2,639,000
Working capital of group:
Working Capital=Total assets- Total liabilities

Working Capital= £ 19,756,000- £ 7,290,000

Working Capital=£12,466,000
5.3 Review of Income Statement
Creightons Plc. is a manufacturing company and the income statement is in statement form.
IFRS 15 is adopted for revenue recognition from 1 April 2018. The standard provides a single
comprehensive model for revenue recognition. Creightons Plc revenue is generated from selling goods
and is recognized when control has been transferred to the customer. The passage of control to the
customer occurs at point of collection for those customers arranging onward shipment or at point of
delivery where transport is arranged by the company. There is limited judgement needed in identifying
the point control passes: once physical delivery of the products to the agreed location has occurred,
company no longer has physical possession, has a right to payment on agreed terms and it is considered
that company has satisfied the performance obligation.
Company has only administrative and finance costs during the year. 17% net profit margin is obtained by
the Group which is a satisfactory percentage. Mainly expenses are incurred in manufacturing and admin
of the company.
5.4 Review of Cash Flow Statement
The cash flow from operations of the Group has significantly increased from last year. Group has
increased sales revenue due to which Net Loss has been converted into Net Profit. Furthermore, Group
has also decreased their increase in payables form last years, which has lessened the burden of debt on the
Group
Cash flow from investing activities depict that Group has further invested in PPE and intangible assets,
which would enable the Group to increase the production capacity and increase their market share
eventually.
Cash flow from financing activities show that company has repaid borrowings amounting to £413,000
and distributed dividends to shareholders. Furthermore, cash inflows from invoice financing facilities are
also depicted by the cash flows from investing activities.
5.5 Financial Ratio Analysis-Group
Ratio 2019 2018
Gross Profit Margin 39% 41%
Net Profit Margin 7% 4%
Current Ratio 2.34 2.02
Quick Ratio 1.21 1.23
Return on Investment 4.6 times 2.02 times
Debt to equity ratio 1.48 1.23
EPS 4.69 2.03

5,6 Debt Servicing Capacity

According to the above analysis, the Group’s profitability ratio shows an increasing trend as per the Net
Profit Margin due to controlled expenses. Moreover, company’s current ratio is satisfactory, and company
can easily repay of its current liabilities using its current assets. Return on investment is extraordinary, as
company is repaying 4 times of its initial investment. This increased return on investment also contributed
towards the exponential increase in the earnings per share.
7. Projections
Project Income Statement
2018 2019 Projected 2020
Revenue 34,810 44,030 55,478
Cost of Sales (20,660) (26,690) (31,622)
 Gross Profit 14,150 17,340 23,855
Distribution costs (1,479) (2,204) (3,284)
Administrative expenses (11,036) (12,236) (13,704)
Operating profit 1,635 2,900 6,867
Finance Costs (26) (31) (37)
Profit before Tax 1,609 2,869 6,830
Taxation (377) 22 45
Profit for the year 1,232 2,891 6,785

Projected Balance Sheet

2018 2019 2020
Non-Current Assets
Goodwill 331 331 331
Other intangible assets 349 418 557
Property, Plant &
1,832 2,363 3,048
Equipment
2,512 3,112 3,936

Current Assets
Inventories 5,499 8,015 11,682
Trade and other
7,667 8,280 8,942
receivables
Cash and cash
968 349 223
equivalents
14,134 16,644 20,847

Total assets 16,646 19,756 24,784

Current liabilities
Trade and other
6,260 6,339 4,529
payables
Obligations under
- 40 32
finance leases
Borrowings 747 732 717
Non-current liabilities
Deferred tax liability 34 25 18
Obligations under
- 154 148
finance leases
7,041 7,290 5,444

Equity
Share capital 607 625 644
Share premium account 1,262 1,329 1,400
Other reserves 25 25 25
Retained earnings 7,711 10,487 17,272
9,605 12,466 19,340

7.1 Profit & Loss Assumptions

For the above income statement following assumptions are considered;

— Sales are likely to grow by 26%

— Gross profit margin would increase by 2%
— Net profit would increase by 135%
7.2 Balance Sheet Assumptions
For the above income statement following assumptions are considered;

— Goodwill will remain the same

— Liabilities would decrease as they will be paid off
— Total assets will increase by 25%
7.3 Cash Flow Assumptions
For the above income statement following assumptions are considered;

— Cash flow from operation will be positive

— Cash flow from investing activities will be positive but there would be capital expenditure
— Cash flow from financing activities will be negative due to repayment of liabilities.
8. Recommendations
After the analysis of Creightons Plc, we have concluded that company is on the verge of growth, as it is
experiencing increase in every line item. Company’s profitability ratios are extraordinary and above the
industry norm which is a beneficial fact. Moreover, company has low debt undertakings including only a
finance lease obligation. Furthermore, the liquidity ratios of the company are also impressive, as it depicts
that company can pay off its liabilities approx. 2 times using its assets. Moreover, company has a low day
to inventory sale which is a plus point as it saves the company from obsoletion of inventory risk. In a
nutshell, in light of the analysis of Company’s financials and projected financials, it would be safe to say
that Company can be granted credit facility, as repayment of credit would not be difficult for the
company.