A)Bengal Co

Bengal Co 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
Inventories 3,600 1,800
Trade receivables 2,400 1,400
Cash and cash equivalents 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

Additional information:
(i) Bengal Co acquired the assets of another business during the year. It has identified that some of
the assets are surplus to requirements and have been classified as 'held for sale' at 31 March
20X1. It expects that it will take some time for the remaining assets to be fully integrated into its
current business. There were no disposals of assets.
(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 Co for the year ended 31 March 20X1. Up to five marks are
available for the calculation of appropriate ratios.
(b) Explain the limitations of ratio analysis.

B) Woodbank Co
Shown below are the financial statements of Woodbank Co 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
Inventories 15,500 12,000
Trade receivables 11,000 8,000
Cash and cash equivalents 500 5,000
______________________
27,000 25,000
Total assets 175,000 110,000
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 Co acquired a controlling interest in Shaw Co for $50 million. It
paid for the acquisition through the issue of additional 10% loan notes and by using some of its
cash reserves. Shaw Co 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 Co'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 Co, which
are included in Woodbank Co'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 Co 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 Co for the year ended 31 March 20X4.
(b) Calculate for the year ended 31 March 20X4 equivalent ratios to the first FOUR only for
Woodbank Co excluding the effects of the purchase of Shaw Co.
(c) Assess the comparative financial performance and position of Woodbank Co for the year
ended 31 March 20X4. Your answer should refer to the effects of the purchase of Shaw Co.

C) Greenwood
Greenwood Co is a public listed company. On 31 March 20X7 Greenwood Co sold its 80%-owned
subsidiary –Deadwood Co – 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. Greenwood Co did not own any other
subsidiaries.
Extracts from Greenwood Co'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 (consolidated)

$’000 $’000 $'000 $'000
Non-current assets
Property, plant and equipment 17,500 17,600
Goodwill nil 1,500
Current assets
Inventories 1,500 1,350
Trade receivables 2,000 2,300
Due on sale of subsidiary 6,000 nil
Cash and cash equivalents nil 9,500 50 3,700
Total assets 27,000 22,800

20X7 20X6 (consolidated)

$'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

Notes
1 The carrying amount of the assets of Deadwood Co at 31 March 20X6 was $6.25 million which
included $3 million of property, plant and equipment.
2 All of the cash and cash equivalents within the group at 31 March 20X6 were attributable to
Deadwood Co.
3 Deadwood Co is a wholesale business whereas Greenwood Co is a retail business. Deadwood
Co sold a large amount of goods to its parent at a price that was set by Greenwood Co.
4 Greenwood Co measures non-controlling interest at share of net assets.

Required
Analyse the financial performance and position of Greenwood Co 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.