ACCOUNTING FOR BUSINESS 1

SEMESTER 1

Tutorial questions to be prepared for week 5

Prepare in advance of the tutorial for discussion in the tutorial

1. The following information is provided for Andrew Hunt plc

together with industry averages

Andrew Hunt plc

Income statement for the year
ended 31 December Year 2
£000s £000s
Sales (revenue) 4,420
Cost of sales (2,810)
Gross profit 1,610
Distribution costs (450)
Admin expenses (550) (1,000)
Operating profit 610
Finance Costs:
Loan Interest (30)
Profit before
taxation 580
Taxation (145)
Profit after taxation 435
Balance Sheet/(SOFP) as at 31st December Year 2

£000s
ASSETS:

Non-current (fixed) assets:

Land and buildings 600
Plant and equipment 450
Total non-current assets 1,050

Current assets:
Inventory (stock) 330
Trade receivables 470
(debtors)
Prepayments 110
Bank 90
Total current assets 1,000
Total Assets 2,050

EQUITY & LIABILITIES:

Capital & Reserves

Ordinary shares of 25p
nominal value each 375
Retained profits 810
Total capital & Reserves 1,185

Current liabilities:
Trade payables 290
(creditors)
Taxation 145
Accruals 30
 Total current liabilities 465

Non-current liabilities
10% debentures 400
Total non-current liabilities 400

Total Equity & Liabilities 2,050

Dividend proposed for the year is £150,000 or 10 pence per share.

The market price of the ordinary shares of Andrew Hunt plc
immediately after the preliminary announcement of the Year 2 profit
was 255 pence per share.

Industry average ratios

Price /earnings ratio: 15
Dividend yield: 4.3%
Return on shareholders’ equity: 25%
Return on Total capital employed
(ROCE): 35%
Operating profit margin: 20%
Gross profit margin: 40%
Inventory (stock) holding period/days:
65.1 days
Trade Receivables collection period
(Debtors days) : 40 days
Trade Payables payment period
(Creditors days): 38 days
Current ratio: 1.5 : 1
Debt/Equity ratio: 28%
Interest cover: 14 times

Requirement:
 (i) Name the five main categories of ratios, and identify which of
the ratios named above in the industry averages belong in each
category.

(ii) Calculate ratios for Andrew Hunt plc and evaluate by

comparison with the industry average.

In the absence of better information for the inventory/stock

holding period you can simply use the closing stock (this is on
the basis that stockholding levels do not change too much –
but, of course, this could be a bad assumption).

And, for suppliers’ payment period, you can use cost of sales
instead of purchases (for the same reason as mentioned above
– inventory levels remain fairly constant).

Q. 2.
You are the fund manager in charge of the investment portfolios of
wealthy private clients. One of them has asked you to explain the
statement of cash flows that appears in the annual report of a listed
company. Explain to your client the nature and purpose of a
statement of cash flows and why it is useful to the fund manager in
evaluating the company.