Financial statements and ratio analysis

Questions 16 and 17 are based on the data below.

Extract from accounts of Righton plc, 2024

Calculate the current ratio for Righton plc for 2024.

Show your working.

Righton plc achieved a Return on Capital Employed (ROCE%) of 12% in 2024.

Calculate its operating profit.

Show your working.

Read the information below and then answer the questions that follow.

SCF

SCF is a UK-based manufacturer of components that are sold to UK and EU businesses which use them to produce computers. It has strong relationships with its small number of customers. However, recent vertical and horizontal mergers involving other firms in the sector have reduced the number of buyers. As a result, there are fewer opportunities to win new contracts. Furthermore, many of the biggest computer manufacturers only want to deal with large suppliers. Some manufacturers will only purchase components made in the European Union (EU).

SCF’s owners are increasingly concerned about falling sales and profit margins. They recently appointed a new Chief Executive who set out a vision for ambitious growth. The growth plans focus on supplying directly to EU manufacturers from a new factory in Spain. This factory would replace the existing UK site, where efficiency has been falling.

Appendix A Extract from SCF’s cash flow forecast

Note: The closing balance for 31 October is £4.30 million.

Appendix B Financial information for SCF, 2022–2024

Appendix C Value of total market and SCF’s sales in different markets, 2020–2028

Note: Values for 2026 onwards are forecasts. These do not take into account the plan to move production to Spain.

Appendices continue on the next page

Appendix D Decision tree showing outcomes of different strategic options predicted by

SCF’s sales forecasting

Option 1: Upgrade existing UK factory Option 2: Build new factory in Spain

Appendix E Forecasts for selected economic variables, 2025–2028

The data in Appendix A assumed all customers would make immediate payments. With effect from 1 November, customers will be given one month’s credit.

Calculate SCF’s closing balance for November, assuming all customers take advantage of the new payment terms.

Explain one possible reason for the change in inventory turnover shown in Appendix B.

Using Appendix D and the other information available, analyse why SCF chose Option 2.

Your answer should include quantitative and qualitative information.

To what extent do the changes in the economic environment create more threats than opportunities for SCF?

Use Appendix E and the other information provided in your answer.

A business’ current liabilities are three times the level of its current assets.

Shareholders provide 20% of its capital employed.

This business has:

To what extent are financial ratios the best way of assessing the performance of non-profit organisations, such as charities or mutuals?

Read the information below and then answer the questions that follow.

Biggs Ltd

Biggs Ltd operates in the snack food market, selling crisps, nuts and other savoury products. Potatoes are a key ingredient in its snacks. The price of potatoes has risen by 35% over the last two years.

The company is one of six firms who dominate a market that has been growing strongly for ten years. The market growth is largely due to the development of new snacks designed for children. However, Biggs Ltd’s market share has been falling since 2019.

Biggs Ltd plans to launch a completely new range of products in 2024. It will promote this by sponsoring a major televised sporting competition which has children and families as its audience.

Appendix A Extract from Biggs Ltd’s recent financial statements

Appendix B Labour productivity for Biggs Ltd and the snack food industry average (shown as an index number, base year = 2017)

Appendix C Marketing expenditure as a percentage of revenue, 2020–2024*

* 2024 based on Biggs Ltd’s forecast.

Appendix D Results of market research conducted with families on Biggs Ltd’s new

Source: Data from 27 interviews with families, conducted by Biggs Ltd in 2021.

Appendix E Percentage of snack products bought and consumed by different

Results from a recent survey of 3000 respondents conducted by an independent market research firm.

Using Appendix A, calculate Biggs Ltd’s payables days ratio for 2023.

Using the information provided, explain one reason why Biggs Ltd’s gross profit margin for 2023 fell to 46.9%.

Analyse how the changes in Biggs Ltd’s labour productivity, shown in Appendix B, may cause its market share to fall.

In 2024, Biggs Ltd became the sponsor of a major televised sporting competition that attracts a wide range of ages and is popular with families.

With reference to the information provided, evaluate whether Biggs Ltd’s decision to promote its new product range in this way is a good idea.

Table 1 Extracts from financial records of Wot plc

Wot plc receives £20 million from selling ordinary shares.

The company uses this money as follows:

• £15 million to purchase machinery

• £3 million to pay off its overdraft

• £2 million to increase inventory levels.

Calculate Wot plc’s current ratio after these changes.

Show your working.

Read the information below and then answer the questions that follow.

AJS plc

AJS plc is a manufacturer of non-recyclable packaging. This packaging is widely used by takeaway food outlets. AJS plc plans to invest £500 000 in new technology to increase capacity and make its factory more capital intensive.

Appendix A Data on proposed investment (produced by AJS plc’s operations manager)

Appendix B UK market for non-recyclable takeaway food packaging

Appendix C UK market for recyclable takeaway food packaging

Appendix D Selected Human Resource data 2022

Appendix E Selected Financial data for AJS plc

Calculate the Net Present Value for AJS plc’s proposed investment.

Using Appendix E, calculate the Return on Capital Employed for AJS plc in 2022.

Analyse why AJS plc has decided to become more capital intensive.

With reference to the data provided, would you advise a potential investor to buy shares in AJS plc?

Justify your view.

Read the information below and then answer the questions that follow.

Homeworking

Homeworking (or teleworking) is the action of working from home, using the Internet, email and the telephone to link the employee and the business remotely.

The number of people working from home has been rising steadily for several years as communications technology has improved.

Some businesses now adopt homeworking as the normal practice. For example, several financial institutions have reduced the amount of office space they own or rent in city centres. The wider impact of the change has been seen through fewer commuting journeys.

There have been some concerns over increased homeworking due to a reduction in face-to-face communication between employees. There has also been a decline in sales for businesses, such as coffee shops, that rely on office staff as customers.

Some sectors, such as transportation and wholesale, provide few opportunities for people to work from home. Other sectors, such as IT, finance and insurance, provide more homeworking opportunities to staff.

Of people in employment, 36% worked at least partly from home in 2020.

Using Table 1, calculate the percentage change in the number of people working at least partly from home between 2019 and 2020.

Analyse one way the balance sheet of a business (its statement of financial position) might be affected if more of its employees work from home.

The role of a manager has different elements.

Analyse the impact of the increase in homeworking by office staff on the way that their managers fulfil their role.

Would increased homeworking improve the performance of businesses that use Elkington’s Triple Bottom Line to measure their success?

Justify your view.

Logger Boards Ltd has been offered a bank loan at 5% interest per year for the £500 000 needed to finance the building of its new production facility.

Using Appendix B and other information, to what extent is using a bank loan too big a risk for the business?

Use quantitative and qualitative information to justify your view.

Calculate the inventory turnover of Magpie plc.

Calculate the payables days for Magpie plc.

Calculate the current ratio for Magpie plc.

The table below shows the changes in the two efficiency ratios for Wilson PLC, 2018–2019.

Analyse the implications of these changes for Wilson PLC’s cash levels.