Questions
Answers:
Question 2
- Cash flow statement
| RJV plc | |||||||
| Cash flow statement for the period ended 31st march 2014 | |||||||
| Net profit | 4,531 | ||||||
| Adjusted for | |||||||
| Depreciation | 16,401 | ||||||
| Operating profit before working capital changes | (20,932) | ||||||
| Net Cash Flow from operating activities | |||||||
| increase in inventory | (1914) | ||||||
| increase in Trade Debtors | (2288) | ||||||
| increase in bank overdraft | 110 | ||||||
| Increase in trade creditors | 2,354 | (1738) | |||||
| 19,194 | |||||||
| Cash generated from operating activities | |||||||
| interest paid | -2,608 | ||||||
| Dividend paid | -1,100 | ||||||
| tax paid | -5,500 | (9,208) | |||||
| 9,986 | |||||||
| Net Cash from investing activities | |||||||
| cash flow from acquisition of assets | (103,675) | ||||||
| Net Cash from financing activities | |||||||
| Proceeds from issue of shares | 61,163 | ||||||
| Debentures | 24,902 | ||||||
| Proceeds from share premium | 10,692 | 96,757 | |||||
| Net increase in cash flow | 3,128 | ||||||
| cash and cash equivalents at the end of the period | 7,425 | ||||||
| (4,297) | |||||||
- Workings
Cash used for acquisition of fixed assets in the year
Plant and machinery at cost 2013 143,000
Less accumulated depreciation 11,099
Value at 2013 131,901
Plant and machinery at cost 2014 263,076
Accumulated depreciation 27,500
Value at 2014 235,576
Acquired assets 2014 = 235,576-131,901 = 103,675
Cash used on taxation
| Bal from 2013 Bank 8,800
Bal c/d 5,500 14,300 |
1 April 2013 8,800
P/L Appropriation 5,500 14,300 Bal b/d 5,500 |
Cash raised from financing
Ordinary shares 2014 299,663 less ordinary shares 2013 (238,500) = 61,163
Share premium 2014 22,000 less share premium 2013 (11,308) = 10,692
Debentures 2014 32,602 less debentures 2013 (7,700) = 24,902
Question 3
a) Ratios
Working capital (current ratio)
Current ratio = current assets/current liabilities
= 43,890:22,880 = 1.92:1
Stock turnover (days)
Stock turnover = cost of sates/average stock
= 330,000/22,143 = 15
= 365 days/15 = 24 days
Debtors Payment period (days)
Debtors Payment period in days = (365 × Average debtors) ÷ sales
= (365 × 19,646)/440,000
= 16 days
Creditors Payment period (days)
Creditors Payment period = (365 × Average creditors)/sales
= (365 × 16,093)/440,000
= 13 days
Working capital operating cycle (days)
Working capital operating cycle = stock turnover + debtors collection period – creditors payment period
Working capital operating cycle = (24+16-14) days
= 26 days
Operating profit margin
Operating profit margin = (operating profit/sales) × 100
= (14,399/440,000) × 100 = 3.27%
Return on Capital Employed
Return on capital employed = (operating profit/total capital employed) × 100
Return on Capital Employed = (14,399/546,588) × 100 = 2.63%
Net asset turnover
Net asset turnover = Annual sales/net assets
= 440,000/546,588 = 0.8 times
b) Performance of RJV plc
Compared to the industry overall, RJV has performed below average in most of the ratios. In terms of profitability, RJV plc can be considered to be making profits because its profitability ratios are positive. However, the company performs poorly compared to the industry average. For instance, the net asset turnover of the company is lower than the industry’s mean performance (0.8 compared to industry’s mean of 0.94). In this case, RVJ a unit value of an asset results in 0.8 units of annual sales. Compared to the industry’s average performance, RVJ does not utilise its assets well like an average company in the industry. Furthermore, Return on capital employed of 2.63% is below the industry’s average of 4.7%. This means that the company gets less returns per capital or asset employed compared to the overall industry. The operating profit margin of 3.27% is also below the mean performance of the industry (5%). This shows that the company is poor in managing its cost of sales and operating costs compared to an average company in the industry.
In terms of liquidity, RVJ plc is more liquid than an average company in the industry because the current ratio of the company (1.92:1) is higher than the current ratio of the industry average (1.6:1).
In terms of efficiency, RVJ seems to be less efficient than average companies in the industry. This is because most of its efficiency ratios are less than the industry mean. For example, the working capital operating cycle of the company is 26 days compared to the industry’s mean of 12 days. This shows that the company does not manage its working capital operations efficiently compared to average companies in the industry. The company keeps stock longer than other average firms in the industry (24 days compared to 17 days of the industry) and pays creditors faster than average firms in the industry.
c) Relationship between ROCE, Operating profit margin, and net asset turnover
These ratios belong to the same class – profitability ratios. They are all based on how the company utilizes its capital or assets to get revenue and returns. ROCE determines the amount of profit that each asset provides the company while net assets turnover determines the amount of sales/revenue that each asset provides for the company (Bull, 2008). Operating profit margin determines how the company uses its working capital to make profits.
d) Ratios as a forecasting tool
Financial ratios can be used to compare the financial performance of a company from one year to another (Bull, 2008). Therefore, the financial performance of RVJ plc for 2015 can be predicted using its financial statements. The financial ratios above can be used to predict the company’s financial performance in 2015 because they may tell about the ability of the company to manage its financial activities in future. For instance, the current ratio for this year is higher than the mean of the overall industry. This shows that the company’s liquidity is good as it enters the financial year 2014/2015; hence it is able to meet its debts as they fall due. Furthermore, the assets can still be used to generate more revenue in 2015 because the current profitability ratios are positive, meaning that the company is still able to utilize its capital and assets to generate revenue and profits.
e) Non-financial information
There is additional non-financial information that can be used to assess the future performance of RVJ plc. This information includes the size of the firm and important assets such as corporate image, quality of products, customer loyalty, technological operations, etc (Hey-Cunningham, 2006). The market structure also determines future performance of the firm. If the company is a monopoly, it can still perform well in future even if the current year’s financial ratios are poor.
