Question 2.2: The financial statements of Burrator plc for the year that h...
The financial statements of Burrator plc for the year that has just ended are as follows:
| Income statement for Year 8 | |
| £000 | |
| Credit sales revenue | 800 |
| Cost of sales | \underline{(600)} |
| Gross profit | 200 |
| Selling expenses | (80) |
| Distribution expenses | (20) |
| Other expenses | \underline{(20)} |
| Profit before taxation | 80 |
| Tax (25%) | \underline{(20)} |
| Profit for the year | \underline{60} |
| Statement of financial position as at the end of Year 8 | |
| £000 | |
| ASSETS | |
| Non-current assets | \underline{160} |
| Current assets | |
| Inventories | 320 |
| Trade receivables | 200 |
| Cash | \underline{20} |
| \underline{540} | |
| Total assets | \underline{700} |
| EQUITY AND LIABILITIES | |
| Equity | |
| Share capital – 25p ordinary shares | 60 |
| Retained earnings | \underline{380} |
| \underline{440} | |
| Current liabilities | |
| Trade payables | 240 |
| Tax due | \underline{20} |
| \underline{260} | |
| Total equity and liabilities | \underline{700} |
In line with previous years, a dividend of 50 per cent of the profit for the year was proposed and paid during the year.
The following information is relevant for Year 9:
- Sales revenue is expected to be 10 per cent higher than in Year 8.
- The non-current assets of the business are currently operating at full capacity.
- The tax rate will be the same as in Year 8 and 50 per cent of the tax due will be outstanding at the year end.
- The business intends to maintain the same dividend policy a for Year 8.
- Half of the tax relating to Year 9 will be outstanding at the year end. Tax due at the end of Year 8 will be paid during Year 9.
- Any financing gap will be filled by an issue of long-term loan notes.
We shall prepare a projected income statement and statement of financial position for Year 9 using the per-cent-of-sales method (assuming that Year 8 provides a useful guide to past experience).
To prepare the projected income statement, we calculate each expense as a percentage of sales for Year 8 and then use this percentage to forecast the equivalent expense in Year 9. Tax is calculated as a percentage of the profit before tax for Year 9, using percentages from Year 8.
The statement is therefore as follows:
| Projected income statement for the year ended 31 December Year 9 | |
| £000 | |
| Credit sales revenue (800 + (10% × 800)) | 880 |
| Cost of sales (75% of sales) | \underline{(660)} |
| Gross profit (25% of sales) | 220 |
| Selling expenses (10% of sales) | (88) |
| Distribution expenses (2.5% of sales) | (22) |
| Other expenses (2.5% of sales) | \underline{(22)} |
| Profit before taxation (10% of sales) | 88 |
| Tax (25% of profit before tax) | \underline{(22)} |
| Profit for the year | \underline{66} |