Question 2.S-AQ.1: Quardis Ltd is a small business that imports high-quality la...
Quardis Ltd is a small business that imports high-quality laser printers. The most recent statement of financial position of the business is as follows:
| Statement of financial position as at 31 May Year 8 | ||
| ASSETS | £000 | £000 |
| Non-current assets | ||
| Property | 460 | |
| Accumulated depreciation | \underline{(30)} | 430 |
| Fixtures and fittings | 35 | |
| Accumulated depreciation | \underline{(10)} | \underline{25} |
| \underline{455} | ||
| Current assets | ||
| Inventories | 24 | |
| Trade receivables | 34 | |
| Cash at bank | \underline{2} | |
| \underline{60} | ||
| Total assets | \underline{515} | |
| EQUITY AND LIABILITIES | ||
| Equity | ||
| £1 ordinary shares | 200 | |
| Retained earnings | \underline{144} | |
| \underline{344} | ||
| Non-current liabilities | ||
| Borrowings – loan | \underline{125} | |
| Current liabilities | ||
| Trade payables | 22 | |
| Tax due | \underline{24} | |
| \underline{46} | ||
| Total equity and liabilities | \underline{515} | |
The following forecast information is available for the year ending 31 May Year 9:
- Sales are expected to be £280,000 for the year. Sixty per cent of sales are on credit and it is expected that, at the year end, three months’ credit sales will be outstanding. Sales revenues accrue evenly over the year.
- Purchases of inventories during the year will be £186,000 and will accrue evenly over the year. All purchases are on credit and at the year end it is expected that two months’ purchases will remain unpaid.
- Fixtures and fittings costing £25,000 will be purchased and paid for during the year. Depreciation is charged at 10 per cent on the cost of fixtures and fittings held at the year end.
- Depreciation is charged on property at 2 per cent on cost.
- On 1 June Year 8, £30,000 of the loan from the Highland Bank is to be repaid. Interest is at the rate of 13 per cent per year and all interest accrued to 31 May Year 9 will be paid on that day.
- Inventories at the year end are expected to be 25 per cent higher than at the beginning of the year.
- Wages for the year will be £34,000. It is estimated that £4,000 of this total will remain unpaid at the year end.
- Other overhead expenses for the year (excluding those mentioned above) are expected to be £21,000. It is expected that £3,000 of this total will still be unpaid at the year end.
- A dividend of 5p per share will be announced and paid during the year.
- Tax is payable at the rate of 35 per cent. Tax outstanding at the beginning of the year will be paid during the year. Half of the tax relating to the year will also be paid during the year.
Required:
(a) Prepare a projected income statement for the year ending 31 May Year 9.
(b) Prepare a projected statement of financial position as at 31 May Year 9.
(c) Comment on the significant features revealed by these statements.
All workings should be shown to the nearest £000.
Note: A projected cash flow statement is not required. The cash figure in the projected statement of financial position will be a balancing figure.
The answer to this question can be found at the back of the book on pp. 559 – 560.
(a) The projected income statement for the year ended 31 May Year 9 is:
| £000 | £000 | |
| Sales revenue | 280 | |
| Cost of sales | ||
| Opening inventories | 24 | |
| Purchases | \underline{186} | |
| 210 | ||
| Closing inventories | \underline{(30)} | \underline{(180)} |
| Gross profit | 100 | |
| Wages | (34) | |
| Other overhead expenses | (21) | |
| Depreciation – Property | (9) | |
| Fixtures | (6) | |
| Operating profit | \underline{30} | |
| Interest payable | \underline{(12)} | |
| Profit before tax | 18 | |
| Tax (35%) | \underline{(6)} | |
| Profit for the year | \underline{12} |
(b) Projected statement of financial position as at 31 May Year 9:
| £000 | £000 | |
| ASSETS | ||
| Non-current assets | ||
| Property | 460 | |
| Accumulated depreciation | \underline{(39)} | 421 |
| Fixtures and fittings | 60 | |
| Accumulated depreciation | \underline{(16)} | \underline{44} |
| \underline{465} | ||
| Current assets | ||
| Inventories | 30 | |
| Trade receivables (60% × 280 × 3/12) | \underline{42} | |
| \underline{72} | ||
| Total assets | \underline{537} | |
| EQUITY AND LIABILITIES | ||
| Equity | ||
| £1 ordinary shares | 200 | |
| Retained earnings [144 + (12 − 10)] | \underline{146} | |
| \underline{346} | ||
| £000 | £000 | |
| Non-current liabilities | ||
| Borrowings – loan | \underline{95} | |
| Current liabilities | ||
| Trade payables (186 × 2/12) | 31 | |
| Accrued expenses (3 + 4) | 7 | |
| Bank overdraft (balancing figure) | 55 | |
| Tax due (50% × 6) | \underline{3} | |
| \underline{96} | ||
| Total equity and liabilities | \underline{537} | |
(c) The projected statements reveal a poor profitability and liquidity position for the business.
The liquidity position at 31 May Year 9 reveals a serious deterioration when compared with the previous year.
As a result of preparing these projected statements the management of Quardis Ltd may wish to make certain changes to their original plans. For example, the repayment of part of the loan may be deferred or the dividend may be reduced in order to improve liquidity.
Similarly, the pricing policy of the business and the level of expenses proposed may be reviewed in order to improve profitability.