financial management AND control

Anonymous
timer Asked: Jan 1st, 2019
account_balance_wallet $35

Question description

Part A - Longi Plc

You are a financial analyst at Longi Plc; a public limited company specialising in manufacturing and distributing office furniture. The Board of Directors have looked into the financial statements of the company for the last two years and have raised a concern about the company’s profitability and liquidity. The financial statements of Longi Plc for the last two years are given below:

Income statement for the year ended 31 December

2017

2016

£000

£000

£000

£000

Revenue

16,200

15,000

Cost of sales:

Opening inventory

800

650

Manufacturing costs

7,950

7,000

Closing inventory

925

800

7,825

6,850

Gross profit

8,375

8,150

Selling and distribution expenses

3,200

2,875

Administrative expenses

2,775

1,890

Bad debts written off

890

520

6,865

5,285

Operating profit before interest and tax

1,510

2,865

Interest payable

850

540

Profit before tax

660

2,325

Income tax

220

1,115

Profit after tax

440

1,210

Dividends paid

190

170

Retained profit for the year

250

1,040


Statement of Financial Position as at 31 December

2017

2016

£000

£000

£000

£000

Property, plant and equipment (net)

Land and building

6,890

5,570

Equipment

1,450

1,145

Motor vehicles

1,075

890

9,415

7,605

Current assets

Cash

-0-

460

Inventory

925

800

Trade receivables

3,750

2,495

Current liabilities

Trade payables

2,150

2,070

Other payables (including taxation)

90

185

Bank overdraft

185

-0-

Net current assets

2,250

1,500

11,665

9,105

Non-current liabilities

Loan capital

4,450

4,075

7,215

5,030

Equity

Ordinary shares of £1 each

6,165

4,230

Retained profit

1,050

800

7,215

5,030

Required:

  • Provide relevant ratio calculations for both 2013 and 2012 within the following performance areas:-
  • Write a report to the Board of Longi Plc. that provides relevant analysis and evaluation of the company performance based upon the calculations offered within the previous section.(20%)
  • Profitability.
  • Liquidity. (Including the WCC calculation)
  • Gearing.
  • Efficiency / Asset Utilization.
  • Investor.

(15%)

All calculations should be clearly shown including workings and should be made to two decimal places.


Total for Part A(35%)

Tutor Answer

Robert__F
School: UT Austin

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Financial Management and Control
Name
Tutor’s name
Course
Date

Financial Management and Control
Part A: Longi Plc
Description of the scenario
The present analysis describes the use of financial ratios for the evaluation of the financial
performance of a company. This analysis is a critical assessment to both accounting managers and
investors considering how the computed financial ratios will illustrate the company’s financial health and
provide a mean to the comparison with other companies in both the same and other industrial sectors.
Provided financial results of the company
Income statement for the year ended 31 December
2017
£000
Revenue
Cost of sales:
Opening inventory
Manufacturing costs
Closing inventory
Gross profit
Selling and distribution expenses
Administrative expenses
Bad debts written off
Operating profit before interest and tax
Interest payable
Profit before tax
Income tax
Profit after tax
Dividends paid
Retained profit for the year

2016
£000
16,200

800
7,950
925

£000

£000
15,000

650
7,000
800
7,825
8,375

3,200
2,775
890

6,850
8,150
2,875
1,890
520

6,865
1,510
850
660
220
440
190
250

5,285
2,865
540
2,325
1,115
1,210
170
1,040

Running head: FINANCIAL MANAGEMENT AND CONTROL

3

Statement of Financial Position as at 31 December
2017
£000
Property, plant, and equipment (net)
Land and building
Equipment
Motor vehicles
Current assets
Cash
Inventory
Trade receivables
Current liabilities
Trade payables
Other payables (including taxation)
Bank overdraft
Net current assets
Non-current liabilities
Loan capital
Equity
Ordinary shares of £1 each
Retained profit

2016
£000

£000

6,890
1,450
1,075
9,415

£000
5,570
1,145
890
7,605

-0925
3,750

460
800
2,495

2,150
90
185

2,070
185
-02,250
11,665

1,500
9,105

4,450
7,215

4,075
5,030

6,165
1,050
7,215

4,230
800
5,030

FINANCIAL MANAGEMENT AND CONTROL

4

Relevant ratio calculations
The table below summarizes the most commonly used financial ratios for the
measurement of the financial health of the company (Kaplan et al., 2014).
Financial ratio
Gross margin (%)

Formula
𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡
∗ 100
𝑅𝑒𝑣𝑒𝑛𝑢𝑒

2017
51.70

2016
54.33

Net profit margin

𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡
∗ 100
𝑅𝑒𝑣𝑒𝑛𝑢𝑒

1.54

6.93

Working capital

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
− 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
∗ 365
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑
∗ 365
𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠 𝑐𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛
𝑝𝑒𝑟𝑖𝑜𝑑 – 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
𝑐𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑝𝑒𝑟𝑖𝑜𝑑
𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝐸𝑞𝑢𝑖𝑡𝑦
𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡
∗ 100
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

2,250

1,500

1.93

1.67

88.49 days

60.71 days

100.28 days

110.29 days

11.79 days

49.58 days

0.72

0.96

2.66

13.67

Current ratio
Receivables collection
Payables collection
ratio
Working capital cycle
Debt to equity ratio
Return on assets

As observed from this table, the company’s gross margin has decreased slightly between
2016 and 2017. In this regard, the computed gross margin decreased from 54.33% to 51.70% in
2017. An analysis of the provided financial statements illustrates how both the revenue and the
gross profit have increased from 2016 to 2017. However, since the increase in the gross profit
was considerably lower than that of the revenue, the resulting...

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