£000
Revenue 943
Cost of sales (460)
Gross profit 483
Distribution costs (110)
Administrative expenses (212)
Other expenses (25)
Operating profit 136
Finance costs (40)
Profit before tax 96
Taxation (24)
Profit for the period 72
Manet plc
Statement of changes in equity for the year ended 30 June 2007
Share Share Reval. Translat. Retained Total Capital premium reserve reserve earnings
£m £m £m £m £m £m
Balance as at 30 June 2006 250 50 120 15 380 815
Changes in equity for the year ended
30 June 2007 Gain on revaluation
of properties 30 30
Exchange differences on translation of foreign
operations (5) (5)
Net income recognised
directly to equity 30 (5) 25
Profit for the period 160 160
Total recognised income and expense for the
period 30 (5) 160 185
Dividends (80) (80)
Balance at 30 June 2007 250 50 150 10 460 920
5.4 5.3
Here are some points that might be made concerning accounting regulation and accounting measurement:
For
l It seems reasonable that companies, particularly given their limited liability, should be required to account to their members and to the general public and that rules should prescribe how this should be done – including how particular items should be measured.
It also seems sensible that rules should try to establish some uniformity of practice.
Investors could be misled if the same item appeared in the financial statements of two separate companies but had been measured in different ways.
l Companies would find it difficult to attract finance, credit and possibly employees without publishing credible information about themselves. An important measure of performance is profit, and investors often need to make judgements concerning relative performance within an industry sector. Without clear benchmarks by which to judge performance, investors may not invest in a company.
Against
l It could be argued that it is up to the companies to decide whether or not they can sur- vive and prosper without publishing information about themselves. If they can, then so much the better for them as they will have saved large amounts of money by not doing so. If it is necessary for a company to provide financial information in order to be able to attract investment finance and other necessary factors, then the company can make the necessary judgement of how much information is necessary and what forms of measure- ment are required.
l Not all company managements view matters in the same way. Allowing companies to select their own approaches to financial reporting enables them to reflect their person- alities. Thus, a conservative management will adopt conservative accounting policies such as writing off research and development expenditure quickly, whereas more adventurous management may adopt less conservative accounting policies such as writing off research and development expenditure over several years. The impact of these different views will have an effect on profit and will give the reader an insight to the approach adopted by the management team.
Carpetright plc Table of key results
This table extracts some of the information from the segmental report and calculates a few ratios to help gain an insight to financial health. (Ratios will be explored in detail in Chapters 7 and 8.)
5.8 5.5
SOLUTIONS TO SELECTED EXERCISES 429
2006 2005
UK and Rest of UK and Rest of
RoI Europe RoI Europe
£m £m £m £m
Segment revenue 397.7 53.7 409.2 53.3
Gross profit 241.2 29.7 245.2 27.8
Operating profit 55.1 3.6 60.4 3.0
Total assets 162.7 74.8 147.9 64.2
Net assets (TA – TL) 52.7 60.2 47.0 52.4
Capital expenditure 30.8 4.3 23.6 9.5
Key ratios
Gross profit as % revenue 60.6% 55.3% 59.9% 52.2%
Operating profit as % revenue 13.9% 6.7% 14.8% 5.6%
Operating profit as % of net assets 104.6% 6.0% 128.5% 5.7%
Capital expenditure as % of total assets 18.9% 5.7% 16.0% 14.8%
Comparing 2006 with the 2005 segment results UK and RoI segment
l For the UK and RoI segment, revenue, gross profit and operating profit fell slightly in 2006 compared to the previous year.
l Operating profit as a percentage of revenue slipped slightly in 2006.
l Net assets increased during 2006.
l Given the decline in the operating profits and the increase in net assets, it was inevitable that the operating profits as a percentage of net assets would decline.
l Overall, some deterioration in financial results has occurred during 2006.
Rest of Europe segment
l Revenue increased slightly in 2006 compared to the previous year.
l Gross profit and operating profits increased by a greater amount than the increase in revenue compared to the previous year.
l Net assets increased by nearly 15 per cent in 2006 compared to the previous year.
l The increase in net assets was greater than the increase in operating profits.
l The operating profit as a percentage of net assets did not increase significantly.
l Overall, some improvement in financial results has occurred for the Rest of Europe during 2006.
Comparing the two segments
l There is a significant difference in the size of the two segments – the UK and RoI segment dwarfs the Rest of Europe segment.
l For 2006, sales revenue for the UK and RoI is more than seven times higher and operating profits are more than 15 times than for the rest of Europe.
l The UK and RoI segment is the more profitable segment in both years and across all measures.
l Capital expenditure, as a percentage of total assets, is much higher for the UK and RoI than for the Rest of Europe in both years.
l The Rest of Europe requires a much higher investment of assets to generate each £1 of sales revenue and each £1 of profit.
The reasons for the differences in profitability between the two segments are not clear from the information available. Possible reasons may include:
l a more difficult economic environment in the Rest of Europe segment;
l the Rest of Europe segment is not yet fully established in its markets;
l problems in applying, or adapting, the UK and RoI business model to the Rest of Europe.
Chapter 6
(a) An increase in the level of inventories would, ultimately, have an adverse effect on cash.
(b) A rights issue of ordinary shares will give rise to a positive cash flow, which will be included in the ‘financing’ section of the cash flow statement.
(c) A bonus issue of ordinary shares has no cash flow effect.
(d) Writing off some of the value of the inventories has no cash flow effect.
(e) A disposal for cash of a large number of shares by a major shareholder has no cash flow effect as far as the business is concerned.
(f ) Depreciation does not involve cash at all. Using the indirect method of deducing cash flows from operating activities involves the depreciation expense in the calculation, but this is simply because we are trying to find out from the profit before taxation (after depreciation) figure what the profit before taxation and depreciation must have been.
Torrent plc
Cash flow statement for the year ended 31 December 2007
£m £m
Cash flows from operating activities
Profit before taxation (after interest) (see Note 1 below) 170 Adjustments for:
Depreciation (Note 2) 78
Interest expense (Note 3) 26
274
Decrease in inventories (41 −35) 6
Increase in trade receivables (145 −139) (6)
Decrease in trade payables (54 −41) (13)
Cash generated from operations 261
Interest paid (26)
Taxation paid (Note 4) (41)
Dividend paid (60)
Net cash from operating activities 134
Cash flows from investing activities
Payments to acquire plant and machinery (67)
Net cash used in investing activities (67)
Cash flows from financing activities
Redemption of loan notes (250 −150) (Note 5) (100)
Net cash used in financing activities (100)
Net decrease in cash and cash equivalents (33)
Cash and cash equivalents at 1 January 2007
Bank overdraft (56)
Cash and cash equivalents at 31 December 2007
Bank overdraft (89)
To see how this relates to the cash of the business at the beginning and end of the year it can be useful to provide a reconciliation as follows:
6.3 6.1
SOLUTIONS TO SELECTED EXERCISES 431
Analysis of cash and cash equivalents during the year ended 31 December 2007
£m
Cash and cash equivalents at 1 January 2007 (56)
Net cash outflow (33)
Cash and cash equivalents at 31 December 2007 (89)
Notes
1 This is simply taken from the income statement for the year.
2 Since there were no disposals, the depreciation charges must be the difference between the start and end of the year’s plant and machinery values, adjusted by the cost of any additions.
£m
Carrying amount, at 1 January 2007 325
AddAdditions 67
392
LessDepreciation (balancing figure) 78
Carrying amount, at 31 December 2007 314
3 Interest payable expense must be taken out, by adding it back to the profit before taxation figure. We subsequently deduct the cash paid for interest payable during the year. In this case the two figures are identical.
4 Companies pay 50 per cent of their tax during their accounting year and 50 per cent in the following year.
Thus the 2007 payment would have been half the tax on the 2006 profit (that is, the figure that would have appeared in the current liabilities at the end of 2006), plus half of the 2007 tax charge (that is, 23 +(1/2×36) =41).
5 It is assumed that the cash payment to redeem the debentures was simply the difference between the two balance sheet figures.
It seems that there was a bonus issue of ordinary shares during the year. These increased by £100 m. At the same time, the share premium account balance reduced by £40 m (to zero) and the revaluation reserve balance fell by £60 m.
Blackstone plc
Cash flow statement for the year ended 31 March 2007
£m £m
Cash flows from operating activities
Profit before taxation (after interest) (see Note 1 below) 1,853 Adjustments for:
Depreciation (Note 2) 1,289
Interest expense (Note 3) 456
3,598
Increase in inventories (2,410 −1,209) (1,201)
Increase in trade receivables (1,173 −641) (532)
Increase in trade payables (1,507 −931) 576
Cash generated from operations 2,441
Interest paid (456)
Taxation paid (Note 4) (300)
Dividend paid (400)
Net cash from operating activities 1,285
Cash flows from investing activities
Proceeds of disposals 54
Payment to acquire intangible non-current asset (700)
Payments to acquire property, plant and equipment (4,578)
Net cash used in investing activities (5,224)
Cash flows from financing activities
Bank borrowings 2,000
Net cash from financing activities 2,000
Net decrease in cash and cash equivalents (1,939)
Cash and cash equivalents at 1 April 2006
Cash at bank 123
Cash and cash equivalents at 31 March 2007
Bank overdraft (1,816)
6.6
To see how this relates to the cash of the business at the beginning and end of the year it can be useful to provide a reconciliation as follows:
Analysis of cash and cash equivalents during the year ended 31 March 2007
£m
Cash and cash equivalents at 1 April 2006 123
Net cash outflow (1,939)
Cash and cash equivalents at 31 March 2007 1,816
Notes
1 This is simply taken from the income statement for the year.
2 The full depreciation charge was that stated in Note 3 to the question (£1,251 m), plus the deficit on disposal of the non-current assets. According to Note 3, these non-current assets had originally cost
£581 m and had been depreciated by £489 m, that is a net carrying amount of £92 m. They were sold for £54 m, leading to a deficit on disposal of £38 m. Thus the full depreciation expense for the year was
£1,289 m (that is, £1,251 m +£38 m).
3 Interest payable expense must be taken out, by adding it back to the profit before taxation figure. We subsequently deduct the cash paid for interest payable during the year. In this case the two figures are identical.
4 Companies pay tax at 50 per cent during their accounting year and the other 50 per cent in the following year. Thus, the 2007 payment would have been half the tax on the 2006 profit (that is, the figure that would have appeared in the current liabilities at 31 March 2006), plus half of the 2007 tax charge (that is, 105 +(1/2×390) =300).
York plc
Cash flow statement for the year ended 30 September 2007
£m £m
Cash flows from operating activities Profit before taxation (after interest)
(see Note 1 below) 10.0
Adjustments for:
Depreciation (Note 2) 9.8
Interest expense (Note 3) 3.0
22.8 Increase in inventories and trade receivables (122.1 −119.8) (2.3)
Increase in trade payables (82.5 −80.0) 2.5
Cash generated from operations 23.0
Interest paid (3.0)
Taxation paid (Note 4) (2.3)
Dividend paid (3.5)
Net cash from operating activities 14.2
Cash flows from investing activities
Proceeds of disposals (Note 2) 5.2
Payments to acquire non-current assets (20.0)
Net cash used in investing activities (14.8)
Cash flows from financing activities
Increase in long-term borrowings 3.0
Share issue (Note 5) 5.0
Net cash from financing activities 8.0
Net increase in cash and cash equivalents 7.4
Cash and cash equivalents at 1 October 2006
Cash at bank 9.2
Cash and cash equivalents at 30 September 2007
Cash at bank 16.6
To see how this relates to the cash of the business at the beginning and end of the year it can be useful to provide a reconciliation as follows:
6.7
SOLUTIONS TO SELECTED EXERCISES 433
Analysis of cash and cash equivalents during the year ended 30 September 2007
£m
Cash and cash equivalents at 1 October 2006 9.2
Net cash inflow 7.4
Cash and cash equivalents at 30 September 2007 16.6 Notes
1 This is simply taken from the income statement for the year.
2 The full depreciation charge was the £13.0 m, less the surplus on disposal (£3.2 m), both stated in Note 1 to the question.
According to the table in Note 4 to the question, the non-current assets disposed of had a net carry- ing value of £2.0 m. To produce a surplus of £3.2 m, they must have been sold for £5.2 m.
3 Interest payable expense must be taken out, by adding it back to the profit before taxation figure. We subsequently deduct the cash paid for interest payable during the year. In this case the two figures are identical.
4 Companies pay 50 per cent tax during their accounting year and the other 50 per cent in the following year. Thus the 2007 payment would have been half the tax on the 2006 profit (that is, the figure that would have appeared in the current liabilities at 30 September 2006), plus half of the 2007 tax charge (that is, 1.0 +(1/2×2.6) =2.3).
5 This issue must have been for cash since it could not have been a bonus issue – the share premium is untouched and the ‘Reserves’ had only altered over the year by the amount of the 2007 retained profit (profit for the year, less the dividend). The shares seem to have been issued at par (that is, at their nominal value). This is a little surprising since the business has assets that seem to be above that value.
On the other hand, were this a rights issue, the low issue price would not have disadvantaged the exist- ing shareholders since they were also the beneficiaries of the advantage of the low issue price.
Axis plc
Cash flow statement for the year ended 31 December 2007
£m £m
Cash flows from operating activities
Profit before taxation (after interest) (see Note 1 below) 34 Adjustments for:
Depreciation (Note 2) 19
Interest expense (Note 3) 2
55
Decrease in inventories (25 −24) 1
Increase in trade receivables (26 −16) (10)
Increase in trade payables (36 −31) 5
Cash generated from operations 51
Interest paid (2)
Taxation paid (Note 4) (15)
Dividend paid (14)
Net cash from operating activities 20
Cash flows from investing activities
Proceeds of disposals (Note 2) 4
Payments to acquire non-current assets (25)
Net cash used in investing activities (21)
Cash flows from financing activities
Issue of loan notes 20
Net cash from financing activities 20
Net increase in cash and cash equivalents 19
Cash and cash equivalents at 1 January 2007
Cash at bank nil
Short-term investments nil
nil Cash and cash equivalents at 31 December 2007
Cash at bank 7
Short-term investments 12
19 6.8
To see how this relates to the cash of the business at the beginning and end of the year it can be useful to provide a reconciliation as follows:
Analysis of cash and cash equivalents during the year ended 31 December 2007
£m
Cash and cash equivalents at 1 January 2007 nil
Net cash inflow 19
Cash and cash equivalents at 31 December 2007 19
Notes
1 This is simply taken from the income statement for the year.
2 The full depreciation charge for the year is the sum of two figures labelled ‘depreciation’ and the deficit on disposal of non-current assets (that is, £2m +£16m +£1m =£19m). These were detailed in the income statement.
According to the note in the question, the non-current assets disposed of had a net carrying amount of £5.0 m (that is, £15 m −£10 m). To produce a deficit of £1 m, they must have been sold for £4 m.
3 Interest payable expense must be taken out, by adding it back to the profit before taxation figure. We subsequently deduct the cash paid for interest payable during the year. In this case the two figures are identical.
4 Companies pay 50 per cent tax during their accounting year and the other 50 per cent in the following year. Thus, the 2007 payment would have been half the tax on the 2006 profit (that is, the figure that would have appeared in the current liabilities at 31 December 2006), plus half of the 2007 tax charge (that is, 7 +(1/2×16) =15).
Chapter 7