financial reporting and analysis

financial reporting and analysis
Impressions Adco Corporation Inc. (IAC) is global Information Technology Company based in New York, which designs, develops, manufactures and distributes computer systems through its subsidiaries across the world. IAC offers its customers a broad range of solutions and services delivered directly and through other distribution channels. IAC has implemented significant restructuring of its subsidiaries’ business operations in the UK to ensure that it is ready for the challenges facing similar businesses in the world market. The restructuring entails downsizing, employees’ layoff and sub-contracting. There has also been increased specialisation of roles with the creation of a central Procurement Department in its subsidiaries. Having specialist Bid Managers, Project Managers and Sales and Marketing Managers within each division and reporting to the Commercial Directors of that division are expected to ensure a commercial focus. Winning future tenders was also considered as essential to the success of IAC as it seems to be facing solid competition. IAC’s General Manager has foreseen some improvement in financial performance as a result of the implemented restructuring strategies. IAC has approached you, as a consultant in financial accounting, for some advice on the performance of its TWO leading subsidiaries operating in the UK.
Required:
Using extracts from the financial statements of the two subsidiaries of IAC (Essakane plc and Westwood plc), you are required to analyse the financial statements shown below. In your analysis you should:
1. Identify, explain and comment of the principal ratios and any key performance indicators that you would use in evaluating these two companies. [You should provide a schedule of appropriate ratios for each of the subsidiaries with supporting calculations, workings and assumptions.]
(30 marks)
2. Evaluate the business performance position of both subsidiaries based on the ratios you have identified as being relevant or significant.
(40 marks)
3. Elliot and Elliot (2011) argue that ratio analysis provides a useful tool for evaluating organisational performance. However, it ignores essential factors shaping an organisation. Drawing from the relevant literature, critically evaluate the above statement.
(30 marks)

(Total 100 marks)
Extracts from the Statement of Comprehensive Income for the year ended 30 June 2010
Essakane plc Westwood plc
£000 £000 £000 £000

Turnover 19,567 55,964
Opening inventory 2,552 6,500
Purchases 10,255 28,956
12,807 35,456
Closing inventory (2,099) (10,708) (10,300) (25,156)
Gross Profit 8,859 30,808
Operating expenses (1,250) (4,500)
Profit from operations 7,609 26,308
Interest payable (85) (270)
Net profit before tax 7,524 26,038
Tax (550) (1,500)
Net profit for the year 6,974 24,538
Retained earnings b/f 1,250 5,675
8,224 30,213
Dividends paid (800) (400)
Retained earnings c/f 7,424 29,813
Extracts from the Statement of Financial Position as at 30 June 2010 Essakane plc Westwood plc
£000 £000 £000 £000
Non-current assets
Property, plant and equipment at cost 68,000 125,655
Less: Provision for depreciation (5,800) (13,055)
62,200 112,600
Current assets
Inventories 2,099 10,300
Trade account receivables 5,866 31,607
Bank 10,876 18,841 – 41,907
81,041 154,507
Equity and liabilities:
Capital and reserves
Ordinary shares @ £1 65,000 95,000
General reserve 27 21,670
Retained profit 7,424 72,451 29,813 146,483

Non-current liabilities
8% debentures (secured) 360 –

Current liabilities
Trade account payables 2,822 7,866
Bank overdraft – 140
Other provisions 5,408 8,230 18 8,024
81,041 154,507

 
You are also given the following information:
(i) The market share prices for Essakane plc and Westwood plc are £5.69 and £7.68 respectively.

(ii) Both Essakane plc and Westwood plc purchase and sell goods on credit. Essakane offers 30-days credit for their customers, while Westwood offers 90-days credit for theirs. Both firms are allowed 60-day credit from their suppliers.

 

 
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