Photo AI
Interpretation of Accounts The following figures have been taken from the final accounts of JB plc, a health food manufacturer, for the year ended 31/12/2016 - Leaving Cert Accounting - Question 5 - 2017
Question 5
Interpretation of Accounts The following figures have been taken from the final accounts of JB plc, a health food manufacturer, for the year ended 31/12/2016. The c... show full transcript
Worked Solution & Example Answer:Interpretation of Accounts The following figures have been taken from the final accounts of JB plc, a health food manufacturer, for the year ended 31/12/2016 - Leaving Cert Accounting - Question 5 - 2017
Step 1
Calculate the closing stock if the rate of stock turnover is 10 based on average stock.
Answer
To find the closing stock, we first find the average stock:
Average Stock = ( \frac{\text{Opening Stock} + \text{Closing Stock}}{2} )
Let closing stock be ( x ). So,
Average Stock = ( \frac{73,000 + x}{2} )
Using the stock turnover formula:
Stock Turnover = ( \frac{\text{Cost of Goods Sold}}{\text{Average Stock}} )
( 10 = \frac{565,000}{\frac{73,000 + x}{2}} )
Cross-multiplying gives us:
( 10 \cdot \frac{73,000 + x}{2} = 565,000 )
( 5 \cdot (73,000 + x) = 565,000 )
( 365,000 + 5x = 565,000 )
( 5x = 200,000 )
( x = 40,000 )
Thus, the closing stock is €40,000.
Step 2
The dividend yield.
Answer
The dividend yield can be calculated using the formula:
( \text{Dividend Yield} = \left( \frac{\text{Dividend per Share}}{\text{Market Price}} \right) \times 100 )
Given:
- Dividend per Share = €9.44
- Market Price = €1.35
Calculating: ( \text{Dividend Yield} = \left( \frac{9.44}{1.35} \right) \times 100 = 6.99% )
Step 3
The earnings per ordinary share.
Answer
Earnings per ordinary share can be derived from:
( \text{Earnings per Ordinary Share} = \frac{\text{Net Profit} - \text{Preference Dividend}}{\text{Number of Ordinary Shares}} )
Where:
- Net Profit = €114,000
- Preference Dividend = €7,500 (5% of €150,000)
- Number of Ordinary Shares = 450,000
Calculating: ( \text{Earnings per Ordinary Share} = \frac{114,000 - 7,500}{450,000} = 23.67 )
Step 4
The return on equity funds.
Answer
Return on equity funds can be calculated as:
( \text{Return on Equity Funds} = \left( \frac{\text{Net Profit after Tax and Dividends}}{\text{Equity Funds}} \right) \times 100 )
Where:
- Net Profit after Tax and Dividends = €114,000 - €7,500 = €106,500
- Equity Funds = €450,000 + €79,000 = €529,000
Calculating: ( \text{Return on Equity Funds} = \left( \frac{106,500}{529,000} \right) \times 100 = 20.13% )
Step 5
Interest cover.
Answer
Interest cover is calculated as:
( \text{Interest Cover} = \frac{\text{Operating Profit}}{\text{Interest}} )
Where:
- Operating Profit = Net Profit + Interest = €114,000 + €16,000 = €130,000
- Interest = €16,000
Calculating: ( \text{Interest Cover} = \frac{130,000}{16,000} = 8.13 )
Step 6
Advise the bank manager if a loan of €300,000, on which a rate of 6% would be charged, should be granted to JB plc.
Answer
Assessing profitability and liquidity:
-
Profitability: The company shows a return on capital employed of 14.79%, which is favorable compared to the borrowing cost of 6%. This suggests the company is capable of covering the loan's interest.
-
Liquidity: The current assets exceed current liabilities, indicating they can meet short-term obligations. The company should be able to service the debt without significant strain.
-
Gearing: The gearing ratio improved from 45% to 39.82%, showing lower reliance on external debt.
Given these factors, it seems prudent for the bank manager to grant the loan.
Step 7
Discuss why the financial information of the company would be of interest to you.
Answer
As an employee, the company’s financial information is crucial for several reasons:
-
Job Security: Understanding the financial health helps to assess job stability and the potential for layoffs during downturns.
-
Performance Feedback: Financial reports show the company’s performance, helping employees to align their goals with those of the company to enhance personal performance and advancement prospects.
-
Profit Sharing: If the company offers profit-sharing, employees need to know how profits are generated and distributed.
-
Growth Opportunities: Financial health indicates potential for company growth and career progression. If the company is doing well, it may expand, leading to new roles and promotions.
Step 8
Identify two other users of financial information.
Answer
Two other users of financial information include:
- Shareholders: They use financial statements to evaluate the company's performance and make informed decisions regarding their investments.
- Creditors: Lenders analyze financial data to assess the creditworthiness of the company before extending credit or a loan.