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Homework answers / question archive / CASE STUDY -You are the accountant of SPARROW
CASE STUDY -You are the accountant of SPARROW. The company has surplus funds and is considering expanding its business activities. SPARROW is an Irish company which imports birdseed from Asia. The company has a retail store in Dublin city centre. The company has 3 full time employees and is owned and managed by two directors
Peter and Jane. Both directors are actively involved in the management of the company.
Jane has identified a potential target company, RAVEN an American company which specializes in manufacturing birdboxes. RAVEN acquires 80% of its materials to make the birdboxes from one supplier. Neither
Jane nor Peter has any experience in the manufacturing sector.
The financial statements for RAVEN for the year ended 31 December 2021 are provided below.
Requirement:
Write a report to Peter and Jane to advise if they should invest in RAVEN. Your report should not exceed 1,500 words. As part of your report, you are required to:
1. Provide a detailed analysis of the financial performance of RAVEN to include:
a. Profitability
b. Liquidity
c. Investment
d. Gearing
2. To discuss in depth any other issues Peter and Jane should consider before investing in RAVEN
3. The purpose and importance of preparing regular budgets.
Continued overleaf
Raven Limited prepares its accounts to 31 December each year.
The following financial statements of Raven Limited are available:
Raven Limited
Statement of Profit or Loss
For the year ended 31 December 2021
2021 2020
$' 000 $'000
Sales 3,852 2,876
Cost of Sales -1,865 -1,483
Gross Profit 1,987 1,393
Distribution expenses -150 -160
Administration expenses -100 -70
Operating profit 1,737 1,163
Interest -30 -25
1,707 1,138
Corporation tax -260 -200
Net profit after tax 1,447 938
Raven Limited
Statement of Financial Position
As at 31 December 2021
2021 2020
$' 000 $' 000 $' 000 $' 000
Non Current Assets (see note 1) 5,600 3,610
Current Assets
Inventory 140 130
Trade receivables 195 170
Bank 0 20
335 320
Total assets 5,935 3,930
Equity and Liabilities
Ordinary shares €1 1,500 1,300
Retained earnings 3,778 2,201
5,278 3,501
Non current liabilities
10% Debenture 300 250
300 250
Current liabilities
Bank overdraft 40 7
Trade payables 240 140
Accruals 7 2
Taxation 70 30
357 179
Total equity and liabilities 5,935 3,930
Note 1: - Non Current Assets
2021 2020
Cost/ Cost/
Market value Accumulated Carrying Market Accumulated Carrying
Depreciation Amount Value Depreciation Amount
$’000 $’000 $’000 $’000 $’000 $’000
Land 2,500 2,500 2,510 2,510
Machinery 5,200 2100 3,100 4,200 3,100 1,100
Machinery was sold during the year for $120,000.
The Machinery sold originally cost $1,400,000 was sold at a profit of $20,000.
Draw up a cash budget for Rocky Road Limited showing the balance at the end of each month from the following
information for the six months ended 31 December 2021:
(a) Bank balance on 1 July 2021 €8,000
(b) Production in units
March
2021
April
2021
May
2021
June
2021
July
2021
August
2021
Sept
2021
October
2021
November
2021
December
2021
January
2022
400 800 500 900 800 400 1500 1400 1200 900 800
(c) Raw materials used in production cost €18 per unit. 40% is payable during the month of production and
60% one month after production
(d) Direct labour costs of €14 per unit payable in the month of production
(e) Fixed expenses €500 per month.
(f) Variable expenses incurred in production €10 per unit payable in month after production
(g) Equipment purchased for €600,000 in April 2021. Depreciation is 10% per annum.
(h) Sales of €300 per unit. 75% of all sales are on credit which are payable one month after sale. The
balance are cash sales.
(i) Sales in units
February
2021
March
2021
April
2021
May
2021
June
2021
July
2021
August
2021
Sept
2021
October
2021
November
2021
Dec
2021
800 900 600 800 1500 700 1400 1300 1200 500 1600
REQUIREMENT:
Part (i)
Prepare the cash budget for the period July 2021 to December 2021.
(20 marks)
Continued overleaf
Part (ii)
Comment on the results cash budget prepared in part (a) above for the period July 2021 to 31 December 2021.
(10 marks)
Part (c) – 40 Marks
Continued overleaf
You have been asked to prepare the year end financial statements for Greengrass Limited.
You have been provided with the following trial balance.
Trial Balance as at 31 October 2021
€ €
Trucks 160,000
Machinery 90,000
Bank 3,100
Trade payables 22,950
Inventory as at 31 October 2020 16,895
Share capital (€1 ordinary shares) 20,000
Share premium 4,000
Retained earnings as at 31 October 2020 110,228
Trade receivables 60,000
Purchases 720,145
Wages and salaries 42,900
Directors remuneration 75,632
Sales 985,632
Light and heat 8,521
10% Debentures 80,000
Motor expenses 38,750
Telephone 13,005
Debenture interest 8,000
Administration expenses 35,742
Accumulated Depreciation - Trucks 32,000
Accumulated Depreciation - Machinery 18,000
Irrecoverable (bad) debts 6,320
1,275,910 1,275,910
Additional Information
Information (that is not included in the trial balance above) has been provided as follows:
(i) Trucks are to be depreciated at 10% straight line.
(ii) Machinery is to be depreciated at 20% reducing balance.
(iii) Closing inventory at 31 October 2021 was €25,000.
(iv) An irrecoverable debt (bad debt) amounting to €4,400 is to be written off.
(v) A provision of for bad debts (allowance for receivables) of 5% is to be made.
(vi) Examination of the expense records revealed that on 31 October 2021:
€
Telephone owning 1,600
Administration prepaid 1,300
(vii) Corporation tax due on profits for the year was €4,250
REQUIREMENTS
You are required to prepare:
(a) A Statement of Profit or Loss for Greengrass Limited for the year ended 31 October 2021.
(13 marks)
(b) A Statement of Financial Position for Greengrass Limited as at 31 October 2021.
(17 marks)
Total 30 marks
