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CASE STUDY -You are the accountant of SPARROW

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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