Financial Analysis and Advice

Section 1: Income Statement Analysis

Section 1:

Income Statement

The following are financial information from Sunshine Coast Ltd for the 12-month reporting period ended 30 June 2021 on a cash basis:

Sales  $        416,100 Cost of Goods Sold  $        246,000 Gross Profit  $        170,100 Advertising  $            8,400 Administration  $          28,200 Insurance  $            5,160 Interest  $            7,140 Rent  $          13,800 Salary and Wages  $          42,600 Profit  $          64,800

You have also been provided with the following additional information:

• The accounts receivable and accounts payable balances at the start of the reporting period were $24,600 and $14,700 respectively. At the end of the reporting period, accounts receivable was $31 800 and accounts payable was $29,640.
• An advertising invoice of $4,440 had not been paid.
• The business has equipment that cost $60,600. It has a useful life of five years and an expected residual value of $6,600.
• The insurance expense represents the 12-month premium on a policy that was purchased on 30 April 2021.

Required:

1. Prepare the Income Statement for Sunshine Coast Ltd for the year ended 30 June 2021 on an accrual basis.

Angela Joss, the CEO of Sunshine Coast Ltd is confused about cash basis and accrual basis. She is also confused about which basis is more useful to measure financial performance in the Income statement. She is a lawyer by profession and has limited knowledge of accounting.

Required:

Prepare a memo advising Angela on which basis is more useful to measure financial performance and provide reasons. To support your argument, provide two examples from the income statement that you prepared in question 1 above.

Section 2:

Analysis and interpretation of financial statements

Wilson Ltd., a new medium-sized company operating in the agri-food sector, produces quality prepared food products. The following table illustrates the average performance of other companies in the same sector for 2020.

Industry Average Results, 2020

Return on equity (ROE)	27%
Asset turnover	2
Current ratio	6.5
Debt to equity ratio	70%

The following information has been extracted from the financial statements for 2020 and 2019 for Wilson Ltd.

Â	2020  $	2019 $
Net profit for the year ended 30 June	200,000	190,000
Sales revenue for the year ended 30 June	2,100,000	1,600,000
Current assets as at 30 June	801,000	855,000
Non-current assets as at 30 June	950,000	703,000
Current liabilities as at 30 June	155,000	345,000
Non-current liabilities as at 30 June	660,000	500,000

 

Calculate the following ratios for Wilson Ltd for the year ended 30 June 2020. (all ratios must be rounded up to 2 decimal places)

1. Return on Equity (ROE)
2. Asset turnover
3. Current ratio
4. Debt to equity ratio

Comment on the company’s profitability and liquidity for the year ended 2020 using the relevant ratios calculated in 1 above and the industry averages given in the question. Also, make recommendations to improve the company’s profitability and liquidity position.  

Section 3:

Cost-volume-profit analysis

Wormy Comp is a manufacturer of plastic worm farms. Data relating to their one product for 2020 is as follows:

 

Annual volume	18,000
Selling price per unit	$560
Variable manufacturing cost per unit	$230
Annual fixed manufacturing costs	$2,800,000
Variable marketing and distribution costs per unit	$45
Annual fixed non-manufacturing costs	$1,800,000

Required:

Covid-19 has increased the prices of plastic. This increased the variable manufacturing cost to $250 per unit. However, the company has managed to reduce their factory rental by $100,000, which has saved money on fixed manufacturing costs. Calculate the units that would need to be sold in 2021 to achieve the same profit as 2020. Comment on the impact of Covid-19 on the costs for 2020 using the relevant figures you calculated above.   

 

Safety First is a manufacturer of life jackets, life vests and buoyancy aids. They have provided the following information relating to the sales of their products in 2020:

 

Â	Life Jackets	Life Vests	Buoyancy aids
Sales mix (8,500 units)	2,000	2,600	3,900
Selling price	$120	$110	$85
Variable cost/unit	$45	$30	$25

Total Fixed costs = $515,000                                                                                                               

1. Calculate the break-even point in total units and units per product for 2020, using the following table:

Â	Life Jackets	Life Vests	Buoyancy Aids	Total
Unit sales	Â	Â	Â	Â
Contribution margin	Â	Â	Â	Â
Sales mix %	Â	Â	Â	Â
Weighted Average Contribution Margin	Â	Â	Â	Â

 Calculate the total profit for 2020. Show all your workings.

Safety First is rearranging its store and wants to ensure that they make the best use of the limited space available to maximise sales possibilities. They have 150 metres of space available, and the 3 products use up space as follows:

 

Â	Life Jackets	Life Vests	Buoyancy Aids
Contribution margin per product	$75	$80	$60
Minimum shelf space required per product	2.5	1.2	1.5

How should the shelf space (150 metres) be allocated to the 3 products to maximise the profits? Justify your reasons for the space allocation using the relevant figures calculated above.

Section 4: Budgeting

Bitcom Limited had undertaken the following budget planning.  The budget is planned to sell 700 boxes at $700 each. The budget shows that it takes 20 kg of raw material to produce 1 box of the product. Each kg costs $14. The direct labour costs are budgeted at 10 hours per box produced, and the hourly rate for direct labour is $10. Fixed production and fixed administrative expenses are budgeted at 140,000 and 60,000 each. You have also been provided actual income statement information for the month of December 2020 (See the Table below).

Required:

Calculate the budgets alongside the actual results for the month of December 2020, calculate the individual variances, and indicate whether each variance is favourable or unfavourable.

 

Â	Budget Data	Actual	Variance	Favourable or Unfavourable
Sales in units	700 units	700	Â	Â
Sales	Â	$525,000	Â	Â
Direct materials cost	Â	$210,000	Â	Â
Direct labour cost	Â	$80,850 ($10.5 per hour x 11 hours)	Â	Â
Fixed production cost	Â	$155,000	Â	Â
Fixed administrative expense	Â	$70,000	Â	Â
Net Profit	Â	$9,150	Â	Â

 

Based on your answer in required 1. above, briefly explain the possible causes of the variances.