Financial Statements Analysis of Peacock, Sibson, and Amax

Consolidated Statements of Profit or Loss for the year ended 31st March 2020

The following are the financial statements of Peacock plc, Sibson Ltd and Amax Ltd

The following information is available:

1. Peacock’s acquisitions:

1.Share capital of both Sibson and Amax remains the same as at the date of acquisition by Peacock. Group policy is to recognise the non-controlling interest in subsidiaries using the proportionate method.

2.On the date of acquisition, a fair value review was carried out on Sibson’s non-current assets.  It was found that land exceeded its book value by £0.5 million.

3.During the year, Sibson sold golds to Peacock for £120,000, which included a mark-up of one-third.  90% of these goods were still in Peacock’s inventory at the end of the year.

4.An impairment review of goodwill in Sibson was carried out at the year ending 31st March 2020 and it was found that goodwill was impaired by £200,000.

a)Prepare the consolidated statement of profit or loss for the Peacock Group for the year-ended 31st March 2020.

Please ensure that you show the profit attributable to the group and to the non-controlling interest.

b)Prepare the consolidated statement of financial position for the Peacock Group as at 31st March 2020.

All figures should be rounded to the nearest whole number.

Amber plc and Bronze Plc are two companies that retail furniture, furnishings and various other household items. Financial information for the two groups is given below.

                                          Amber    Bronze
                                            £m         £m
Revenue                              1350      590
Cost of sales                       (700)     (340)
Gross profit                         650      250
Operating expenses           (440)    (200)
Operating profit                  210       50
Finance expense                  -          (10)
Profit before tax                  210       40
Tax                                       (50)       (10)
Profit for the year                160       30

Consolidated Statements of Financial Position as at 31st March 2020

                                                       Amber      Bronze
                                                        £m          £m
Non-current assets
Intangible assets                             10            10
Property, plant and equipment      300          60
Total non-current assets                 310          70

Current assets
Inventories                                      190       100
Trade receivables                             20         0
Other receivables                            10         60
Cash and cash equivalents              90         50
Total current assets                        310       210

Total assets                                     620      280

Current liabilities
Short-term borrowings                   10         -
Trade payables                                50        60
Other payables                               80        90
Other current liabilities                   10       10
Total current liabilities                   150      160

Non-current liabilities   
Non-current borrowings                70         20
Total liabilities                               220       180
Net assets                                     400       100
        
Equity
Share capital                                  10         20
Share premium account                10           -
Retained earnings                        380        80
Total equity                                  400       100

Impact of Peacock's Acquisitions

Chrome Ltd are a small, manufacturer of high-end household furniture and started trading just over 2 years ago.  When they began trading, they sold exclusively to retailers, but are gradually expanding their business by also selling to the general public via the internet.

Chrome have contacted you as they have the opportunity to supply furniture to both Amber and Bronze.  The sales director sees it as an excellent way to rapidly increase their turnover.  However, the finance director has reservations and would prefer to increase marketing activity in the UK and overseas in order to increase sales to the general public as the profit margins are much higher as retailers expect large discounts.  Unfortunately, they do not have the funds to follow both the finance director’s and the sales director’s strategies. Therefore, the managing director and majority shareholder, Harold Crump, needs to make a decision. He is wary of overtrading as this caused his previous company, Gone Ltd, to fail.

Amber have stated that their payment terms are 60 days and require a credit limit of £2 million.  They expect to spend around £20 million a year with Chrome.
 
Bronze have also requested a credit limit of £2 million but they will pay within 45 days and expect to spend around £12 million a year with Chrome.

Chrome’s credit terms for retailers are usually 30 days and the maximum amount of credit they offer to a small number of their most reliable retail customers is £200,000. Chrome have to follow strict credit control procedures, as they do not have very strong cash flow. When they sell to the general public, they require payment before delivery is made.

Prepare a report for Chrome’s managing director, Harold Crump, comparing the financial performance and financial position of Amber with Bronze using ratio analysis and interpretation.  You should advise whether you think Chrome should trade with Amber and/or Bronze, and if so on what terms.

Your report should include sections commenting upon the limitations of your analysis and identify what additional information would be useful.

Please use year-end figures in your ratio calculations and not averages. Your ratios should appear in an appendix to the report.

A friend of yours is considering investing their lottery winnings in a portfolio of shares. They have acquired the financial statements of the companies that they are interested in and done some internet searches. They keep coming across the terms EPS (earnings per share) and Diluted EPS (DEPS).  They are not really sure of the difference between the two and have turned to you for advice as they are aware that you are studying accounting and finance.

Explain to your friend how to calculate EPS and DEPS, and the difference between the two terms and why it is useful to investors for companies to disclose the EPS calculated on a diluted basis in addition to the basic EPS.

A claim has been made against Downton Construction Plc for an injury suffered by a pedestrian in connection with building work by the company.  Downton’s lawyers have confirmed that Downton will probably have to pay damages of £200,000.  The lawyers have further advised that a claim can be made against the building subcontractors for £100,000.

Explain to Downton, the accounting treatment of this issue, in accordance with IAS 37.

You should assume that all amounts are material.