Analysis and Advice for AEKI Plc

Performance and Position of AEKI Plc Under John's Leadership

Susan, who had previously worked as a purchasing manager for a large furniture retailer, started AEKI plc 20 years ago. Her job as a purchasing manager had involved a considerable amount of travel and, during a buying trip to Northern Europe, she was drawn to the product range of a particular furniture manufacturer. Although she wanted to place a large order with the manufacturer, her employer rejected the idea. She was convinced, however, that the furniture would be very popular in the UK and that it was too good an opportunity to be missed. She therefore decided to start her own wholesale furniture business to import and sell the furniture to UK furniture retailers.

AEKI plc was not an immediate success and during the first few years of its life it was far from certain that it would survive. However, a breakthrough occurred when a department store began to place large orders for the furniture. This was soon followed by orders from other large retailers and the business then entered a period ofsustained growth. The rate of growth since the initial breakthrough has been steady rather than spectacular. During the past four years, for example, the sales revenue of AEKI plc grew at a rate of around 5% a year and profits increased by around 6% a year.

Recently, Susan was taken ill and was advised by her doctor to stop working. She had, until her illness, been both chairman and chief executive of AEKI plc and had been the driving force behind the performance of the business. Although she had intended for her son, John, to take over eventually, she had not though this would happen until some years into the future. At the time of Susan’s forced retirement, John was not even working for the business. After graduating with a BS degree in Business four years earlier, he now worked in Italy for a large furniture retailer to gain experience. Nevertheless, he was asked by his mother to return to the UK and take over AEKI plc. Despite John's lack of experience in the UK business environment, Susan had faith in her son and, as she was the controlling shareholder in this business, and no one could challenge her decision that John should replace her. The financial statements for AEKI plc at the time that Susan stepped down as chairman and chief executive are shown below:

Analyze the performance and position of AEKI plc over the period that John has been chairman and chief executive and comment on the changes that have occurred since Susan retired. Describe and interpret what the trends and ratios indicate about the financial well-being of AEKI plc. What major changes have occurred in four years? What questions do these figures raise? How do you interpret the findings?

What specific advice would you give John about what he should do to address immediate problems and toward increasing the financing of AEKI plc ?

Examine the offer John has made to Hedgehog Ltd and state whether or not you feel Hedgehog Ltd should accept and why.

Small Mart, a retail company, is considering whether to open a new distribution center locatedclose to its stores in the North East UK. The center would open January 1, 2023. To make the decision, the planning committee requires a master budget for the center’s first quarter of operation (January, February, and March of 2023).

You are to construct the first quarter master budget based on the following expectations:

1. January sales are estimated to be £400,000 of which £100,000 will be cash sales and £300,000 will be on credit. The company expects sales to grow 10% per month for the first few monthsof operation. Prepare a sales budget for the first quarter. (5 marks)
2. The company expects to collect 100% of accounts receivable in the month following the sale. Prepare a schedule of expected cash receipts for the first quarter. (5 marks)
3. Use the information developed in requirements a and b to determine the balance of accounts receivable on the March 31 budgeted balance sheet and the total sales that would be on the first quarter budgeted income statement. (2 marks)
4. Cost of goods sold will be 60% of sales. Company policy is to budget an ending inventory balance equal to 25% of the next month’s projected cost of goods sold. Assume Small Mart expects April cost of goods sold to be £314,000. Prepare an inventory purchases budget. (5 marks)
5. All inventory purchases are on credit. Small Mart pays 70% of accounts payable in the month of purchase. It pays the remaining 30% in the following month. Prepare a schedule of expected cash payments for inventory purchases. (5 marks)
6. Use the information developed in requirements d and e to determine the amount of cost of goods sold that would be on the first quarter budgeted income statement and the balances of ending inventory and accounts payable that would be on the March 31 budgeted balance sheet. (2 marks)

The capital expenditures budget shows that Small Mart must purchase £100,000 of equipment on January 1 to establish the new center. Small Mart will pay for the equipment on January 31. The equipment will have depreciation expense of £750 month.

1. Sales commissions and utilities are paid in the month after the month in which they are incurred. All other expenses are paid in the month they are incurred. Prepare a schedule of cash payments for selling and administrative expenses. (4 marks)
2. Use the information developed in requirements g and h to determine the balance of sales commissions payable, utilities payable, and accumulated depreciation that would be on the March 31 budgeted balance sheet and the amount of selling and administrative expense that would be on the first quarter budgeted income statement. (4 marks)
3. Using a line of credit, Small Mart borrows and repays loan principal in increments of £1,000 on the last day of the month as needed. It pays interest of 1 percent per month in cash on the last day of the month. Company policy is to maintain an ending cash balance of at least £12,000. Use this information and the schedules prepared in requirements b, e, and h to prepare a cash budget. (18 marks)
4. Use the information developed in requirement j to determine the cash flows from operating, investing, and financing activities. Show the first quarter pro forma statement of cash flows. (16 marks)