Question

Thomas Homes Limited is an independent furniture and homewares retailer, with branches throughout the South East of England. Abbreviated results for the last two years are given below. Statement of Profit or Loss for the year ended 31 December:

2018 2019 £000 £000 Sales 803 858 Cost of sales (509) (513) Gross profit 294 345 Operating expenses (237) (244) Operating Profit 57 101 Investment income - 4 Finance costs (14) (24) Profit before taxation 43 81 Taxation (17) (33) Profit for the year 26 48 Statement of financial position as at 31 December: 2018 2019 £000 £000 Assets Non-current assets Property, plant and equipment 399 507 Long Term Investments 9 18 408 525 Current assets Inventory 111 113 Trade receivables 154 114 Prepayments 8 6 Bank 32 29 305 262 Total assets 713 787 Equity and liabilities Equity Ordinary share capital 186 186 Retained earnings 203 170 389 356 Non-current liabilities Long term loans 198 289 Current liabilities Trade payables 68 73 Accruals 31 27 Bank loan 27 42 126 142 Total equity and liabilities 713 787

Required: (a) Calculate the following ratios for Thomas Homes Limited for each of the years 2018 and 2019: i. Current ratio ii. Inventory turnover (Inventory at 31st December 2017, £105,000) iii. Accounts receivable days iv. Accounts payable days v. Gearing ratio vi. Interest cover

(b) Comment on the company’s liquidity position using the information in the question and your calculations in (a).

(c) List and briefly explain the limitations of analysing the performance of companies using financial statements.

TOTAL: 25 MARKS

Answer 1

Statement of Profit or Loss:

Particulars	2018	2019
Sales	803	858
Cost of Sales	(509)	(513)
Gross Profit	294	345
Operating Expense	(237)	(244)
Operating Profit	57	101
Investment Income	-	4
Finance Costs	(14)	(24)
Profit before taxation	43	81
Taxation	(17)	(33)
Profit for the year	26	48

Statement of Financial Position:

Particulars	2018	2019
Non Current Assets
Property Plant & Equipment	399	507
Long Term Investments	9	18
	408	525
Current Assets
Inventory	111	113
Trade Receivable	154	114
Prepayments	8	6
Bank	32	29
	305	262
Total Assets	713	787
Equity
Ordinary Share Capital	186	186
Retained Earnings	203	170
	389	356
Non Current Liabilities
Long Term Loans	198	289
Current Liabilities
Trade Payables	68	73
Accruals	31	27
Bank Loan	27	42
	126	142
Total Equity & Liabilities	713	787

1. Ratio Analysis:

Particulars	2018	2019
1. Current Ratio:
a.Current Assets	305	262
b.Current Liabilities	126	142
c. Current Ratio (a/b)	2.42:1	1.85:1
2. Inventory Turnover:
a. Cost of Sales	509	513
b. Inventory	111	113
c. Inventory Turnover (a/b)	4.59 times	4.54 times
3. Accounts Receivable Days:
a. Accounts Receivable	154	114
b. Sales	803	858
c. Number of Days	365	365
d. Accounts Receivable Days (a/b *c)	70 days	49 days
4. Accounts Payable Days:
a. Trade Payable	68	73
b. Cost of Sales	509	513
c. Number of Days	365	365
d. Accounts Payable Days (a/b *c)	49 days	52 days
5. Gearing Ratio
a. Long Term Liabilities	198	289
b. Capital Employed	389	356
c. Gearing Ratio (a/b * 100)	50.90%	81,18%
5. Interest Cover
a. EBIT	57	105
b. Interest Expense	14	24
c. Interest Cover (a/b)	4.07 times	4.275 times