Table 1
VISCOUNT LTD
Balance sheets at 30 June

2014                         2015                         2016

Assets
Current assets
Cash 364,700 292,720 123,790
Inventories
Finished products 600,000 700,000 800,000
Work in progress 245,500 258,000 342,000
Raw materials and supplies 483,050 450,000 550,000
Accounts receivable 521,000 669,280 1,184,210
Total current assets 2,214,250 2,370,000 3,000,000
Non-current assets (net of
accumulated depreciation)
Land (at cost) 600,000 816,300, 1,334,104
Buildings (at cost) 2,215,500 2,323,000 3,400,000
Machinery (at cost) 2,538,980 2,500,370 4,505,640
Total non-current assets 5,354,480 5,639,670, 9,239,744
Total assets 7,568,730 8,009,670 12,239,744
Liabilities
Current liabilities
Accounts payable 355,700 360,000 544,620
Provision for tax 500,000 500,000 800,000
Provision for dividend 130,000 430,000 672,000
Total current liabilities 985,700, 1,290,000 2,016,620
Non-current liabilities
Debentures 683,030 903,370 2,999,020
Mortgages 500,000 400,000 1,000,000
Total non-current liabilities 1,183,030 1,303,370 3,999,020
Total liabilities 2,168,730 2,593,370 6,015,640
Net assets 5,400,000 5,416,300 6,224,104
Owners’ equity
8% preference shares 500,000 500,000 1,200,000
Ordinary shares ($1) 4,000,000 4,000,000 4,000,000
Retained profits 900,000 916,300 1,024,104
Total owners’ equity 5,400,000

 

Table 2 Additional information from VISCOUNT Ltd’s financial statements

2014                 2015                2016

From Income Statement
i Annual sales
Credit 2,605,000 3,011,760 4,500,000
Cash 120,000 142,600 1,500,000
Total annual sales 2,725,000 3,154,360 6,000,000
ii Cost of goods sold 1,662,250 1,861,070 3,720,000
iii Net profit before tax 926,500 946,300 1,579,804
Net profit after tax 463,250 473,150 789,902
iv Interest expense before tax 94,642 104,269 399,902
Interest expense after tax 47,321 52,135 199,951

 

Table 3

From Balance Sheet
v Balances as at 30 June 2013 30 June 2013
Accounts receivable 450,000
Total assets 7,000,000
Inventory 1,441,870

 

Table 4

vii Selected financial ratios 2014 2015 2016 Industry average 2016
Ratio
1 Current Ratio 2.25 2.25
2 Quick Ratio 0.9 1.10
3 Debt to equity ratio 0.40 0.48 0.6
4 Rate of return on shareholders’ equity 8.6% 8.8% 16%
5 Gross margin ratio 39% 39% 38% 40%
6 Net margin ratio 17.00% 15.00% 16%
7 Rate of return on assets 6.75% 6.74% 14%
8 Interest expense as a percentage of sales 3.47% 3.31% 6.67% Not Available

 

Requirements:

  1. Prepare a common size Balance Sheet and Income Statement Extract from the data in Tables 1 and 2 using the 2014 year as the base-year (30 marks)
  2. Calculate the eight (8) missing ratios from Table 4 above using formulae provided on page 1.

(30marks)

  1. Evaluate and provide your conclusions about the financial position of Viscount Ltd; using either Common Size Statements information or these eight (8) ratios in trend and comparative analyses: (a) a three-year 2014, 2015, and 2016 longitudinal trend analysis for the company (16marks) (b) a 2016 cross-sectional analysis for company and the industry average. ( 8marks)
  2. Identify the means by which Viscount Ltd has funded the increase in its non-current assets and comment on how and why this means of purchasing non-current assets may affect the level of business risk of of the company. (Please note it is not intended to calculate the actual effect on the level of business risk between the year 2015 and 2016. You only need to identify how and discuss why this level of business risk effect occurs). ( 9 marks)
  3. The company has increased its annual sales significantly in 2016 compared to 2015 and 2014. Identify (a) How has the company increased its production capacity to achieve its sales expansion strategy in 2016? and ( 4 marks) (b) What is the impact of its increased production capacity on the solvency position of Viscount Ltd? ( 3 marks)

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