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Accounting and Financial Information

Introduction

This is a 1,000-word individual assignment (report) on the case company; a report should demonstrate the use of appropriate tools and approaches to analyze the  company’s financial situation; apply Accounting skills learned from the module  to make statements  based on the requirement.

Learning Objectives

On successful completion of this assessment, students will be able to:

Explain the importance of accounting and finance for new and small businesses, distinguishing between the different contributions made by financial and management accounting

Prepare a simple income statement and statement of financial position and explain key terms

Discuss the advantages and disadvantages of different sources of finance for sole traders and companies

Use investment appraisal techniques to evaluate long-term decision-making opportunities

Apply appropriate costing techniques to decision making situations

Task

Kangaroo plc

Kangaroo plc is a wholesaler and distributor of brandy. The company is family-owned, and was founded in 1915;  it is based in Belfast, Northern Ireland. The current owners are brother and sister Mr Drew Hunter and Ms Jenny Hunter.  The company has been expanding rapidly and its profit has risen from £1.8 million for the year ending 30 April 2020 to £2.8 million for the year ended 30 April 2021. Despite the rapid growth, the bankers have required Kangaroo plc to reduce its overdraft (£5 million as of 30 April 2021), by half by 31 October 2021. The bankers arrived at this decision after some very difficult discussions with Drew and Jenny.

Drew always considers Jenny is a very talented brandy brewer, but he is not confident that she is good with financial planning.  To resolve this issue with the bankers, the Board of Kangaroo plc approached you, at the end of May 2021, to recommend a plan of action to turn around the company’s fortunes. The agreement was that if your plan of action was accepted by the Board, you would then be appointment to an executive position in order to implement your proposals.

Having studied and analyzed Kangaroo plc’s situation, you recommended the following proposals:

Provisions are to be made against old inventory, valued at one million pounds This mainly consists of centenary promotional packs from 2015

Two of the company’s customers are in liquidation; one was a regular customer, and the other was relatively new. The debts amounted to a total of £500,000, and you proposed that the amounts should be written off.

You noted that under the company’s credit sales terms, payments should be made within 30 days of delivery of goods.  However, many customers were taking longer than that to make the payment and some have defaulted.  You therefore recommended a policy where all orders from new customers, with no proven credit history, should only be accepted if a 30% deposit is paid at the time of the order and the balance paid on delivery. For the remaining customers, re-orders should not be accepted if the past sales order remains unpaid for more than 30 days.

You noted that most of the trade suppliers were paid within one or two days of delivery even though the normal credit term is 30 days after delivery.  You proposed that the credit terms should be maximized and suppliers should be paid 30 days after delivery.

In order to manage the current cash flow, you proposed that no dividends should be paid at that time, and that dividend payments should be reviewed in January 2022. A letter should be sent to all the shareholders explaining the reason for this.

Your plans were accepted at the Board meeting of 30 April 2021, and have been in operation since then to the current day, 30 June 2021.

Your appointment as the Managing Director has upset Jenny. She had held the positions of Managing Director and Marketing Director, but now only retains the latter role.   As well as taking over the Managing Director’s responsibilities, you are now also overseeing financial matters, which were previously undertaken by Jenny’s husband, Mike, who is also the Sales Director.

You had insisted that everyone in the team should continue to oversee their area of expertise. Jenny, however, does not trust you because she suspects that you are out to assume more of her responsibilities. Moreover, Jenny is furious that because a key part of your newly accepted action plan detailed removing the proposed dividend payment to shareholders.  She would have received almost £150,000 if the dividends had been paid but, without this sum, she faced the prospect of being unable to afford her dream holiday cottage in France.

Jenny feels that she understands the brandy industry better than you. She believes that customers will demand long credit periods, and will buy elsewhere if this is not given. In her opinion, the worst of your decisions was to make the two write-offs, which led the company to its first-ever loss for the quarter. “They have only been here a couple of weeks and we are making our first ever loss – and they are charging us £20,000 a month to mess things up!” she quipped.

The Board will meet in a couple of days and Jenny has decided that she will demand your removal. There are two items on the agenda: the plans for the next quarter to 31 October 2021 and the figures for the three months to the end of 31 July 2021, which show the loss. She has added a third – to debate the removal of you as Managing Director.

Appendix 1 contains the Income Statement for the year ended 30 April 2021 and Statement of Financial Position as at 30 April 2021, along with any other necessary information for the quarter to 31 July 2021.

Answer Format:

Statement of financial position as at 30 April 2021

Income statement for the year ended last 30 April 2021

Appendix 1 (cont.)

Further information relevant to the three months to 31 July 2021

(All numbers are in £000s)

Sales for the quarter were £6,250 and all were on credit.

Cash receipts from debtors totaled £5,800.

Receivables write-offs totaled £600 (includes £500 proposed by you)

Purchases of inventory totaled £2,800 (all on credit), and £2,790 was paid to trade playable.

Inventory write-offs totaled £1,100 (includes £1,000 write-off proposed by you).

Cost of goods sold totaled £3,600.

Operating expenses (excluding depreciation) were £1,000, all of which were paid immediately as incurred. This figure includes £20 for your salary for July.

The depreciation expense was £650. There were no purchases of non-current assets, nor any disposals.

Interest expenses for the period were £400.

Other receivables, other playable and cash in hand remained constant. The taxation for the year ended 30 April 2021 is not due to be paid until January 2022.  Tax is accrued at the rate of 25% of the cumulative profits for the quarter (before depreciation charges).  If the company made losses, it is not the company’s policy to accrue for any potential tax refund due.

The Board decided in July that no dividends in respect of the previous year would be paid.

Appendix 2:

Further information relevant to the three months to 31 October 2021.

(All numbers are in £000s)

1.Sales for the quarter will be £6,300, and all will be on credit.

2.In line with you proposal to, the closing trade receivables is forecast to equate to 1 month credit sales for the quarter (i.e. £2,100).

3.The trade receivables write-offs for the quarter equated to £150.

4.Purchases of inventory will total £3,900 (all on credit) and in line with your proposal, the closing creditor will equate to one month of the average purchases for the quarter (i.e. £1,300).

5.There will be no inventory write-offs.

6.Cost of goods sold will total £3,500.

7.Operating expenses (excluding depreciation) will be £1,100, all of which will be paid immediately as incurred. This figure includes your salary for the quarter.

8.The depreciation expense will be £625. There will be no purchases of non-current assets, nor any disposals.

9.Interest expenses for the period will be £250.

10.Other receivables, other playable and cash in hand will remain constant. The taxation for the year ended 30 April 2021 is not due to be paid until January 2022.  Tax is accrued at the rate of 25% of the cumulative profits for the quarter (before depreciation charges).  If the company made cumulative losses, it is not the company’s policy to accrue for any potential tax refund due.

Required:

Question 1.

You submitted 5 plans at the Board meeting of 30 April 2021. Please explain the reasons and  the impact on financial statements (SOFP or IS ) for  each plan.  Please only apply the knowledge you learned from this module.

Question 2.

Based on the information provided in Appendix 1 and 2, you are to prepare:-

(a)  the Income Statement for the quarter to 31 July 2021

(b) the Statement of Financial Position at the end of 31 July 2021

(c) the projected Income Statement for the quarter to 31 October. 2021

(d) the budgeted Statement of Financial Position at the end of October 2021

Question 3.

Based on the statements that you have prepared in (2), comment on the expected performance of both the company and your plan. Your comments should include your defense on Jenny’s demand that you are to be removed.