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Analyse and interpret the financial performance of Smith Plc by calculating 8 ratios that you consider relevant and comment on any features that you believe important in future decision-making. (8 marks) (b) State with reasons whether or not as an investor you would invest in the business based on the preceding analysis. (Maximum 500 words) (6 marks)

Question 1
Statement of financial position of Smith Ltd. Company as at 31/12/2011
£
£
£
Assets
Non Current Assets
Patent
20,000
Brands
15,000
Goodwill
30,000
Freehold land and buildings
220,000
Furniture
5,000
Vehicle I
15,000
305,000
Current Assets
Inventories
5,000
Cash
35,000
Receivables
5,000
Prepaid Expenses:
Interest
800
Rates
500
46,300
Total Assets
351,300
Current Liabilities
Accrued Expenses:
Electricity
690
Wages
400
Trade Payables
5,000
Other payables Tax
5,000
11,090
Non Current Asset
Mortgage
145,000
Total Liabilities
(156,090)
Net Assets
195,210
Equity
Share Capital
Ordinary Shares
100,000
Preference Shares
10,000
Retained Earnings
85,210
Total Equity
195,210
Income Statement of Smith Ltd. for the period ending 31/12/2011
£
Sales
200,000
Less cost of Sales
(65,000)
Gross Profit
135,000
Total Expenses
(25,290)
Operating Profit
109,710
Interest
(14,500)
Profit before Tax
95,210
Tax
(10,000)
Profit for the year
85,210
Notes:
1) On 01 December 2010 the company was created with authorised share capital of £150,000. The share capital is made up of 120,000 ordinary shares and 30,000 3% preference shares.
2) On 01 January 2011 the company issued 100,000 ordinary shares at a nominal value of £1 and 10,000 preference shares at a nominal value of £1 each.
3) On 01 January 2012 the company decided to issue its remaining ordinary shares for £1.40 per share.
4) On 01 January 2012 the company decided to issue its remaining preference shares.
5) During the year the company purchased inventories totalling £95,000. Suppliers were paid cash £50,000 and the rest were bought on credit.
6) During the financial year total cash sales were £80,000 (cost of £30,000). The total credit sales were £100,000 (cost of £58,000).
7) Electricity bills for the first three quarters of the year and £690 for the last quarter of the previous year were paid totalling £2,090. But before the financial statements are finalised for the year, the bill for the last quarter arrived showing a charge of £467.
8) The company paid off £20,000 of the mortgage during the year and paid trade creditors £45,000.
9) Annual interest of £12,500 for the building mortgage were continued to pay. During the year interest of £5,500 was paid in cash.
10) During the year company received £60,000 in payments against of accounts receivable. However, £10,000 worth of credit customers went bankrupt and their debts were written off. Provision for bad debts of 3% is applied after this bad debt.
11) The company decided to use the direct method (straight-line method) of depreciation for the following assets. Furniture is depreciated at a rate of 10% and Vehicle I at 20%. The freehold land and buildings were depreciated at a rate of 20%.
12) Rates on the land and building were paid during the year for the period 1 April 2012 to 31 March 2013 and amounted to £1,500
13) On 01 January 2012 a second vehicle (II) was purchased for £8,000 and it is expected to be used in the business for three years and then to be sold for £2,000.
14) Wages totalling £5,000 were paid during the year. At the end of the year, the business owed £400 of wages for the last month of the year.
15) Van running expenses for the year were £600.
16) Brands have an infinite life and the impairment test showed that the asset has a selling value of £10,000 and the value in use of £13,000.
17) The goodwill was created on the 1 January 2012 and it has a finite life of 6 years, and the company decided to use a straight-line method of amortisation.
18) Patent is depreciated at a rate of 5% during the first 5 years.
19) The corporation tax bill for the financial year was estimated as being £10,000 and half of which has already been paid in cash during the year.
20) On the 31 December directors proposed and paid 10p dividend for ordinary shareholders.
21) On the 31 December preference dividends was paid in cash.
Required:
Using the information detailed above, prepare and present:
1) Income Statement (also known as a Profit and Loss Account or Profit Statement) for the financial year ended 31 December 2012 (7 marks)
2) Statement of Financial Position in vertical format as at 31 December 2012 (7 marks)
3) Statement of Changes in Equity for the financial year ended 31 December 2012 (5 marks)
4) A Cash Flow Statement for the financial year ended 31 December 2012 (using the Indirect Method of preparation) (5 marks)
Question 2
(a) Analyse and interpret the financial performance of Smith Plc by calculating 8 ratios that you consider relevant and comment on any features that you believe important in future decision-making. (8 marks)
(b) State with reasons whether or not as an investor you would invest in the business based on the preceding analysis. (Maximum 500 words) (6 marks)

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