Assessment Assessment 2 Outcomes covered 3, 4 and 5 Assessment instructions The

ID: 2807559 • Letter: A

Question

Assessment Assessment 2 Outcomes covered 3, 4 and 5 Assessment instructions The financial statements of SSP Ltd are attached. SSP is a company operating in the food manufacturing industry. In this assessment you will be expected to prepare and submit one single report which will demonstrate your ability to explain the purpose of a set of financial accounting statements and analyse and interpret the information contained within them. In preparing this report you should examine the financial statements in detail and carry out three tasks. Your report should have an introduction outlining its purpose. Your report shou ld then e at least three sections-one section covering each of the three tasks set in this assessment. Y our report should also include appropriate conclusions/ recommendations. Wherever possible you should attempt to integrate the information within the report Task 1 Prepare a list of four people/organisations who may have reason to use these accounts For each user identified above, describe the purpose for which they require information from these accounts and identify the statement or statements which will answer their needs Task 2 Examine the organisation's statement of financial position and identify the sources of finance employed by the company. Describe the characteristics of each source of finance and categorise them into short, medium and long-term Scottish Qualifications Authority ssessment Support Pack/F84M 34/CASPO01 V3 Business Accounting August 2015

Explanation / Answer

Ans:

Task 1

Financial statements are useful to existing and potential investors, lenders, other creditors and the Government. The financial statements are used by investors to decide buying, selling or holding equity and debt instruments. Lenders and other creditors use these statements to provide or settle the loans or other forms of credit. Government authorities use these statements to decide on tax liabilities.

Task 2

Sources of finance

Company is meeting its financial requirements from following three sources:

1.Equity and retained earnings- Long term finance

2.Debentures (Non current liabilities)- Medium term

3.Current Liabilities- Short term

Equity and retained earnings are considered permanent source of finance. Debentures are debt instruments which are usually repayable over a period of 3-5 years while current liabilities are repayable within a year’s time.

Task 3

1. Major cash inflow is through operating activities and major cash outflow is on account of purchase of property, plant and equipment.

2. Financial analysis using six key ratios:

Ratio

2013

2014

Gross Profit Margin

59.96

60.06

Return on Capital Employed (ROCE)

31.86

23.33

Current Ratio

1.56

1.78

Quick Ratio

0.77

0.64

Rate of Inventory Turnover

7.61

Gearing Ratio

0.35

0.32

Company is able to operate on high margins on its products. The profitability margins are healthy. Company is generating healthy returns on capital employed. It has good liquidity position which is indicated by current ratio of more than 1. This shows that company has enough resources to meet its current obligations. Inventory turnover ratio of 7.61 shows that company is efficiently using its resources. Finally the gearing ratio of lower than 1 indicates strong financial position of the company. This shows that company is meeting its financial requirements through internal resources and it is not dependent on external resources.

3. Company has maintained strong financial position. Company has strong equity capital base and it has also increasing its reserves by way of retained earnings. Company should raise finance by raising debt either through banks or money markets or quasi debt instruments like preference shares.