The directors of Dennis Limited cannot understand why, when shareholders’ funds and sales show an increase over the previous year, net profit has declined. Also, they cannot understand why, even though profits have been made during the year, and the property revalued, there has been a substantial fall in the bank balance to a point where the company is now overdrawn as never before.

The company’s accounts for 19_3, together with the figures for 19_2, are given below.

Additional information:
(1) On 1 January 19_3 land and buildings were revalued at £80 000 —
which had been the market value of this asset for the past 3 years.
(2) On 1 February 19_3 the company made a bonus issue of one ordiriary share for each five held.
(3) All purchases and sales were credit transactions.
(4) During the year plant and machinery which had cost £10 000 (written down value £3 000) was sold for £1 500.
Required:
Prepare a report for the directors of Dennis Limited, which must contain:

(a) not more than eight ratios for comparing the year ended 31 December 19_3, with the year ended 31 December 19_2, together with brief comments about the significance of the information drawn from such ratios.

(b) a source and application of funds statement to illustrate the change in the bank balance during 19_3

Transcribed Image Text:

Profit statement for the year ended 31 December 19_3 19_2 Sales 780 000 650 000 Stock, 1 January 22 000 18 000 Purchases 647 800 524 000 669 800 542 000 Less: Stock, 31 December 38 000 22 000 Cost of sales 631 800 520 000 Gross profit 148 200 130 000 Administrative expenses 93 600 71.500 Distribution costs 46 800 39 000 140 400 110 500 Net profit for the year 7.800 19 500 Profit and loss account brought forward 9 500 2 500 17 300 22 000 Transfer to general reserve 12 500 Profit and loss account carried forward 17 300 9500