Spreader plc is a UK parent company with a number of wholly-owned subsidiaries in the USA and Europe. Extracts from the consolidated financial statements of the group for the year ended 30 April 1997 are given below.

Requirements In your capacity as chief accountant of Spreader plc,

(a) prepare a report for the board of directors of the company which analyses the results of the group for the year ended 30 April 1997; (21 marks)

(b) explain why the segmental data which has been included in the extracts may need to be interpreted with caution. (4 marks)

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Profit and loss account-year ended 30 April 1997 1996 000 000 Turnover (Note 1) 50000 48000 Cost of sales (25000) (22000) Gross profit 25000 Other operating expenditure (15000) 26000 (14200) Operating profit 10000 11800 Interest payable (1000) (900) Profit before taxation (Note 2) 9000 10900 Taxation (2800) (3600) Profit after taxation 6200 7300 Dividend (3000) (3200) Retained profit 3200 4100 Note 1 Analysis of turnover for the year by geographical segment Total sales UK 1997 1996 1997 1996 000 000 000 15000 20000 10000 Inter-segment sales (2000) (2500) (1000) Sales to third parties 13000 17500 9000 US Rest of Europe Total 1997 1996 1997 1996 000 000 8000 30000 (500) (2000) 7500 28000 23000 000 000 000 25000 55000 53000 (2000) (5000) (5000) 50000 48000 Note 2 Analysis of profit before tax for the year by geographical segment UK US Rest of Europe Total 1997 1996 1997 1996 1997 1996 1997 1996 000 000 Segment profit 3000 6000 000 000 1500 1200 000 000 000 000 6000 5000 10500 12200 Common costs Operating profit Interest payable Profit before taxation (500) (400) 10000 11800 (1000) (900) 9000 10900