Colin Black is considering investing a substantial sum in the ordinary shares of Jacks Ltd. Having some accounting knowledge he has extracted the following information from the accounts for the last two financial years.

Because he was disappointed with the result he obtained when he calculated the return on the equity capital employed, Colin Black has asked for your advice.

Required:
(a) Calculate the figures which prompted Colin Black’s reaction.
(b) Prepare a memorandum to Colin Black pointing out other information to be considered when comparing the return on equity capital employed over two years as a basis for his investment decision.
(c) Explain why a company builds up and maintains reserves.

Transcribed Image Text:

Issued share capital £1 ordinary shares, fully paid Reserves Share premium Retained earnings Loan capital 10% loan notes 2022-2023 Net profit after tax As at 31 March 2015 £ 100,000 10,000 140,000 40,000 For year ended 31 March 2015 £ 60,000 As at 31 March 2016 £ 150,000 60,000 160,000 40,000 For year ended 31 March 2016 £ 70,000