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.

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.

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Issued share capital 1 ordinary shares, fully paid Reserves Share premium Retained earnings As at 31 March 19X4 As at 31March 19X5 100,000 150,000 10,000 60,000 140,000 160,000 Loan capital 10% debentures 19X7-X9 40,000 40,000 For year ended For year ended Net profit after tax 60,000 31 March 19X5 70,000 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. 31 March 19X4