The directors of $\mathrm{L}$ Ltd appointed a new sales manager towards the end of 2011. This manager devised a plan to increase revenue and profit by means of a reduction in selling price and extended credit terms to customers. This involved considerable investment in new machinery early in 2012 in order to meet the demand which the change in sales policy had created.

The financial statements for the years ended 31 December 2011 and 2012 are shown below. The sales manager has argued that the new policy has been a resounding success because revenue and, more importantly, profits have increased dramatically.

Note: The balance on the retained profits reserve at the end of 2011 was $£ 327,000$.

(a) You are required to explain whether you believe that the performance for the year ended 31 December 2012 and the financial position at that date have improved as a result of the new policies adopted by the company. You should support your answer with appropriate ratios.

(b) All of L Ltd's sales are on credit. The finance director has asked you to calculate the immediate financial impact of reducing the credit period offered to customers. Calculate the amount of cash which would be released if the company could impose a collection period of 45 days.
(Chartered Institute of Management Accountants)

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Income statements 2012 2011 000 000 Revenue 2,800 900 Cost of sales (1,680) (360) Gross profit Selling expenses Bad debts Depreciation 1,120 540 (270) (150) (140) (18) (208) (58) Interest (192) (12) Net profit 310 302 Statements of financial position 2012 2011 000 000 000 000 Non-current assets Factory 441 450 Machinery 1,791 490 2,232 940 Current assets Inventory 238 30 Accounts receivable 583 83 Bank 12 821 125 Total assets 3,053 1,065 Current liabilities Accounts payable 175 36 Bank 11 - 186 36 Non-current liabilities Borrowings 1,600 100 (1,786) (136) 1,267 929