1. Briefly explain the general purpose of each of the three financial statements (the income statement, the balance sheet and the cash flow statement) and the usefulness of each of them for Quartz Antique Furniture Ltd. (20 marks) 2. Analyse the financial statements that have been prepared by Quartz Antique Furniture Ltd's financial director. In particular, comment on the following aspects of the company: (50 marks in total) . Areas of concern in financial performance, focussing mainly on information from the income statement. (17 marks) ii. Areas of concern in financial health, focussing on ratios dependent on the income statement and the balance sheet. (17 marks) iii. Areas of concern in cash flow management, focussing mainly on information available from the cash flow statement. (16 marks) 3. Assess the value of Aunt Sophie's recent concern that taking on the recent bank loan was not advisable and the company has not performed well in the past year' (the year to 31 December 2019). What practical steps should Pat now undertake in order to improve the financial performance and financial health of the business? (20 marks) Quartz Antique Furniture Ltd Pat Dotella has always admired quality antique furniture. Her Aunt Sophie, who has built up an impressive collection of Georgian furniture, kindled Pat's interest in antiques from a young age. Since then Pat has developed an expertise in identifying popular trends in antique styles and the antique furniture that is most in demand. After studying Art at university, Pat worked for an auction house for five years where she learnt the trade of locating, buying and selling high quality antique furniture. About ten years ago, she started her own business in London. Her first shop Quartz Antique Furniture - London' soon became popular and profitable. Pat has since replicated her success in London to two other London venues as well as five shops around England in affluent locations in the following English cities: Brighton, Bristol, Manchester, Leeds and Birmingham. Quartz Antique Furniture Ltd is a private company with only two shareholders. Pat owns 80% of the ordinary shares of the business and her aunt owns the balance. Pat is the chief executive of her business but is not as financially knowledgeable as she would like to be. She is thus dependent on her financial director, Owen, who was only recruited two years ago. While Sophie is not actively involved with the business she is a great source of knowledge and experience for Pat. Pat's retail outlets have been complemented by an effective and profitable website Until recently, Quartz Antique Furniture Ltd has been very profitable. Revenues have increased on average by 9% per annum in the last three years. In the year ending 31 December 2018 the company achieved a return on equity of 21%. The company's financial performance has significantly benefited from an increase in gearing. In the last three years, a number of interest-only loans have been taken out that need to be repaid in between five and ten years' time. Pat and Sophie have not taken dividends out of the firm over the last few years as another way of increasing funds available for reinvestment. In the last year, Pat has relied mainly on Owen's advice to invest in a number of areas of the business in order to improve its financial performance and health. Such investment included greater expenditure on advertising and office equipment. Under Owen's guidance, in order to finance this investment, and to have more cash available for short-term opportunities, the company took out a further ten year long-term loan of one and a half million pounds. The loan is interest-only. Pat is now keen to improve profitability and reduce financial risk where possible, in order to put the business on a stronger and more sustainable footing. Unfortunately, the early indication is that the business seems to be suffering from a downturn in the economy. Sophie advised Pat against taking on the new loan and has recently suggested that the company has not performed well in the past year. Pat now needs to properly understand the implications of the latest financial statements below to see if the company is on the right track, and if her aunt's concerns are justified. Quartz Antique Furniture Ltd Income Statements for the years ended 31 December 2019 and 31 December 2018 Year to 31 Dec 2019 Year to 31 Dec 2018 k 45,238 Sales revenue 43,256 Less: cost of goods sold: Opening inventory 2,563 2,394 Purchases from wholesalers 35,156 31,648 37.719 34,042 Less closing inventory 3,134 2,563 Cost of goods sold 34,585 31,479 Gross profit 10,653 11,777 Less expenses: Salaries and other costs 6,738 Rent and office services Insurance Distribution and postage costs Marketing and advertising expenses Office administration Energy and other utilities Depreciation Audit, Accounting & Legal Costs Interest on bank loan Total Expenses 9,744 Interest received 127 Profit before taxation 2,160 Corporation tax 432 Profit after taxation 1,728 Quartz Antique Furniture Ltd Balance Sheets at 31 December 2019 and 31 December 2018 Year to 31 Dec 2019 Year to 31 Dec 2018 Non-current assets Property 14,586 15,066 Computers and equipment 312 279 Vehicles 194 187 Total non-current assets 15,092 15,532 Current assets Inventory 3,134 2.563 Receivables 3,318 2,203 Other current assets 28 Cash at bank 5,189 4,247 Total current assets 11,687 9,041 Current liabilities Payables 3,983 3,542 Corporation tax 139 432 Total current liabilities 4,122 3,974 Net current assets/working capital 7,565 5,067 Total assets less current liabilities 22,657 20,599 Long-term liabilities Bank loan 12,027 10,527 Net Assets 10,630 10,072 Equity Share capital 100 100 Reserve: retained earnings 10,530 9,972 Total Equity 10,630 10,072 Quartz Antique Furniture Ltd Cash Flow Statements for the years ended 31 December 2019 and 31 December 2018 Year to 31 Dec 2019 Year to 31 Dec 2018 k Operating activity: Operating profit 1,504 2,875 Corporation tax paid ( 433) ( 578) Add back non-cash expenses: Depreciation Loss/(Profit) on disposal of non-current assets Changes in cash invested in working capital: (Increase Decrease in inventory ( 571) ( 169) (Increase/Decrease in receivables ( 1,115) ( 472) (Increase/Decrease in other current assets Increase/(Decrease) in payables 1,854 Increase/(Decrease) in other tax liabilities Net cash inflowl(outflow) from operating activities 3,974 Investing activity: Purchase of non-current assets ( 46) Proceeds on disposal of non-current assets Net cash generated (consumed) by investing activity (53) (46) Financing activity: Increase in bank loan 1,500 Interest paid on bank loan ( 962) Interest received on bank deposit 156 127 Net cash generated (consumed) by financing activity 694 ( 715) Change in cash balances 942 3,213 Opening cash balance (overdraft) at 1st January 4,247 1,034 Closing cash balance (overdraft) at 31st December 5,189 4,247 1. Briefly explain the general purpose of each of the three financial statements (the income statement, the balance sheet and the cash flow statement) and the usefulness of each of them for Quartz Antique Furniture Ltd. (20 marks) 2. Analyse the financial statements that have been prepared by Quartz Antique Furniture Ltd's financial director. In particular, comment on the following aspects of the company: (50 marks in total) . Areas of concern in financial performance, focussing mainly on information from the income statement. (17 marks) ii. Areas of concern in financial health, focussing on ratios dependent on the income statement and the balance sheet. (17 marks) iii. Areas of concern in cash flow management, focussing mainly on information available from the cash flow statement. (16 marks) 3. Assess the value of Aunt Sophie's recent concern that taking on the recent bank loan was not advisable and the company has not performed well in the past year' (the year to 31 December 2019). What practical steps should Pat now undertake in order to improve the financial performance and financial health of the business? (20 marks) Quartz Antique Furniture Ltd Pat Dotella has always admired quality antique furniture. Her Aunt Sophie, who has built up an impressive collection of Georgian furniture, kindled Pat's interest in antiques from a young age. Since then Pat has developed an expertise in identifying popular trends in antique styles and the antique furniture that is most in demand. After studying Art at university, Pat worked for an auction house for five years where she learnt the trade of locating, buying and selling high quality antique furniture. About ten years ago, she started her own business in London. Her first shop Quartz Antique Furniture - London' soon became popular and profitable. Pat has since replicated her success in London to two other London venues as well as five shops around England in affluent locations in the following English cities: Brighton, Bristol, Manchester, Leeds and Birmingham. Quartz Antique Furniture Ltd is a private company with only two shareholders. Pat owns 80% of the ordinary shares of the business and her aunt owns the balance. Pat is the chief executive of her business but is not as financially knowledgeable as she would like to be. She is thus dependent on her financial director, Owen, who was only recruited two years ago. While Sophie is not actively involved with the business she is a great source of knowledge and experience for Pat. Pat's retail outlets have been complemented by an effective and profitable website Until recently, Quartz Antique Furniture Ltd has been very profitable. Revenues have increased on average by 9% per annum in the last three years. In the year ending 31 December 2018 the company achieved a return on equity of 21%. The company's financial performance has significantly benefited from an increase in gearing. In the last three years, a number of interest-only loans have been taken out that need to be repaid in between five and ten years' time. Pat and Sophie have not taken dividends out of the firm over the last few years as another way of increasing funds available for reinvestment. In the last year, Pat has relied mainly on Owen's advice to invest in a number of areas of the business in order to improve its financial performance and health. Such investment included greater expenditure on advertising and office equipment. Under Owen's guidance, in order to finance this investment, and to have more cash available for short-term opportunities, the company took out a further ten year long-term loan of one and a half million pounds. The loan is interest-only. Pat is now keen to improve profitability and reduce financial risk where possible, in order to put the business on a stronger and more sustainable footing. Unfortunately, the early indication is that the business seems to be suffering from a downturn in the economy. Sophie advised Pat against taking on the new loan and has recently suggested that the company has not performed well in the past year. Pat now needs to properly understand the implications of the latest financial statements below to see if the company is on the right track, and if her aunt's concerns are justified. Quartz Antique Furniture Ltd Income Statements for the years ended 31 December 2019 and 31 December 2018 Year to 31 Dec 2019 Year to 31 Dec 2018 k 45,238 Sales revenue 43,256 Less: cost of goods sold: Opening inventory 2,563 2,394 Purchases from wholesalers 35,156 31,648 37.719 34,042 Less closing inventory 3,134 2,563 Cost of goods sold 34,585 31,479 Gross profit 10,653 11,777 Less expenses: Salaries and other costs 6,738 Rent and office services Insurance Distribution and postage costs Marketing and advertising expenses Office administration Energy and other utilities Depreciation Audit, Accounting & Legal Costs Interest on bank loan Total Expenses 9,744 Interest received 127 Profit before taxation 2,160 Corporation tax 432 Profit after taxation 1,728 Quartz Antique Furniture Ltd Balance Sheets at 31 December 2019 and 31 December 2018 Year to 31 Dec 2019 Year to 31 Dec 2018 Non-current assets Property 14,586 15,066 Computers and equipment 312 279 Vehicles 194 187 Total non-current assets 15,092 15,532 Current assets Inventory 3,134 2.563 Receivables 3,318 2,203 Other current assets 28 Cash at bank 5,189 4,247 Total current assets 11,687 9,041 Current liabilities Payables 3,983 3,542 Corporation tax 139 432 Total current liabilities 4,122 3,974 Net current assets/working capital 7,565 5,067 Total assets less current liabilities 22,657 20,599 Long-term liabilities Bank loan 12,027 10,527 Net Assets 10,630 10,072 Equity Share capital 100 100 Reserve: retained earnings 10,530 9,972 Total Equity 10,630 10,072 Quartz Antique Furniture Ltd Cash Flow Statements for the years ended 31 December 2019 and 31 December 2018 Year to 31 Dec 2019 Year to 31 Dec 2018 k Operating activity: Operating profit 1,504 2,875 Corporation tax paid ( 433) ( 578) Add back non-cash expenses: Depreciation Loss/(Profit) on disposal of non-current assets Changes in cash invested in working capital: (Increase Decrease in inventory ( 571) ( 169) (Increase/Decrease in receivables ( 1,115) ( 472) (Increase/Decrease in other current assets Increase/(Decrease) in payables 1,854 Increase/(Decrease) in other tax liabilities Net cash inflowl(outflow) from operating activities 3,974 Investing activity: Purchase of non-current assets ( 46) Proceeds on disposal of non-current assets Net cash generated (consumed) by investing activity (53) (46) Financing activity: Increase in bank loan 1,500 Interest paid on bank loan ( 962) Interest received on bank deposit 156 127 Net cash generated (consumed) by financing activity 694 ( 715) Change in cash balances 942 3,213 Opening cash balance (overdraft) at 1st January 4,247 1,034 Closing cash balance (overdraft) at 31st December 5,189 4,247