Analyse the financial statements that have been prepared by Home Styles Ltds financial director. In particular, comment on the following aspects of the company: (50 marks in total)

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 on information available from the cash flow statement. (16 marks)

Assess the value of Jana Jarils parents recent concern that the company has not performed well in the past year (the year to 30 June 2019). What practical steps should Jana now undertake in order to improve the financial performance of the business? (20 marks)

Home Styles Ltd Jana Jaril comes from a family that has bought, renovated and sold or rented houses as a side-line to their main forms of employment for a number of years. This family interest has proved to be a profitable small business. Her mother is an electrician by trade but has developed skills in other areas such as basic plumbing work and carpentry. This has greatly reduced the cost of doing up old properties. Janas father works as a part-time bookkeeper, so he has enough spare time to keep proper financial records for the business. Janas favourite subject at school was Art. While still at school Jana discovered a knack for helping her parents to tastefully furnish renovated properties in preparation for their sale or rent. After school Jana studied interior design while helping run her parents business. About 20 years ago Jana was left money by a grandparent. She used this to open her first Home Styles shop in an exclusive part of Edinburgh. It sells home furnishings and accessories to a range of customers. Janas luck, good taste and business acumen have proved very successful. The private company she formed nearly 18 years ago, Home Styles Ltd, has grown to comprise a chain of 25 stores in Edinburgh and southern Scotland. The retail outlets have been complemented by an effective and profitable website. Jana is the majority shareholder, while her parents own the remaining shares in the business. Jana has recently decided she wants to sell the business in about three years. She is conscious that her parents are growing old and she also wants to spend more time with her young family. Janas parents have decided to retire from formal employment in the next few months. They will still, however, run their property business. While they are essentially passive shareholders in Home Styles Ltd, Jana still relies on them for common sense advice she can trust. Home Styles Ltd has been profitable since the global financial crash that began in 2007. It appears to Jana and the new joint chief executive director of the company, Peter, that the domestic furnishings market has not been affected by cuts in government expenditure. Revenues have increased on average by 4% per annum in recent years. In the year ending 30 June 2018 the company achieved a record return on equity of 21%. This has generated some media interest in Home Styles Ltd, as well as a number of serious offers to buy the company. In the last year, Jana has relied mainly on Peters advice to improve financial performance and financial health ratios, invest in new staff, and improve back office and other business systems by means of technology. The joint chief executive director has also concentrated on buying higher quality goods that can be sold with a higher profit margin. A more contentious strategic decision by the joint chief executive director was to increase marketing and advertising expenses in order to significantly improve sales. Peter is keen to improve profitability and reduce financial risk where possible, in order to put the business on a stronger and more sustainable footing. Janas parents have recently challenged Peters views and advised their daughter that the company has not performed well in the past year. Jana 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 parents recent advice is justified.

Home Styles Ltd Income Statements for the years ended 30 June 2019 and 30 June 2018

	Year to 30 June 2019		Year to 30 June 2018
	k	k	k	k
Sales revenue		89,572		82,674
Less: cost of goods sold:
Opening inventory	4,234		4,462
Purchases from wholesalers	42,856		41,387
	47,090		45,849
Less closing inventory	3,832		4,234
Cost of goods sold		43,258		41,615
Gross profit		46,314		41,059
Less expenses:
Salaries and other costs	17862		16,054
Rent and office services	639		629
Insurance	94		103
Distribution and postage costs	321		308
Marketing and advertising expenses	861		828
Office administration	187		161
Energy and other utilities	251		228
Depreciation	649		669
Audit, Accounting & Legal Costs	46		44
Interest on bank loan	10		6
Interest on bank overdraft	0		0
Total Expenses		20,920		19,030
Interest received		1,395		1,285
Profit before taxation		26,789		23,314
Corporation tax		5,358		4,595
Profit after taxation		21,431		18,719

Home Styles Ltd Balance Sheets at 30 June 2019 and 30 June 2018

	Year to 30 June 2019		Year to 30 June 2018
	k	k	k	k
Non-current assets
Property		23,428		24,098
Computers and equipment		396		334
Vehicles		247		226
Total non-current assets		24,071		24,658
Current assets
Inventory	3,832		4,234
Receivables	3,178		2,182
Other current assets	43		39
Cash at bank	87,958		65,121
Total current assets	95,011		71,576
Current liabilities
Payables	10,942		10,421
Corporation tax	5,358		4,595
Other tax liabilities	309		276
Bank overdraft	0		0
Total current liabilities	16,609		15,292
Net current assets/working capital		78,402		56,284
Total assets less current liabilities		102,473		80,942
Long-term liabilities
Bank loan		200		100
Net Assets		Total102,273		Total80,842
Equity
Share capital		1,000		1,000
Reserve: retained earnings		101,273		79,842
Total Equity		Total102,273		Total80,842

Home Styles Ltd Cash Flow Statements for the years ended 30 June 2019 and 30 June 2018

	Year to 30 June 2019	Year to 30 June 2018
	k	k
Operating activity:
Operating profit	25,404	22,035
Interest paid on overdraft	0	0
Corporation tax paid	(4,595)	(6,485)
Add back non-cash expenses:
Depreciation	649	669
Loss/(Profit) on disposal of non-current assets	0	0
Changes in cash invested in working capital:
(Increase)/Decrease in inventory	402	228
(Increase)/Decrease in receivables	(996)	(472)
(Increase)/Decrease in other current assets	(4)	8
Increase/(Decrease) in payables	521	1,854
Increase/(Decrease) in other tax liabilities	33	94
Net cash inflow/(outflow) from operating activities	21,414	17,931
Investing activity:
Purchase of non-current assets	(62)	(47)
Proceeds on disposal of non-current assets	0	0
Net cash generated (consumed) by investing activity	(62)	(47)
Financing activity:
Repayment of bank loan	0	0
New bank loan	100	0
Interest paid on bank loan	(10)	(6)
Interest received on bank deposit	1,395	1,285
Net cash generated (consumed) by financing activity	1,485	1,279
Change in cash balances	22,837	19,163
Opening cash balance (overdraft) at 1st January	65,121	45,958
Closing cash balance (overdraft) at 31st December	Total87,958	Total65,121