Faustus SA is a manufacturer and prepares accounts, in Euros, for years to 31 December. During the year to 31 December 2020 sales, all on credit, totalled €21.2m, and €17m was received in payments from customers in respect of those sales. However, included in 2020 sales are customers who between them owed €1.2m have become insolvent and are highly unlikely to make any further payment. The cost of writing off these receivables should be treated as an administrative expense.

On 1 January 2020 €1.2m was paid for rent for the period from 1 January 2020 to 30 June 2020 (the next payment, of €2.4m for the next nine months, was made in February 2021). Rent is allocated to Cost of Sales, Distribution, and Administration in ratio of 2:1:1.

The company’s non-current assets consist of manufacturing equipment (purchased January 2019 for €10m) and vehicles (purchased January 2020 for €0.8m). The expected useful life of equipment is 10 years and that of the vehicles is 4 years, and both are depreciated on a straight-line basis. The vehicles are all used for distribution to customers.

Raw material costing €6m was purchased (all on credit) during the year, and suppliers were owed €0.4m at the year end. Inventories on 31 December 2020 had cost €1.1m (compared to the previous year’s figure of €0.9m) and the bank balance stood at €1.8m.

Wages and Salaries for the financial year totalled €4.2m, of which €0.2m in bonuses relating to 2020 were not paid until January 2021. Various operating expenses for the financial year totalled €2.4m of which €2m had been paid in cash by the end of the financial year. Both types of expenditure are to be allocated to Cost of Sales, Distribution, and Administration in ratio of 3:2:1.

The company is financed by 4m ordinary shares of €0.50 each and a long-term loan of €5m (interest is 4% per year). Loan interest was paid in full during the year. A final dividend for 2019 of €0.10 per share was declared and paid in March 2020. An interim dividend of €0.25 per share was paid in October 2020. A final dividend for 2020 of €0.15 per share was declared and paid in March 2021.

The Corporation Tax liability for the year is €1m which is due to be paid in September 2021.

Required:

(a) Using the information detailed above, prepare and present, in accordance with International Accounting Standards as far as the information provided allows, financial statements for the financial year ended 31 December 2020, consisting of:

(i) an Income Statement for the financial year ended 31 December 2020 (Figures for Earnings per Share are not required). (9 marks)

(ii) a Statement of Changes in Equity for the period. (4 marks)

(iii) a Statement of Financial Position in vertical format at 31 December 2020.(13 marks)

(b) a calculation of

1. (i) Return on Capital Employed (ROCE)

2. (ii) Return on Equity (ROE)

3. (iii) Distinguish the ratios in b) (i) and (ii) evaluate what they disclose about the firm.

(c) Critically assess the limitations of the use of ratio analysis in evaluating company performance. (15 marks)