Nature Care Limited

Background

Nature Care Limited (Ltd.), founded in 2019 by Emma Edward in Ballygowan, Northern Ireland (NI), has established itself as a notable player in the organic cosmetic industry in NI. Initially targeting the niche market of environmentally conscious consumers in NI, the company embarked on a journey to explore the demand for high-end, eco-friendly skincare products. Recognised for its dedication to environmental sustainability, Nature Care Ltd. garnered regional accolades, solidifying its presence through local digital and social media channels. This led to a surge in product demand and subsequent growth. The company efficiently met this demand by transitioning portions of its production from manual labour to automated processes. It is currently poised for a somewhat moderated growth trajectory due to anticipated inflationary impacts in the present fiscal year (2023).

Strategic Growth Phase

Acknowledging the need for strategic marketing to bolster its growth, Nature Care Ltd. enlisted the expertise of a marketing consulting group. As a recommendation of this partnership, the company introduced a customer incentive scheme. Commencing from January 1, 2023, customers making an initial purchase of 80 or more are provided with a coupon entitling them to a 5% discount on their subsequent purchase exceeding 30. Forecasts indicate that approximately 1800 such coupons will be distributed this year, with an anticipated redemption rate of 72% and these customers, on average, are projected to spend 52 per transaction. This initiative not only encourages customer loyalty but also reflects the company's commitment to value-added offerings.

Infrastructure Expansion and Financing

The escalating demand for Nature Care's products necessitated a larger operational facility. Accordingly, the company took the strategic decision to construct a depot. This expansion endeavour entails an expenditure of 300,000 for land acquisition, 200,000 for building construction, and 60,000 for fixture and fitting installation. To fund this expansion initiative and acquire additional machinery, Nature Care secured financial support through borrowing. 360,000 was procured from NI Cooperative at an interest rate of 6%, supplemented by an additional 400,000 from Ushar Bank at 4%, both loans being effective from January 1, 2023. Although the construction timeline was initially scheduled for completion by August 31, 2023, unforeseen adverse weather conditions from February 1 to February 28, 2023, disrupted progress and incurred supplementary site preparation costs amounting to 22,000. The depot, however, was ultimately finalized and ready for use by September 30, 2023, with plans to commence operational use from January 1, 2024.

Environmental Concerns and Mitigation

While Nature Care Ltd.'s expansion efforts aim to meet growing market demand, they have faced opposition from a local environmental pressure group. The group contends that the new depot and factory expansion pose a potential threat to the local natural environment. As this concern gained media attention, Nature Care Ltd swiftly responded by committing, via its official website, to restoring the site to its original state following the lease agreement's completion. The site restoration will cost 220,000 after the lease agreement of 20 years, which aligns with the company's commitment to ethical and sustainable practices. It is worth noting that Nature Care Ltd.'s weighted average cost of capital stands at 10%, while the risk-free rate remains at 2%.

Nature Care Limited

Summary of Financial Information

a. Nature Care Limited - summary of Statements of Profit or Loss and Other Comprehensive Income for the year ended 31 December 2022

	2021 '000	2022 '000
Revenue	331.92	358.47
Operating expense	(295.79)	(289.67)
(Loss)/ profit before Interest and Tax	36.13	48.8
Interest expense	(20)	(20)
Taxation	(4.03)	(12.2)
(Loss)/ profit after tax	12.10	36.6

An analysis of the company's operating expenses indicates:

	2021 '000	2022 '000
Direct operating cost	242.50	241.43
Administrative	11.52	14.48
Logistics	41.77	33.76
Total	295.79	289.67

b. Nature Care Limited - Summary of Statements of Financial Position as at 31 December 2022

	2021 '000	2022 '000
Non-current assets	676.8	1,915.2
Current assets
Inventories	473	72.7
Trade receivables	78	87
Other current assets	422.1	135.6
Cash and cash equivalent	272.2	252
Total assets	1,922.1	2,462.5
Current liabilities
Overdraft	760.57	754.54
Payables	19.93	29.76
	780.5	784.3
Non-current liabilities
Bank loan	500	500
	1280.5	1284.3
Equity
Capital	500	1000
Reserves	141.6	178.2
	641.6	1178.2

c. The cosmetic industry's average ratio for 2021 and 2022 provided for benchmarking.

	Industry Average
ROCE	3.52%
Asset turnover	2.2 times
Net profit margin	15.5%
Current ratio	1.3:1
Acid test ratio	0.9
Trade receivable days	60 days
Trade payable days	45 days
Gearing ratio	45%
Operating cost as a percentage of the sale	80%
Interest cover	3 times

Note: Formula used to calculate the ratios are in appendix

YWC Accounting Service

Nature Care has established contact with YWC Accounting Services, an accounting firm based in Northern Ireland, to manage its financial records and annual reporting. Given the company's ongoing expansion, Emma has acknowledged the impracticality of personally overseeing the accounts. As the trainee accountant spearheading this engagement, your role involves addressing Emma's queries concerning the appropriate accounting treatment of recent developments and their potential implications for the company's financial position. In preparation for your scheduled meeting with Emma next week, you will be delivering a presentation to Emma, focusing on the following key points:

1. Evaluating and interpreting the financial position of Nature Care Limited in comparison with the sector average. Besides, assessing the impact of the decision to build a new depot and machinery purchase on its financial stability.

(50 marks)

1. Discussing the limitations of the above comparison.

(10 marks)

1. Explaining the impact of coupons on revenue recognition.

(15 marks)

1. Providing an explanation of the accounting process for depot construction.

(20 marks)

1. Describing the appropriate accounting approach for the site restoration cost proposal.

(5 marks)

Appendix:

(i) Return on Capital employed

(Net profit before tax and dividends/ Capital employed) x100.

Capital employed = Total asset - current liabilities

(ii) Asset turnover ratio

Sales/ Capital employed.

(iii) Net profit margin

(Profit before tax and dividends/sales) x 100

(iv) Current ratio

Current assets / current liabilities

(v) Acid Test

(Current assets-inventory) / current liabilities

(vi) Trade receivable days

(Trade receivables/sales) x 365 days

(vii) Trade payable days

(Trade payable / cost of goods sold) x 365 days

(viii) Gearing ratio

(Loan capital / total capital employed) x 100

(ix) Operating cost as a percentage of sales

(Operating expense/sales) x 100

(x) Interest Cover

PBIT/interest expense

Nature Care Limited

Background

Nature Care Limited (Ltd.), founded in 2019 by Emma Edward in Ballygowan, Northern Ireland (NI), has established itself as a notable player in the organic cosmetic industry in NI. Initially targeting the niche market of environmentally conscious consumers in NI, the company embarked on a journey to explore the demand for high-end, eco-friendly skincare products. Recognised for its dedication to environmental sustainability, Nature Care Ltd. garnered regional accolades, solidifying its presence through local digital and social media channels. This led to a surge in product demand and subsequent growth. The company efficiently met this demand by transitioning portions of its production from manual labour to automated processes. It is currently poised for a somewhat moderated growth trajectory due to anticipated inflationary impacts in the present fiscal year (2023).

Strategic Growth Phase

Acknowledging the need for strategic marketing to bolster its growth, Nature Care Ltd. enlisted the expertise of a marketing consulting group. As a recommendation of this partnership, the company introduced a customer incentive scheme. Commencing from January 1, 2023, customers making an initial purchase of 80 or more are provided with a coupon entitling them to a 5% discount on their subsequent purchase exceeding 30. Forecasts indicate that approximately 1800 such coupons will be distributed this year, with an anticipated redemption rate of 72% and these customers, on average, are projected to spend 52 per transaction. This initiative not only encourages customer loyalty but also reflects the company's commitment to value-added offerings.

Infrastructure Expansion and Financing

The escalating demand for Nature Care's products necessitated a larger operational facility. Accordingly, the company took the strategic decision to construct a depot. This expansion endeavour entails an expenditure of 300,000 for land acquisition, 200,000 for building construction, and 60,000 for fixture and fitting installation. To fund this expansion initiative and acquire additional machinery, Nature Care secured financial support through borrowing. 360,000 was procured from NI Cooperative at an interest rate of 6%, supplemented by an additional 400,000 from Ushar Bank at 4%, both loans being effective from January 1, 2023. Although the construction timeline was initially scheduled for completion by August 31, 2023, unforeseen adverse weather conditions from February 1 to February 28, 2023, disrupted progress and incurred supplementary site preparation costs amounting to 22,000. The depot, however, was ultimately finalized and ready for use by September 30, 2023, with plans to commence operational use from January 1, 2024.

Environmental Concerns and Mitigation

While Nature Care Ltd.'s expansion efforts aim to meet growing market demand, they have faced opposition from a local environmental pressure group. The group contends that the new depot and factory expansion pose a potential threat to the local natural environment. As this concern gained media attention, Nature Care Ltd swiftly responded by committing, via its official website, to restoring the site to its original state following the lease agreement's completion. The site restoration will cost 220,000 after the lease agreement of 20 years, which aligns with the company's commitment to ethical and sustainable practices. It is worth noting that Nature Care Ltd.'s weighted average cost of capital stands at 10%, while the risk-free rate remains at 2%.

Nature Care Limited

Summary of Financial Information

a. Nature Care Limited - summary of Statements of Profit or Loss and Other Comprehensive Income for the year ended 31 December 2022

	2021 '000	2022 '000
Revenue	331.92	358.47
Operating expense	(295.79)	(289.67)
(Loss)/ profit before Interest and Tax	36.13	48.8
Interest expense	(20)	(20)
Taxation	(4.03)	(12.2)
(Loss)/ profit after tax	12.10	36.6

An analysis of the company's operating expenses indicates:

	2021 '000	2022 '000
Direct operating cost	242.50	241.43
Administrative	11.52	14.48
Logistics	41.77	33.76
Total	295.79	289.67

b. Nature Care Limited - Summary of Statements of Financial Position as at 31 December 2022

	2021 '000	2022 '000
Non-current assets	676.8	1,915.2
Current assets
Inventories	473	72.7
Trade receivables	78	87
Other current assets	422.1	135.6
Cash and cash equivalent	272.2	252
Total assets	1,922.1	2,462.5
Current liabilities
Overdraft	760.57	754.54
Payables	19.93	29.76
	780.5	784.3
Non-current liabilities
Bank loan	500	500
	1280.5	1284.3
Equity
Capital	500	1000
Reserves	141.6	178.2
	641.6	1178.2

c. The cosmetic industry's average ratio for 2021 and 2022 provided for benchmarking.

	Industry Average
ROCE	3.52%
Asset turnover	2.2 times
Net profit margin	15.5%
Current ratio	1.3:1
Acid test ratio	0.9
Trade receivable days	60 days
Trade payable days	45 days
Gearing ratio	45%
Operating cost as a percentage of the sale	80%
Interest cover	3 times

Note: Formula used to calculate the ratios are in appendix

YWC Accounting Service

Nature Care has established contact with YWC Accounting Services, an accounting firm based in Northern Ireland, to manage its financial records and annual reporting. Given the company's ongoing expansion, Emma has acknowledged the impracticality of personally overseeing the accounts. As the trainee accountant spearheading this engagement, your role involves addressing Emma's queries concerning the appropriate accounting treatment of recent developments and their potential implications for the company's financial position. In preparation for your scheduled meeting with Emma next week, you will be delivering a presentation to Emma, focusing on the following key points:

1. Evaluating and interpreting the financial position of Nature Care Limited in comparison with the sector average. Besides, assessing the impact of the decision to build a new depot and machinery purchase on its financial stability.

(50 marks)

1. Discussing the limitations of the above comparison.

(10 marks)

1. Explaining the impact of coupons on revenue recognition.

(15 marks)

1. Providing an explanation of the accounting process for depot construction.

(20 marks)

1. Describing the appropriate accounting approach for the site restoration cost proposal.

(5 marks)

Appendix:

(i) Return on Capital employed

(Net profit before tax and dividends/ Capital employed) x100.

Capital employed = Total asset - current liabilities

(ii) Asset turnover ratio

Sales/ Capital employed.

(iii) Net profit margin

(Profit before tax and dividends/sales) x 100

(iv) Current ratio

Current assets / current liabilities

(v) Acid Test

(Current assets-inventory) / current liabilities

(vi) Trade receivable days

(Trade receivables/sales) x 365 days

(vii) Trade payable days

(Trade payable / cost of goods sold) x 365 days

(viii) Gearing ratio

(Loan capital / total capital employed) x 100

(ix) Operating cost as a percentage of sales

(Operating expense/sales) x 100

(x) Interest Cover

PBIT/interest expense