Pete Sandstrom is the CEO of WeRHere4U Ltd. He is speaking with you having shown you these financial statements for the years 2016 through 2019. He is extremely proud of his results; Net profit has steadily increased from $67,200 in 2017 to $73,500 in 2018 and in 2019, $83,300. He also highlights to you that the Return on Equity (ROE) at WeRHere4U Ltd has also improved substantially form 51% in 2017 to 62% in 2019. He is hoping that when these results are presented to the shareholders of WeRHere4U that he will be rewarded with a substantial bonus for all his good efforts. You decide to take a closer look at the performance of WeRHere4U using the techniques you have learnt in ACCT1101 by considering each of the questions below.

PART A:

You perform a Common-size analysis on the Statements of Financial Performance for each of the years 2017, 2018 and 2019. This is shown below.

COMMON SIZE ANALYSIS
	2019	2018	2017
Sales	100.00%	100.0%	100.0%
Cost of Sales	47.0%	45.2%	43.0%
Gross Profit	53.0%	54.8%	57.0%
Other expenses	16.2%	18.0%	20.0%
Operating profit	36.8%	36.8%	37.0%
Interest	4.6%	2.9%	1.5%
Profit before Tax	32.2%	33.9%	35.5%
Tax expense	9.6%	10.2%	10.7%
Net Profit	22.6%	23.7%	24.8%

Required:

(a) Explain how this analysis helps you assess the performance of WeRHere4U.

(b) Does this analysis explain how Pete has been able to achieve the excellent results? If so, how? If not, why not?

PART B:

You now use the information provided in the WeRHere4Us financial statements to perform the following DuPont Analysis of the Return on Equity (ROE) for each of the years 2017, 2018 and 2019.

DU PONT ANALYSIS
	2019	2018	2017
Return on Equity (ROE)	0.6170	0.5444	0.5110
Return on Capital Employed (ROCE)	0.5913	0.6000	0.6390
Operating Profit Margin	0.3676	0.3677	0.3704
Capital Turnover	1.6087	1.6316	1.7252
Tax and Interest ratio	0.6125	0.6447	0.6720
Leverage	1.7037	1.4074	1.1901

Required:

(a) Explain the meaning and interpretation of EACH of these ratios.

(b) Explain the trend in each of these ratios over the last 3 years?

(c) What is your assessment of Petes claims that he has managed a substantial improvement in WeRHere4Us Return on Equity? How has Pete managed to achieve this performance? Explain using your computations.

(d) Why is this analysis useful to assess Petes claims that the performance of WeRHere4U has been excellent over the last 3 years?

PART C:

The following are extracts from WeRHere4Us financial statements. You decide to assess how well WeRHere4U is managing their Sales on credit and Purchases of Inventory on credit. To do this you compute the necessary ratios using average balances where required.

WeRHere4U Ltd
Extract from the Statement of Financial Performance
	2019	2018	2017
	$	$	$
Sales	370,000	310,000	270,000
Cost of Sales	174,000	140,000	116,000
Gross Profit	196,000	170,000	154,000

WeRHere4U Ltd
Extract from the Comparative Statements of Financial Position
	2019	2018	2017	2016
	$	$	$	$
Current Assets
Accounts receivable	62,000	41,000	31,000	29,000
Inventory	18,000	15,000	17,000	18,000
Other current assets	30,000	16,000	14,000	10,000
Total Current Assets	110,000	72,000	62,000	57,000

Other Information:

All Sales at WeRHere4U Ltd to customers are made on credit.

All Inventory at WeRHere4U Ltd is purchased form suppliers using trade credit.

Required:

(a) What is your assessment of the success with which WeRHere4U is managing this aspect of their business? Can you see any possible future problems from your analysis. Explain, using your ratio computations to support your answer.