QUESTION 2

HappyShopping Ltd is a food retail chain with 100 convenience stores distributed in 50 different towns and cities in England and Wales, serving a wide range of quality food and drinks. Recently, the company has started suffering from profitability decline, particularly due to losing customers to discount stores.

After several discussions, the company's directors realised that HappyShopping is experiencing financial problems, and that major changes should be applied to overcome the situation.

The following information has been extracted from the accounting records.

Income statement

2018

M

2019

M

Revenue

79.2

57.8

Cost of sales

(42.5)

(35.1)

Gross profit

36.7

22.7

(Operating expenses)

(22.5)

(21.5)

Operating Profit

14.2

1.2

Interest

(1.5)

(1.1)

Profit before tax

12.7

0.1

Tax

(4.1)

(0)

Net profit

8.6

0.1

(QUESTION CONTINUES ON NEXT PAGE)

QUESTION 2 (continued)

Statement of Financial Position

2018

M

2019

M

Non-current Assets

45.2

34

Current assets

Inventory

10.2

11.4

Cash

20.6

9.5

Total current assets

30.8

20.9

Total assets

76

54.9

Equity & Liabilities

Capital

15

15

Reserves

18.3

18.1

Total equity

33.3

33.1

Non-current liabilities

Long term loan

17

12

Current liabilities

Trade payables

15.1

6.4

Tax payable

9.2

2.2

Interest payable

1.4

1.2

Total current liabilities

25.7

9.8

Total equity & liabilities

76

54.9

Required

a)Using the information above, calculate the following five ratios for every year.

i)Return on capital employed

ii)Gross profit margin

iii)Current ratio

iv)Inventory turnover period

v)Payables settlement period

(10 marks)

b)Comment critically on the current status of HappyShopping Ltd using suitable classifications of performance to highlight your answers in A. Make recommendations for addressing the company's problems.

(8 marks)

c)Discuss the limitation of ration analysis

(7 marks)

Total: 25 marks