Question
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
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
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