QUESTION 2 Stockholm Racers Ltd. has operated as a business for 20 years. In spite of the business having experienced good levels of growth and return on capital in the past, its recent lack of investment in research or product development has made it unable to introduce new product lines. In addition, the company has experienced an increase in turnover but a downturn in overall performance. In a meeting with Linda Ross, a director from a firm of Management Consultants, Trevor Johnson, Stockholm Racers Ltd.'s director, stated that he wanted to "introduce tighter management control within the company by introducing a system of management accounting". Afterwards, Linda sent her assistant a copy of Stockholm Racers Ltd.'s summary of abbreviated profit statements and balance sheets for the past three years (2009-2011), including performance indicators for its business sector as a whole for 2011. To these, she attached a memo instruction to examine the given information and to meet with her on Friday morning to discuss the presentation of the company's detailed financial analysis over the three-year period. You are Linda Ross's assistant in her firm of Management Consultants and receive the following memo from her regarding this case. Memorandum To: Date: Business Planning Assistant 31* January 2012 Linda Ross, Director Stockholm's Racers Ltd. - Accounts Information From: Subject: You are aware that I met with Trevor Johnson yesterday and that he is concerned with the latest results shown in the final accounts that were recently prepared at year end. The file attached contains a summary of the company's abbreviated profit statements and balance sheets for the past three years, together with additional information and performance indicators for their overall business sector for the period under review. I would like you to examine this information and meet with me on Friday morning to discuss the form and presentation of a detailed financial analysis of the company over the three-year period. Signed: L. Ross Financial Information on Stockholm's Racers Ltd. 1. Summary Profit Statements Km Km Km Years 2009 2010 2011 Sales Turnover 4.90 5.30 6.60 4.17 4.43 5.82 Operating costs Operating profit before tax 0.73 0.87 0.78 Taxation 0.24 0.30 0.27 Profit after tax 0.49 0.57 0.51 Dividends 0.12 0.16 0.16 Retained profit 0.37 0.41 0.35 The firm's detailed breakdown of costs is as follows: Years 2009 2010 2011 Labour costs 0.93 0.98 1.25 Distribution costs 0.44 0.49 0.61 Administration costs 0.19 0.22 0.27 2. Summary balance sheets Km Km Km Years 2009 2010 2011 Fixed Assets 2.40 2.77 2.88 Current Assets Stocks: Raw materials 0.09 0.12 0.15 Finished goods 0.40 0.43 0.45 Debtors 1.14 1.32 1.84 Bank 0.03 0.04 0.05 1.66 1.91 2.49 Less Current liabilities 1.35 1.56 1.90 Net current assets 0.31 0.35 0.59 2.71 3.12 3.47 Capital and reserves 0.50 0.91 1.26 Bank loans 2.21 2.21 2.21 2.71 3.12 3.47 3. Racer Builders Federation - Average Ratios for federation Members 2011 % Return on capital employed 26.0% Asset turnover 1.79 times Net profit margin 14.5% Current ratio 1.5:1 Acid test ratio 1.03:1 83 days Debtors collection period Gearing ratio 32.0% Return on Investment Debt to Equity Ratio Inventory Turnover In your role as planning assistant, you are required to prepare an analysis of the company's figures over the three-year period using the performance criteria listed in the inter-firm comparison table. (a) Calculate all the ratios given in the average ratios for federation members for 2009, 2010 and 2011. (10 marks) (b) Prepare a detailed report on the company's performance in terms of profitability and liquidity compared with the average of the sector over the period. Additionally, the analysis should identify the external and internal factors which may affect Management's decision-making and should also enable Linda Ross to advise the management of Stockholm Racers Ltd. on how they can improve the business and the best course of action for them to take. (10 marks) Total (20 marks) QUESTION 2 Stockholm Racers Ltd. has operated as a business for 20 years. In spite of the business having experienced good levels of growth and return on capital in the past, its recent lack of investment in research or product development has made it unable to introduce new product lines. In addition, the company has experienced an increase in turnover but a downturn in overall performance. In a meeting with Linda Ross, a director from a firm of Management Consultants, Trevor Johnson, Stockholm Racers Ltd.'s director, stated that he wanted to "introduce tighter management control within the company by introducing a system of management accounting". Afterwards, Linda sent her assistant a copy of Stockholm Racers Ltd.'s summary of abbreviated profit statements and balance sheets for the past three years (2009-2011), including performance indicators for its business sector as a whole for 2011. To these, she attached a memo instruction to examine the given information and to meet with her on Friday morning to discuss the presentation of the company's detailed financial analysis over the three-year period. You are Linda Ross's assistant in her firm of Management Consultants and receive the following memo from her regarding this case. Memorandum To: Date: Business Planning Assistant 31* January 2012 Linda Ross, Director Stockholm's Racers Ltd. - Accounts Information From: Subject: You are aware that I met with Trevor Johnson yesterday and that he is concerned with the latest results shown in the final accounts that were recently prepared at year end. The file attached contains a summary of the company's abbreviated profit statements and balance sheets for the past three years, together with additional information and performance indicators for their overall business sector for the period under review. I would like you to examine this information and meet with me on Friday morning to discuss the form and presentation of a detailed financial analysis of the company over the three-year period. Signed: L. Ross Financial Information on Stockholm's Racers Ltd. 1. Summary Profit Statements Km Km Km Years 2009 2010 2011 Sales Turnover 4.90 5.30 6.60 4.17 4.43 5.82 Operating costs Operating profit before tax 0.73 0.87 0.78 Taxation 0.24 0.30 0.27 Profit after tax 0.49 0.57 0.51 Dividends 0.12 0.16 0.16 Retained profit 0.37 0.41 0.35 The firm's detailed breakdown of costs is as follows: Years 2009 2010 2011 Labour costs 0.93 0.98 1.25 Distribution costs 0.44 0.49 0.61 Administration costs 0.19 0.22 0.27 2. Summary balance sheets Km Km Km Years 2009 2010 2011 Fixed Assets 2.40 2.77 2.88 Current Assets Stocks: Raw materials 0.09 0.12 0.15 Finished goods 0.40 0.43 0.45 Debtors 1.14 1.32 1.84 Bank 0.03 0.04 0.05 1.66 1.91 2.49 Less Current liabilities 1.35 1.56 1.90 Net current assets 0.31 0.35 0.59 2.71 3.12 3.47 Capital and reserves 0.50 0.91 1.26 Bank loans 2.21 2.21 2.21 2.71 3.12 3.47 3. Racer Builders Federation - Average Ratios for federation Members 2011 % Return on capital employed 26.0% Asset turnover 1.79 times Net profit margin 14.5% Current ratio 1.5:1 Acid test ratio 1.03:1 83 days Debtors collection period Gearing ratio 32.0% Return on Investment Debt to Equity Ratio Inventory Turnover In your role as planning assistant, you are required to prepare an analysis of the company's figures over the three-year period using the performance criteria listed in the inter-firm comparison table. (a) Calculate all the ratios given in the average ratios for federation members for 2009, 2010 and 2011. (10 marks) (b) Prepare a detailed report on the company's performance in terms of profitability and liquidity compared with the average of the sector over the period. Additionally, the analysis should identify the external and internal factors which may affect Management's decision-making and should also enable Linda Ross to advise the management of Stockholm Racers Ltd. on how they can improve the business and the best course of action for them to take. (10 marks) Total (20 marks)