Question B: Interpretation of business performance (40 marks):

The owners of A & E Enterprise have advertised to sell their business. The financial statements of the business for the last two years are shown in appendix B. A prospective investor has approached their bankers for support to help them make a bid to buy the business. The bankers have asked you as an independent assessor to evaluate the financial performance of A & E Enterprise using accounting ratios, and to advise them. You are required to:

1. Calculate one profitability ratio, one liquidity ratio, one efficiency ratio and one gearing ratio using information in the financial statements of A & E Enterprise. The calculations should be shown in the appendices of the report. Refer to appendix C for suggested ratios and their formulae. (4 marks)

2. Using the calculated ratios evaluate the financial performance of A & E Enterprise. (20 marks)

3. Explain with reasons whether the bank will likely provide financial support to their client to enable them buy A & E Enterprise. (8 marks)

4. Explain the limitations of the analysis and evaluation of the financial performance of A & E Enterprise undertaken for the period in view. (8 marks)

Appendix B: Financial statements of A & E Enterprise- (a) Income Statement for the period ended 31st December 2019 4 e du Net Sales: Sales Sales returns I 111,600 (1.500) 110,100 LESS: Cost of sales: Opening inventory Purchases Carriage in Purchases returns 14,2084 71,244 1,860 (2,6 02) 84,7104 (18,000) LESS: Closing inventory Gross Profit Add: Other incomes: (66.710) 43,390 04 43,3904 LESS: Expenses: Carriage out Salaries & Wages Rent & Rates Insurance Motor expenses Telephone Electricity General expenses Net Profit 1,200 22,6404 1,824 1,000 2,856 2,624 9964 1,884 (35,024) 8,366 (b) Statement of Financial Position as at 31st December 2019 de Non-Current Assets: Plant & Machinery Buildings Motor Vehicles at coste Fixtures & Fittings 5,000 50,0004 10,8004 2.100 67,900 Current Assets: Inventory Trade receivables Cash at Bank 18,0004 26,0104 3.092 47,1024 Less: Current Liabilities Trade payables (20,386) Net current assets (working capital) Total Assets - CL 26.7164 94,6164 Less: Non-Current Liabilities Net Assets (0) 94616 Financed by: Capital Profit 93,450 8.366 101,8164 (7.200) 94.616 LESS: Drawings t Appendix C: Ratio formulas: a Ratio Formula Ratio Formula a 1 Gross profit margine (Gross Profit/Sales Revenue)*100 6e Inventory Days Closing Inventory / Cost of Sales * 3654 e 24 Net profit margin (Net Profit/Sales Revenue)*100 7 Debtor Collection Days Trade Receivables/Credit Sales*365 34 Return on Capital Employed Net profit / Capital Employed * 100 84 Creditor Days Trade Payables/Cost of Sales*3652 44 Current Ratio- 90 Gearing Non-current liabilities/ Capital Employed to Current Assets/Current Liabilitiese 5 Acid Test Ratio (Current Assets - Inventory)/Current Liabilities 10 Interest Covere Operating Profit Finance Coste Credit sales: Use sales revenue figure for credit sales if no information is provided