The CEO of Oak Trading Limited has been reviewing the company's balance sheets over the past few years. In particular, she has been concentrating on the financial year just ended on 31 December 2021. She is puzzled over the apparently strange combination of circumstances which have seen the company incur significant losses in the year to 31 December 2021 and yet move from an overdraft position at December 2020 to positive cash balances at December 2021. The balance sheets are as follows: Year ended Year ended 31-Dec-20 31-Dec-21 m m Non-current assets 75 Equipment Vehicles 25 100 Current assets Inventory 129 Trade debtors 72 Cash at bank 201 Creditors: amounts falling due within one year Bank overdraft 25 Creditors (see note 5) 45 70 Net current assets 131 231 Total assets less current liabilities Long-term loans 29 202 Capital and reserves Share capital 60 Share premium 10 Profit and loss account 132 202 45 5 50 68 55 20 143 75 75 68 118 22 96 80 20 96 The summary profit and loss accounts are as follows: 250 Revenue Cost of sales Gross profit 220 30 Administrative costs (see note 1) 73 55 Marketing and selling costs (see note 2) Distribution costs 26 4 Depreciation (see note 3) (128) Profit before intertest and tax Interest payable Profit before taxation (128) Corporate taxation on profit Profit attributable to shareholders Dividends (128) 8 Retained profit for financial year (136) Notes to the balance sheet and profit and loss account: Note 1 Administrative expenses include directors' remuneration of 5m in 2021 and 2m in 2020 Note 2 Marketing and selling costs in 2020 include 5m spent on market research Note 3 Depreciation Year ended 31-Dec-21 m Equipment 3 Vehicles 1 4 Note 4 Any non-current asset disposals were made at no gainso losses Equipment costing 3m was purchased in 2021 Note 5 Analysis of creditors: Year ended 31-Dec-21 Em Trade creditors 68 1 Corporate taxation payable Dividends payable 6 75 Year ended 31-Dec-21 Em Year ended 31-Dec-20 Em 270 120 150 Hallelu Year ended 31-Dec-20 Em 40 3 2 45 In recent management meetings, concerns have been expressed by: The production director whose attempts to increase output levels are being thwarted by delays in supplies of key raw materials. Further investigation reveals that suppliers are suspending deliveries to the company due to late payments of their invoices. The sales director who is being adversely influenced by the rundown in stockholdings of finished goods. Orders are being lost to competitors due to the inability to offer short delivery times. Also, he is receiving complaints from customers that they are being harassed to pay their accounts on strictly 30 days term, when previous practice allowed up to 60 days credit. The CEO has also received a report from independent financial advisors, providing details of operating ratios for companies trading within Oak Trading Limited's industrial sector. From reviewing the report, she has highlighted several ratios which the report's writers have identified as crucial: Industry Average Current ratio 1.4 times 3.1% Profit margin Inventory turnover 3.2 times Average collection period 85 days The CEO has called in the company's financial director and asked him to explain the reasons behind the improvement in the cash position during 2021. Also, she wishes to assess Oak Trading Limited's performance against the industry average for these crucial ratios. Required: 1. Prepare a Cash Flow Statement for 2021 and comment on the significant movements in cash over the year, suggesting areas for further investigation. (13 marks) 2. Compute the four key ratios for 2021 and 2020 and comment on Oak Trading Limited's performance relative to the industry averages. (12 marks) The CEO of Oak Trading Limited has been reviewing the company's balance sheets over the past few years. In particular, she has been concentrating on the financial year just ended on 31 December 2021. She is puzzled over the apparently strange combination of circumstances which have seen the company incur significant losses in the year to 31 December 2021 and yet move from an overdraft position at December 2020 to positive cash balances at December 2021. The balance sheets are as follows: Year ended Year ended 31-Dec-20 31-Dec-21 m m Non-current assets 75 Equipment Vehicles 25 100 Current assets Inventory 129 Trade debtors 72 Cash at bank 201 Creditors: amounts falling due within one year Bank overdraft 25 Creditors (see note 5) 45 70 Net current assets 131 231 Total assets less current liabilities Long-term loans 29 202 Capital and reserves Share capital 60 Share premium 10 Profit and loss account 132 202 45 5 50 68 55 20 143 75 75 68 118 22 96 80 20 96 The summary profit and loss accounts are as follows: 250 Revenue Cost of sales Gross profit 220 30 Administrative costs (see note 1) 73 55 Marketing and selling costs (see note 2) Distribution costs 26 4 Depreciation (see note 3) (128) Profit before intertest and tax Interest payable Profit before taxation (128) Corporate taxation on profit Profit attributable to shareholders Dividends (128) 8 Retained profit for financial year (136) Notes to the balance sheet and profit and loss account: Note 1 Administrative expenses include directors' remuneration of 5m in 2021 and 2m in 2020 Note 2 Marketing and selling costs in 2020 include 5m spent on market research Note 3 Depreciation Year ended 31-Dec-21 m Equipment 3 Vehicles 1 4 Note 4 Any non-current asset disposals were made at no gainso losses Equipment costing 3m was purchased in 2021 Note 5 Analysis of creditors: Year ended 31-Dec-21 Em Trade creditors 68 1 Corporate taxation payable Dividends payable 6 75 Year ended 31-Dec-21 Em Year ended 31-Dec-20 Em 270 120 150 Hallelu Year ended 31-Dec-20 Em 40 3 2 45 In recent management meetings, concerns have been expressed by: The production director whose attempts to increase output levels are being thwarted by delays in supplies of key raw materials. Further investigation reveals that suppliers are suspending deliveries to the company due to late payments of their invoices. The sales director who is being adversely influenced by the rundown in stockholdings of finished goods. Orders are being lost to competitors due to the inability to offer short delivery times. Also, he is receiving complaints from customers that they are being harassed to pay their accounts on strictly 30 days term, when previous practice allowed up to 60 days credit. The CEO has also received a report from independent financial advisors, providing details of operating ratios for companies trading within Oak Trading Limited's industrial sector. From reviewing the report, she has highlighted several ratios which the report's writers have identified as crucial: Industry Average Current ratio 1.4 times 3.1% Profit margin Inventory turnover 3.2 times Average collection period 85 days The CEO has called in the company's financial director and asked him to explain the reasons behind the improvement in the cash position during 2021. Also, she wishes to assess Oak Trading Limited's performance against the industry average for these crucial ratios. Required: 1. Prepare a Cash Flow Statement for 2021 and comment on the significant movements in cash over the year, suggesting areas for further investigation. (13 marks) 2. Compute the four key ratios for 2021 and 2020 and comment on Oak Trading Limited's performance relative to the industry averages. (12 marks)