Using trend analysis and appropriate ratios, analyse the financial statements that have been prepared by the business in the case study. In particular, comment on the following aspects of the company:

areas of concern in financial performance, focussing mainly on the performance statement.

areas of concern in financial health, focussing mainly on both the performance and position statement.

Main financial ratio calculations:

	2022	2021
Calculations relating to Financial Performance
Revenue (Sales) Growth/Decrease (%) [2022 only]		N/A
Gross Margin (%)
Operating Profit Margin (%)
Return on Equity (%) [2022 only]		N/A
Calculations relating to Financial Health
Quick Ratio
Receivables Collection Period (days)
Inventory Turnover Period (days)
Gearing (%)

CASE STUDY:

Nikola Wodzinski was a qualified doctor of medicine who retired in 2005 from a busy GP practice in the north west of England. After retirement he began to trade in antiquarian books, a collection of which (mainly medical and scientific texts) he had built up over several years. As well as selling parts of his own collection, he also started to travel to book fairs and auctions across Europe to buy choice items that he felt would be a good investment over time and which might eventually be sold for a profit. He incorporated his business as Wodzinski Antiquarians Ltd in 2008, of which he was the sole owner and director. His activity in the trade (and his reputation as a discerning buyer and seller of old books) increased steadily over the next 15 years, and by 2022 he had built a very successful business with an inventory of many thousands of volumes, some held at his home but many in the secure storerooms of several other antiquarian booksellers across Europe.

Nikola continued to run his business alone, advertising his books through a website and by email to customers. With the aid of a bank overdraft, the company was able to invest in a wide variety of books. Particularly valuable specimens were bought with the aid of a bank loan of 100,000 (bearing interest at 10% p.a.) taken out on 1 January 2018 and repayable in 10 instalments of 10,000 each at the end of 2018 and every financial year for the following nine years.

Books sold were invoiced directly to customers, with payment expected within 30 days. The independent bookseller outlets operated on his instructions to pack and send books to customers. For this service they receive a commission of 10% of the sales value of each book, plus the cost of any associated postage and taxes, although books sold from his personal collection did not involve such commission.

By 2021 Nikolas health was starting to fail and he decided that he could no longer continue to devote himself full-time to this business. In particular, he could no longer spend the time and energy travelling around Europe to buy books. He understood that the business had a reputation that was valuable many of his customers had been with him for some years, and they could be relied upon to provide a significant proportion of his annual sales for several years to come and up to 2020 it had always been profitable. One of his European bookseller partners (International Antiquarians GmbH) had indicated that they would be willing to buy the company and all of its inventory and remaining business assets and liabilities with effect from 1 January 2022, provided they could continue to use his name and employ him as a consultant to stay in touch with his major customers and bookseller partners for the next three years. Apart from these obligations, Nikola would resign as the sole director and have no further responsibility for the running of the company, which would henceforth be managed by an employee of International Antiquarians GmbH. Nikola was asked to organise the transfer of all inventory to International Antiquarians GmbH storerooms before 1 January 2022 and to agree to pay all associated costs incurred by the partner booksellers. From that date, all commission and associated arrangements came to an end. Nikola found all of this acceptable and a contract was signed accordingly.

It is now early 2023 and you are the manager of Wodzinski Antiquarians Ltd. Your line manager (International Antiquarians GmbHs finance director) has indicated that she is concerned about the businesss performance (profitability) and financial health (working capital and cash management) and has asked you to review the financial statements of the company for 2022 and 2021 and:

identify the particular elements of performance (profitability) and financial health (working capital and cash management) that might be regarded as problematic

make recommendations to improve the businesss future performance and financial health.

You have been presented with the following financial statements:

31 December 2022					31 December 2021
	k				k	k	k
Non-current assets
Computers and office equipment					38.1		15.4
Current assets
Inventory	170.6					140.9
Receivables	23.6					14.6
Other current assets			Total 2.0			Total 2.0
Total current assets			Total 196.2			Total 157.5
Current liabilities
Payables	23.6					6.0
Corporation tax	0.0					0.0
Other tax liabilities	5.8					7.4
Bank overdraft	Total 143.9					Total 34.1
Total current liabilities	Total 173.3					Total 47.5
Net current assets/working capital					Total 22.9		Total 110.0
Total assets less current liabilities					Total 61.0		Total 125.4
Long-term liabilities
Bank loan					Total 50.0		Total 60.0
Net Assets					Total 11.0		Total 65.4
Equity
Share capital					20.0		20.0
Reserve: retained earnings					Total (9.0)		Total 45.4
Total Equity					Total 11.0		Total 65.4