You are the management accountant of Expand, a company incorporated in Dollarland. The company is seeking to grow by acquisition and has identified two potential investment opportunities. One of these, Hone, is also a company incorporated in Dollarland. The other, Over, is a company incorporated in Francland. You have been presented with financial information relating to both companies. The financial information is extracted from their published financial statements. In both cases, the financial statements conform to domestic accounting standards. The financial statements of Hone were drawn up in $s while those of Over were drawn up in Francs. The information relating to Over has been expressed in $s by taking the figures in Francs and dividing by 1.55 the $/Franc exchange rate at 31 December 2000. The financial information is given below.
Income statements

Statement of changes in equity

Balance sheets

Expand is more concerned with the profitability of potential investment opportunities than with liquidity. You have been asked to review the financial statements of Hone and Over with this concern in mind.
Required:
(a) Prepare a short report to the directors of Expand that, based on the financial information provided, assesses the relative profitability of Hone and Over.
(b) Discuss the validity of using this financial information as a basis to compare the profitability of the two companies.

Transcribed Image Text:

Hoe Over 1 March 1 March 31 December 31 December 2000 550 (250) 1999 milion 560 (260) 300 (85 Year endod 2001 million 620 (320) 300 (90) 210 122) 188 (78) 110 milliornSmin 600 300) 300 Revenue Cost of sales Gross profi Other operating expens Profit from operations Finance cost 300 20 180 195 (18) (20) 195 Proft before tax Incone tax expense Net profit for the period 160 (50) 110 122 Hane Over 31 March 31 March 31 December 31December Year ended 2001 2000 2000 1999 $ million 240 105 million illion million 470 418 122 Balance brought forward Net proft for the period Dividends Balance canried forward 265 110 (80 110 Hone Over 31 March 31 March 31 Decembor 3 Decomber 2001 S million mi 1999 S million 440 Non-current assets Inventories Trade recelvable Cash 455 10 ssued share capita Reservers 150 110 185 110 510 470 150 interest-bearing borrowings Current liabilities 750-