1 Discuss the main financial statements

2 Compare appropriate formats of financial statements for different types of business and AC 4.3 Interpret financial statements using appropriate ratios and comparisons, both internal and external.
Note: This part consists of two case studies

CASE STUDY 1: R Riggs and J & B Associates
R Riggs and J & B Associates are two retailers in the fashion industry whose final drafts of financial statements are represented below.
(a) What type of business are R Riggs and J & B Associates operating (e.g. Limited Liability Company, etc…)? For each business, justify your answer by identifying at least 3 factors that motivated your choice.
(b) Which business appears to be the most profitable? Justify your answer.
(c) Which business appears to be less liquid? Justify your answer.

R Riggs
Profit and Loss Account for the year ended 28 February 2007

£ £
Sales 157,165
Less Cost of goods sold:
Opening stock 4,120
Add Purchases 92,800
96,920
Less Closing stock 2,400 94,520
Gross profit 62,645
Add discounts received 160
62,805
Less Expenses:
Wages and salaries 31,740
Rent 3,170
Discounts allowed 820
Van running costs 687
Bad debts 730
Doubtful debt provision 91
Depreciation 1,630 38,868
Net Profit 23,937

J & B Associates
Profit and Loss Account for the year ended 30 March 2007

£ £
Sales 363,111
Less Cost of goods sold:
Opening stock 62,740
Add purchases 210,000
272,740
Less closing stock 74,710 198,530
Gross profit 164,581
Add Reduction in provision for doubtful debt 150
164,731
Less Expenses:
Salaries 58,529
Office expenses 4,975
Carriage outwards 3,410
Discounts allowed 620
Bad debts 1,632
Loan interest 3,900
Depreciation 5,600 78,666
Net Profit 86,065

Add Interest on drawings: J 900
B 600 1,500
87,565
Less Interest on capital: J 5,000
B 3,750 8,750

Salary: J 30,000 38,750
48,815

Shared: J 29,289
B 19,526 48,815

R Riggs
Balance Sheet as at 28 February 2007

£ £ £
Fixed assets
Office furniture 2,900
Less depreciation 380 2,520
Delivery van 3,750
Less depreciation 1,250 2,500
5,020
Current Assets
Stock 2,400
Debtors 12,316
Less provision for doubtful debts 496 11,820
Prepaid expenses 230
Cash at bank 4,100
Cash in hand 324
18,874
Less current liabilities
Creditors 5,245
Expenses owing 412 5,657
Net current assets 13,217
Net assets 18,237

Financed by
Capital
Opening balance 11,400
Add net profit 23,937
35,337
Less drawings 17,100
18,237
J & B Associates
Balance Sheet as at 30 March 2007

£ £ £
Fixed assets
Buildings 155,000
Fixtures 3,400 158,400

Current assets
Debtors 60,150
Stock 74,210
Bank 6,130
140,490
Current liabilities
Creditors 26,590
Accruals 935 27,525
Net current assets 112,965
271,365
Less loan from P Prince 65,000
Net assets 206,365

Financed by
Capital accounts: J 100,000
B 75,000 175,000

Current accounts: J B
Opening balance 4,100 1,200
Add Interest on capital 5,000 3,750
Salary 30,000 –
Balance of profit 29,289 19,526
68,389 24,476
Less drawings 31,800 28,200
Interest on drawings 900 600
35,689 (4,324) 31,365
206,365
CASE STUDY 2: Staton plc.

david has £40 000 to invest and is considering buying some ordinary shares in Staton plc.
The current market price of the ordinary shares is 80p.

The following information has been extracted from the published accounts of Staton plc. for the year ended 30 April 2008.

£
Operating profit for the year 1,144,000
Interest payable 394,000
Net profit for the year 750,000
Total dividends for the year 200,000
Fixed assets: net book value 13,800,000
Stock 478,600
Other current assets 597,680
Creditors: amount falling due within one year 1,187,600
Creditors: amounts falling due after more than one year 7,880,000
Issued ordinary shares of £1 each fully paid 5,000,000
Reserves 808,680
Additional information:

The following ratios relate to Staton plc for the year ended 30 April 2007.

Gearing 68.65%
Earnings per share 12p
Dividend per share 3.75p
Dividend yield 6.25%
Dividend cover 3.2 times
Price/earnings ratio 5

(a) You are required to calculate the following ratios for the year ended 30 April 2008. State the formulae used.

(i) Gearing
(ii) Earnings per share (EPS)
(iii) Dividend per share
(iv) Dividend yield
(v) Dividend cover
(vi) Price/earnings ratio

(b) Write a report to Jane advising, with reasons, whether or not she should invest in Staton plc.