Financial Reporting and Ethics - The Institute of Chartered ...

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FINANCIAL REPORTING AND ETHICSN’000 N’000 N’000 N’000Capital and Reserves:Issued Share Capital of 1.00 each 5,000 3,000Share Premium 1,000 --Retained Profits 1,750 1,9007,750 4,900Long-term liabilities:Long-term loans 3,000 1,000Current Liabilities:Bank Overdraft 930__Trade Creditors 3,100 2,150Current Tax Payable 220 4,250 450 2,60015,000 8,500Cash Flow Statement for the year ended 30th September 2008:N ’000 N’000Cash flow from operating activities:Operating Profit 1,000Adjustments for:Depreciation 3,800Loss on disposal of fixtures 1,250 5,050Operating profit before working capital changes: 6,050Increase in Stock (1,400)Increase in trade debtors (50)Increase in trade creditors 950 (500)Income Tax Paid (480)Net cash from operating activities 5,070Cash flow from Investing Activities:Purchase of property, plant and equipment (10,500)Disposal costs of fixture (50) (10,550)Net cash flow from investing activities (5,480)Cash flow from financing Activities:Issue of Ordinary Shares 3,000Interest paid (300)Long-term loans 2,000Ordinary Dividend paid (600) 4,100Net decrease in cash and cash equivalents (1,380)Cash and Cash equivalents at beginning of the year 450Cash and Cash equivalents at the end of the year (930)The following information is relevant:(i)(ii)The directors have signalled their intention to maintain annual dividends atN600,000for the foreseeable future.The increase in property, plant and equipment was due to the acquisition of fivenew stores and the refurbishment of some existing stores during the year. Thecarrying value of fixtures scrapped at the refurbished stores was N 1.2 million;they had originally cost N3million. Karsashi Plc received no scrap proceeds fromthe fixtures, but did incur costs of N50,000 to remove and dispose of them. Thelosses on the refurbishment have been charged to operating expenses. Depreciationis charged to cost of sales apportioned in relation to floor area (see below).278
CASE STUDIES(iii)(iv)The floor sales areas (in square metres) were:30th September 2008 30th September 2007NNClothing 48,000 35,000Food 6,000 5,00054,000 40,000The share price of Karsashi plc averaged N6.00during the year to 30th September2007, but was only N3.00 at 30th September 2008.(v) The following ratios have been calculated: 2008 2007Return on capital employed 9.3% 33.9%Net assets turnover 2.1 times 3.3 timesGross profit margin:Clothing 9.4% 18.6%Food 32.1% 25%Net profit (after tax) margin 2.0% 7.1%Current Ratio 0.71:1 0.77:1Stock holding period:Clothing 68days 39daysFood 15days 17daysCreditors’ payment period 59days 50daysGearing 28% 17%Interest Cover 3.3 times 2.5 timesRequired:Write a report analyzing the financial position of Karsashi Plc for the two years ended 30thSeptember 2007 and 2008. Your report should utilize the above ratios and the informationin the cash flow statement. It should refer to the relative performance of the clothing andfood sales, and be supported by any further ratios you consider appropriate.SUGGESTED SOLUTIONKARSASHI PLC(a)Report on the financial performance of KARSASHI PLC for the year ended 30thSeptember 2008:To:From:Date:Operating Performance:Karsashi plc’s overall performance as measured by the return on capital employed hasdeteriorated markedly. This ratio is effectively a composite of the company’s profit marginsand its asset utilization. The expansion represented by the acquisition of the five newstores has considerably increased investment in net assets. The asset turnover (a measureof asset utilization) has fallen from 3.3 times to 2.1 times. This is a relatively large fall andis partly responsible for the deteriorating performance. However, it should be borne inmind that it often takes some time before new investment generates the same level ofsales as existing capacity so it may be that the situation will improve in future years.Of more concern in the current year, is the deteriorating gross profit margin of the company’sclothing sales. This has fallen from 18.6% to 9.4%. The effect of this is more marked becausesales of clothing (in the current year) represents nearly 70% of turnover. It should also be279
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FINANCIAL REPORTING AND ETHICS1.3.3
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ACCOUNTING AND REPORTING POLICIESsu
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ACCOUNTING AND REPORTING POLICIES(j
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ACCOUNTING AND REPORTING POLICIES(i
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ACCOUNTING AND REPORTING POLICIES2.
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3AMALGAMATION, ABSORPTION ANDRECONS
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AMALGAMATION, ABSORPTION AND RECONS
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4ANALYSIS AND INTERPRETATION TION O
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ANALYSIS AND INTERPRETATION OF FINA
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5ACCOUNTING STANDARDS5.0 LEARNING O
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ACCOUNTING STANDARDS(i)(ii)(iii)(iv
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ACCOUNTING STANDARDSThere is no SAS
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ACCOUNTING STANDARDS5.2.4 Borrowing
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ACCOUNTING STANDARDS(iii)Certain pe
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ACCOUNTING STANDARDSby venture capi
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ACCOUNTING STANDARDSIFRS 7 Financia
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ACCOUNTING STANDARDSactivity, non-c
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ACCOUNTING STANDARDSin the year inc
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ACCOUNTING STANDARDS(v)(vi)(vii)whe
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ACCOUNTING STANDARDS(v)Actions requ
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ACCOUNTING STANDARDSAccounting stud
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6ETHICAL FRAMEWORK, CONCEPTSAND VAL
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ETHICAL FRAMEWORK, CONCEPTS AND VAL
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7THE ENVIRONMENT: CORPORATE,PROFESS
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THE ENVIRONMENT: CORPORATE, PROFESS
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8PROFESSIONAL ETHICS8. 0 LEARNING O
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PROFESSIONAL ETHICSobjectivity are
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PROFESSIONAL ETHICS(c)(d)The type o
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PROFESSIONAL ETHICSabout conflicts
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PROFESSIONAL ETHICS(d)(e)Confidenti
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PROFESSIONAL ETHICSA. III onlyB. II
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9DECISION MAKING IN ETHICS9. 0 LEAR
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DECISION MAKING IN ETHICS9.2 A FRAM
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ETHICAL THREATS AND SAFEGUARDS(d)We
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DECISION MAKING IN ETHICS4. A perso
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10ETHICAL THREATS TS AND SAFEGUARDS
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ETHICAL THREATS AND SAFEGUARDS(iv)(
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ETHICAL THREATS AND SAFEGUARDSto th
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ETHICAL THREATS AND SAFEGUARDSpayab
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ETHICAL THREATS AND SAFEGUARDS(a)Fi
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ETHICAL THREATS AND SAFEGUARDSimmin
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ETHICAL THREATS AND SAFEGUARDSHowev
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ETHICAL THREATS AND SAFEGUARDS(iii)
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11CORPORATE GOVERNANCE11.0 LEARNING
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CORPORATE GOVERNANCE11.3.1 Nature(a
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CORPORATE GOVERNANCEThe company sho
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CORPORATE GOVERNANCEtrust, possible
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CORPORATE GOVERNANCEAn agent has im
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CORPORATE GOVERNANCE(a)(b)(c)(d)(e)
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CORPORATE GOVERNANCE11.6.1 The law
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CORPORATE GOVERNANCEimitated. They
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CORPORATE GOVERNANCE(a)(b)Greenbury
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Page 289 and 290: APPENDIX IVTable 1:SUMMARY OF INTER
Page 291 and 292: SUMMARY OF INTERNATIONAL ACCOUNTING
Page 293 and 294: APPENDIX VGLOSSARY OF TERMSAbsorpti
Page 295 and 296: GLOSSARY OF TERMSEthical Objectivis
Page 297 and 298: APPENDIX VIBIBLIOGRAPHYChambers Ham
Page 299 and 300: APPENDIX VIISTUDY AND EXAMINATION T
Page 301 and 302: STUDY AND EXAMINATION TECHNIQUES7.3
Page 303 and 304: INDEXAAbsorption, 17, 19, 39, 40, 4
Page 305 and 306: INDEXProfessional Behaviour, 136, 1
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