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FINANCIAL REPORTING AND ETHICSnoted that the stock holding period of clothing has also increased significantly from 39days in 2007 to 68 days in the current year. This may be a reflection of a company policyto increase stock levels in order to attract more sales, but it may also be an indication thatthere is some slow-moving or obsolete stock.The clothing industry is notoriously susceptible to fashion changes. The new designs maynot have gone down well with the buying public. By contrast, the profit margin on foodsales has increased substantially (from 25% to 32.1%) as indeed have the sales themselves(up to 75% on last year). These improvements have helped to offset the weaker performanceof clothing sales.A more detailed analysis shown by the ratios in the appendix confirms the position. Theexpansion has created a 35% increase in the sales floor area, but the proportionate increasein turnover is only 17.3%. Breaking this down between the two sectors shows that theclothing sector is responsible for this deterioration; an increase in capacity of 37% has ledto an increase in sales of only 2.6%, whereas a more modest increase of 20% in the foodfloor area has led to a remarkable increase of 75% in food sales. In the current year, foodretailing has generated sales of 1,167,000 per square meter, whereas clothing sales persquare meter has fallen from N446,000 to N333,000. When the relative profit margins ofclothing and food are considered, it can be seen that food retailing has been far moreprofitable than clothing retailing and this gap in margins has increased during the currentyear.This deterioration in trading margins has continued through to net profit margins (fallingfrom 7.1% to only 2.0%). It can be observed that operating expenses have increasedconsiderably, but this is to be expected and is probably in line with the increase in thenumber of stores.In summary, the increase in capacity has focused on clothing rather than food retailing.On reflection, this seems misguided as the performance of food retailing was superior tothat of clothing (in 2007) and this has continued (even more so) during the current year.Liquidity/SolvencyThe increase in the investment in new stores and the refurbishment of existing stores hasbeen largely financed by increasing long term loans by 2 million and issuing 3 million ofequity. The effect of this is an increase in gearing from 17% to 28%. Although the level ofgearing is still modest, the interest cover has fallen from a very healthy 25 times to aworrying low 3.3 times.The investment has also taken its toll on the bank balance falling from N450,000 in handto an overdraft of N 930,000. This probably explains why the company has stretched itspayment of accounts payable to 59 days in 2008 from 50 days in 2007.The company’s current liquidity position has deteriorated slightly from 0.77:1 to 0.71:1.No quick ratios have been given, nor would they be useful. Liquidity ratios are difficult toassess for retailing companies.Most of the sales generated by such companies are for cash (thus there will be few tradereceivables) and normal liquidity benchmarks are not appropriate. The cash flow statementreveals cash flows generated from operating activities of N5,550,000. This is a far morereliable indicator of the company’s liquidity position. The N5,500,000is more than adequateto service the tax and the dividend payments. Indeed the operating cash flows havecontributed significantly to the expansion programme.280
CASE STUDIESShare price and dividendsKarsashi’s share price has halved from 6.00 to 3.00 during the current year. The dilutioneffect of the share issue at 1.50 per share (2 million shares for 3 million) would account forsome of this fall (to approximately 4.20), but the further fall probably represents themarket’s expectations of the company’s performance. It is worth noting that the companyhas maintained its dividends at N600,000 despite an after tax profit of only N450,000.Whilst this dividend policy can not be maintained indefinitely (at the current level ofprofits), the directors may be trying to convey to the market a feeling of confidence in thefuture profitability of the company. It may also be a reaction designed to support the shareprice. It should also be noted that although the total dividend has been maintained, thedividend per share will have decreased due to the share issue during the year.SummaryThe above analysis of performance seems to give mixed messages, the company has investedheavily in new and upgraded stores, but operating performance has deteriorated and theexpansion may have been misfocused. This appears to have affected the share priceadversely. Alternatively, it may be that the expansion will take a little time to bear fruitand the deterioration may be a reflection of the current state of the economy. Cash generationremains sound and if this continues, the poor current liquidity position will soon bereversed.SignedBMA & Co.The following additional ratios can be calculated:CLOTHINGFOODOVERALLIncrease in Sales area 13,000 = 37% 1,000 = 20% 14,000 = 35%35,000 5,000 40,000Increase/(Decrease) (400) = 2.5% 3,400 = 85% 3,000 = 15%16,000 4,000 20,000Sales per square meter (2008) Sales per square meter (2007)N’000 N’000Overall (23,000/54) = 426 (20,000/40) = 500Clothing (15,600/48) = 325 (16,000/35) = 457Food ( 7,400/6) = 1,233 ( 4,000/5) = 800281
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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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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 STANDARDSby venture capi
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ACCOUNTING STANDARDSIFRS 7 Financia
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ACCOUNTING STANDARDSin the year inc
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ACCOUNTING STANDARDS(v)(vi)(vii)whe
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ACCOUNTING STANDARDSAccounting stud
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6ETHICAL FRAMEWORK, CONCEPTSAND 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 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 SAFEGUARDSimmin
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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 GOVERNANCE(a)(b)(c)(d)(e)
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CORPORATE GOVERNANCE11.6.1 The law
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Page 269 and 270: APPENDIX IICOMPREHENSIVE QUESTIONS
Page 271 and 272: COMPREHENSIVE QUESTIONS AND SUGGEST
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Page 279: CASE STUDIES(iii)(iv)The floor sale
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Page 291 and 292: SUMMARY OF INTERNATIONAL ACCOUNTING
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Page 295 and 296: GLOSSARY OF TERMSEthical Objectivis
Page 297 and 298: APPENDIX VIBIBLIOGRAPHYChambers Ham
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Page 303 and 304: INDEXAAbsorption, 17, 19, 39, 40, 4
Page 305 and 306: INDEXProfessional Behaviour, 136, 1
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