Atom Trading has been expanding rapidly over the recent years. In 2020, there was a major expansion which included the acquisition of new equipment and premises to cater for a new range of products. The owner of the business has requested you to conduct a review of the business performance and advise on how to improve the financial performance of the business.
A. The financial information for Atom Trading Ltd for 2019 and 2020 are as follows:
Atom Trading
Income Statements for the year ended 31 December
2019 2020
Revenue 10,915,000 15,682,000
Cost of Goods Sold:
Opening Inventories
1,052,000
1,786,000
Purchases 8,868,000 13,970,000
Closing Inventories
Cost of Goods Sold
Gross profit 1,786,000
(8,134,000)
2,781,000 3,560,000
(12,196,000)
3,486,000
Expenses 780,000 1,186,600
Interest Expense
Net Profit for the year
19,200
1,981,800
356,400
1,943,000
Atom Trading Ltd
Balance Sheet as at 31 December
2019 2020
ASSETS
Fixed assets:
Land and building (net)
3,594,000
6,630,000
Plant and equipment (net) Total fixed assets 2,242,000
5,836,000 4,171,000
10,801,000
Current assets: Cash
23,500
0
Inventories 1,786,000 3,560,000
Trade receivables
Total current assets
Total assets
EQUITY AND LIABILITIES Long term liabilities:
Borrowing – loans 1,920,500
3,730,000
9,566,000
320,000 4,180,000
7,740,000
18,541,000
3,105,000
Current liabilities: Trade payables
1,047,000
2,445,000
Other current liabilities 179,000 193,000
Bank overdraft
Total current liabilities
Total Liabilities 0
1,226,000
1,546,000 2,835,000
5,473,000
8,578,000
Equity:
Share capital
2,000,000
2,000,000
Retained Profit 4,038,200 6,020,000
Current year profit
Total Equity
Total equity and liabilities
1,981,800
8,020,000 9,566,000
1,943,000
9,963,000
18,541,000
B. Comparable industry average for Atom Trading Ltd are as follows:
Ratios Industry Average
(a) Gross profit margin 24%
(b) Net profit margin 14%
(c) Return on Asset 15%
(d) Current ratio 2 times
(e) Quick ratio (Acid-test ratio) 1 time
(f) Debtor collection period 50 days
(g) Average Inventory turnover period 60 days
(h) Creditor payment period 50 days
(i) Debt ratio 20%
Required: Answer all questions.
1. Calculate the following ratios for 2019 and 2020 separately (Show all your workings). (a) Gross profit margin (%).
(b) Net profit margin (%).
(c) Return on Asset (%).
(d) Current ratio (in times).
(e) Quick ratio (Acid-test ratio) (in times).
(f) Debtor collection period (in days).
(g) Average Inventory turnover period (in days).
(h) Creditor payment period (in days).
(i) Debt ratio (%)
[27 marks]
2. Using the computed ratios in Part 1, and any information you consider relevant, evaluate the performance of the business and provide detailed suggestions on how to improve the business based on the following areas:
(i) Profitability (250 words) [10 marks]
(ii) Liquidity (250 words) [10 marks]
(iii) Efficiency (250 words) [10 marks]
(iv) Leverage (250 words) [10 marks]
For part (i) to (iv), your report should address the following areas:
Compare the current year performance with the previous year.
Compare the performance of the company with the industry average.
Provide detailed suggestions, with reasoning, on how to improve on the performance of the business.
3. Answer the following questions:
(i) Discuss the difference between a Fixed Asset and an Expense. (100 words)
[8 marks]
(ii) Assess the implication when an Expense is wrongly classified as a Fixed Asset in the financial statements. (100 words)
[7 marks]
4. Answer the following questions in the context of Atom Trading:
(i) Evaluate the advantages and disadvantages of using debt financing. (150 words)
[10 marks]
(ii) Provide your comments on whether bank overdraft should be used for the purpose of long term financing. (150 words)