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Interpretation of Accounts The following figures have been taken from the Final Accounts of Dantzig plc, a manufacturer in food processing sector, for the year ended 31/12/2012 - Leaving Cert Accounting - Question 5 - 2012

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Interpretation of Accounts The following figures have been taken from the Final Accounts of Dantzig plc, a manufacturer in food processing sector, for the year ende... show full transcript

Worked Solution & Example Answer:Interpretation of Accounts The following figures have been taken from the Final Accounts of Dantzig plc, a manufacturer in food processing sector, for the year ended 31/12/2012 - Leaving Cert Accounting - Question 5 - 2012

Step 1

Opening stock.

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Answer

To calculate the opening stock, we can use the formula:

extOpeningStock=extCostofSales−extPurchases ext{Opening Stock} = ext{Cost of Sales} - ext{Purchases}

Here, we are given:

  • Cost of Sales = €852,000
  • Total Sales = €990,000
  • Operating Expenses = €91,000
  • Interest = €16,000
  • Retained Profit = €26,000
  • Total Ordinary Shares = 550,000

From further calculations:

  1. Determine total expenses:

    • Total Expenses = Cost of Sales + Operating Expenses + Interest
    • Total Expenses = €852,000 + €91,000 + €16,000 = €959,000

  2. Using the profits, we find:

    • Net Profit after expenses = Total Sales - Total Expenses
    • Net Profit = €990,000 - €959,000 = €31,000

  3. Then, we can express:

    • extOpeningStock=extCostofSales−extPurchases=€852,000−€31,500 ext{Opening Stock} = ext{Cost of Sales} - ext{Purchases} = €852,000 - €31,500
    • Therefore, Opening Stock = €820,500.

Step 2

Earnings per share.

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Answer

Earnings per share (EPS) can be calculated using the formula:

extEPS=extNetProfitextNumberofOrdinaryShares ext{EPS} = \frac{ ext{Net Profit}}{ ext{Number of Ordinary Shares}}

From previous calculations:

  • Net Profit = €26,000
  • Number of Ordinary Shares = 550,000

Thus,

extEPS=26,000550,000=0.0473extor4.73extcentspershare. ext{EPS} = \frac{26,000}{550,000} = 0.0473 ext{ or } 4.73 ext{ cents per share.}

Step 3

Dividend yield.

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Answer

The formula for calculating Dividend Yield is:

ext{Dividend Yield} = \frac{ ext{Dividends per Share}}{ ext{Market Price}} \times 100 ext{%}

We know from the data:

  • Dividends per Share = €0.0473
  • Market Price = €0.85

Thus, the Dividend Yield can be calculated as follows:

extDividendYield=0.04730.85×100=4.28% ext{Dividend Yield} = \frac{0.0473}{0.85} \times 100 = 4.28\%

Step 4

Period to recoup share premium.

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Answer

The period to recoup share premium can be calculated using the formula:

extPeriod=extMarketPriceextEarningsperShare ext{Period} = \frac{ ext{Market Price}}{ ext{Earnings per Share}}

Substituting the values:

  • Market Price = €0.85
  • Earnings per Share = €0.0473

Thus,

extPeriod=0.850.0473≈18extyearsor17.97extyears. ext{Period} = \frac{0.85}{0.0473} \approx 18 ext{ years or } 17.97 ext{ years.}

Step 5

Interest cover.

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Answer

Interest cover can be calculated using:

extInterestCover=extNetProfitBeforeInterestextInterestCharges ext{Interest Cover} = \frac{ ext{Net Profit Before Interest}}{ ext{Interest Charges}}

Where:

  • Net Profit Before Interest = €31,000
  • Interest = €16,000

Thus,

extInterestCover=31,00016,000≈1.94exttimes. ext{Interest Cover} = \frac{31,000}{16,000} \approx 1.94 ext{ times.}

Step 6

Advice on borrowing for shares.

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Answer

Given the current market situation and the firm's financials, it is advisable not to borrow money to purchase shares in Dantzig plc. The firm has shown a declining trend in important financial ratios and profitability indicators, indicating potential risks.

  • The Earnings per Share is relatively low, and the Dividend Yield has decreased.
  • It indicates a lack of confidence from investors, which is concerning.
  • Additionally, the firm's quick and current ratios suggest liquidity issues.

Thus, the risk of purchasing shares appears significant.

Step 7

Discussion of potential business acquisitions.

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Answer

In reviewing which business to acquire, two companies are of interest based on the financial performances:

  • AB Foods: Stronger Return on Capital Employed (8%) compared to Dantzig's lower figure.
  • XY Traders: Comparable performance with a stable current ratio and lower debt obligations.

The analysis suggests that investing in XY Traders may present a lower risk due to their sound liquidity ratios and profitability, whereas AB Foods might represent a more aggressive growth strategy. However, careful consideration of the market saturation and economic conditions is essential.

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