Question: SuperSoap Ltd. is a new company that produced de-hydrated laundry detergent sheets as an ecological alternative to current provisions on the market.

23 Oct 2022,12:01 AM

 

SuperSoap Ltd. is a new company that produced de-hydrated laundry detergent sheets as an ecological alternative to current provisions on the market. SuperSoap’s company mission statement is to ‘Keep it clean and green, not mean’ with company goals aligned to the UK climate pledge. It commenced life on 1st January in Year 1. Year 1 has just been completed. In January, it issued 100,000 ordinary shares with a nominal value of £0.50 each at a premium of £0.50 each. It also obtained a 5-year bank loan of £75,000 at an annual interest rate of 15% when it started business.

As company based in the UK and with the aim of reducing their carbon footprint, SuperSoap decided to produce the SuperSoap Sheet in a small production plant just outside Birmingham. An agreement had been reached between SuperSoap and a company Rentaspace Ltd meaning that in January Year 1, £50,000 was spent on rent of buildings for the first twenty-four months. The buildings included an office space for the admin team and a climate-controlled warehouse to ensure the product remained de-hydrated and in saleable condition.

At the start of Year 1, machinery and equipment had been purchased for £75,000, to be used for 5 years. SuperSoap Ltd decided to apply the same depreciation policy to all non-current using the reducing balance approach which is also known as the double declining balance approach.

The first year’s products totalling £60,000 were purchased on credit during the year. At the end of the year on New Year’s Eve, 31st December, a stock take was performed. All staff were given clipboards and the warehouse was divided into sections. Each staff member was responsible for counting the packets of sheets in their own section. On close inspection of the product, it appeared that there had been a leak in the warehouse roof and a number of packets to the value of £2,000 were ruined and considered unsaleable. The closing inventories in total amounted to £15,000 before writing off the ruined merchandise. When the accountant performed year end checks it was noted that £8,000 was still owed to trade payables at the end of the year.

Demand for the SuperSoap laundry sheet for the first year was good and inventories sold on credit generated a total revenue of £170,000. SuperSoap Ltd had two paths for distribution of their product, Business-to-Business (B2B) or directly to consumers buying via the SuperSoap website. During the year, one of the medium sized B2B customers went bankrupt, at the time they owed SuperSoap Ltd £5,000 the accountant advised that the debt be recognised and written off as a bad debt. After writing off the bad debt, at the end of the year, the business was still owed £20,000. It seemed sensible to recognise that this might well happen to other customers in the future, and it was decided to create an allowance for bad debts of 5% of the year end receivables.

 

The admin team were very comfortable in their office where they processed orders, collected payments and paid suppliers. Various other operating expenses amounted to £800 each month, paid one month in arrears. The wages and salaries totalled £30,000 for the year and were all paid in full by the end of the year. On the last day of the year a invoice for the landline was received for £300 relating to calls made in Year 1, the bank loan interest was also paid.

The accountant has advised that taxation of Year 1’s profits is estimated as being £3,500. Half of this sum had been paid midway during Year 1. The remainder is payable in the next year. We note that £6,000 was paid to the bank as a repayment of the loan taken out at the beginning of the year.

In order to raise capital for future growth of the business, in the final week of Year 1 there was a second share issue of 10,000 shares at a premium of 25 pence per share.

Being a new company, the decision was taken to create company policy suggesting that no dividends will be paid for the first year and all reinvested profits be ploughed back into the business for maximum growth potential

 

Required:

Prepare the following statements for Supersoap Ltd for Year 1:

1. a) Income Statement.                                                                      [12 Marks]
2. b) Statement of Changes in Equity.                                                            [5 Marks]
3. c) Statement of Financial Position.                                                  [8 Marks]
4. d) The directors of Supersoap Ltd are pleased they have made a profit in the first year and would like your advice on the liquidity position of the company. They are interested in raising funds for expansion of the business and have asked you to outline some options for them based upon the results from their first year of trading.                                                                      [25 Marks]

 

                                                                                         [TOTAL 50 Marks]

Marking criteria note:

Within the allocated marks for Q1 parts (a, b, c & d), marks are awarded for correct figures only. No method marks will be awarded.  Within the mark allocation of part (c) to this question, there is a sub-allocation of 10 marks reflecting academic judgement applied by the marker/assessor, based on the marker/assessor’s perception of logic, rationale, thrust, and communication. The composition of the 10 marks is based upon the assessment criteria for a level 7 module in relation to Knowledge and Understanding as well as Intellectual Skills.

 

SECTION B

This section contains ONE (1) compulsory question. Marks for each part of the question are as detailed. Answer ALL parts in this Section.  

 

QUESTION 2 [20 MARKS]                                                                THIS QUESTION IS COMPULSORY

You have been asked to prepare the statement of cash flows in a form suitable for publication for SudsRUs Ltd for the year ended 31 December 2020.

 

The most recent income statement and statement of financial position (with comparatives for the previous year) of SudsRUs Ltd are set out below.

 

SudsRUs Ltd – Income Statement for the year ended 31 December 2020

 

 

Revenue					104,567
Cost of sales					(71,358)
Gross profit					33,209
Profit on disposal of property, plant and equipment					106
					33,315
Distribution costs					(12,789)
Administrative expenses					(16,371)
Profit from operations					4,155
Finance costs					(608)
Profit before tax					3,547
Tax					(726)
Profit for the period					2,821

 

 

CONTINUED

 

SudsRUs Ltd – Statements of financial position as at 31 December 2020/19

			2020		2019
			£000		£000
ASSETS
Non-current Assets
Property, plant and equipment			42,306		30,832
Current Assets
Inventories			11,378		7,256
Trade and other receivables			9,736		4,175
Cash and cash equivalents			-		905
			21,114		12,336
Total Assets			63,420		43,168
EQUITY AND LIABILITIES
Equity
Ordinary share capital			9,400		7,100
Share premium			16,700		13,400
Retained earnings			9,378		7,857
Total equity			35,478		28,357
Non-current liabilities
Bank loans			15,200		12,000
			15,200		12,000
Current Liabilities
Trade payables			7,106		1,900
Tax liabilities			726		911
Bank overdraft			4,910		-
			12,742		2,811
Total Liabilities			27,942		14,811
Total Equity and Liabilities			63,420		43,168

 

Further information:

• The total depreciation charge for the year was £3,786,000.
• PPE with a carrying amount of £706,000 was sold in the year.
• All sales and purchases were on credit. Other expenses were paid for in cash.
• A dividend of £1,300,000 was paid during the year.

                     

CONTINUED

 

Required

2020. Using the above information generate the cash flow statement for publication using the ‘indirect method’ for year ended 31 December 2020. Note you must show all relevant workings and itemised parts individually. If your answer is not in this format and does not use the ‘indirect method’, you will be awarded ZERO marks for this question.                                                                                                                                                                                              [11 Marks]

 

 

1. Comment briefly on the significance of the information provided by the company’s Cash Flow Statement and in doing so identify 3 potential limitations of the Statement of Cash Flows.

 

     [6 Marks]

 

 

1. “The size of an entity’s profit is an unreliable indicator of its cash situation.”

 

Discuss the above statement by outlining four circumstances whereby a company might report a healthy profit in its financial statements and yet suffer severe cash flow problems.

                                                                                                                                         [8 Marks]

[TOTAL 20 Marks]

 

Marking criteria note:

Within the mark allocation of part (b) to this question, there is a sub-allocation of 5 marks reflecting academic judgement applied by the marker/assessor, based on the marker/assessor’s perception of logic, rationale, thrust, and communication. The composition of the 5 marks is based upon the assessment criteria for a level 7 module in relation to Knowledge and Understanding as well as Intellectual Skills.

 

SECTION C

 

This section contains TWO (2) questions of which you should answer ONLY ONE (1) question. If you answer more than one (1) question, only your first answer will be taken as the attempt for this section.

Question 4 [30 Marks]

‘Investment appraisal is never accurate, after all no one can predict the future.’

 

Required

Compare and contrast the four (4) main investment appraisal methods and in doing so critically evaluate the above statement.

Maximum number of words: 1,000 words.                                                         [30 Marks]

[TOTAL 30 Marks]

Marking criteria note:

Within the mark allocation to this question, there is a sub-allocation of 10 marks reflecting academic judgement applied by the marker/assessor, based on the marker/assessor’s perception of logic, rationale, thrust, and communication. The composition of the 10 marks is based upon the assessment criteria for a level 7 module in relation to Knowledge and Understanding as well as Intellectual Skills.

 

Question 4 [30 Marks]

‘According to the ‘Framework’, qualitative characteristics are the attributes that meet the decision usefulness of financial information.’

Required

Outline the two fundamental and four enhancing characteristics of financial information as defined in the Conceptual Framework, providing examples of each.

Maximum number of words: 1,000 words.                                                        [30 Marks]

[TOTAL 30 Marks]

Marking criteria note:

Within the mark allocation to this question, there is a sub-allocation of 10 marks reflecting academic judgement applied by the marker/assessor, based on the marker/assessor’s perception of logic, rationale, thrust, and communication. The composition of the 10 marks is based upon the assessment criteria for a level 7 module in relation to Knowledge and Understanding as well as Intellectual Skills.