Financial Analysis of Melmotte Ltd

This report provides a financial analysis of Melmotte Ltd, including ratios, revenue analysis, gross profit analysis, and cash flow analysis. It also discusses the purpose of financial statements and the treatment for products going out of fashion. The report is useful for investors and stakeholders in assessing the company's financial health and position.

MELMOTTE LTD

TABLE OF CONTENTS
EXECUTIVE SUMMARY.............................................................................................................1
Question 1........................................................................................................................................1
a) Descriptions.............................................................................................................................1
b) Purpose of financial statements...............................................................................................1
c) Treatment for product going out of fashion.............................................................................1
Question 2........................................................................................................................................1
a) Revenue ..................................................................................................................................2
b) Gross Profit .............................................................................................................................2
c) Other SPL Costs ......................................................................................................................3
d) Operating Profit ......................................................................................................................4
Question 3........................................................................................................................................5
a) Non Current Assets .................................................................................................................5
b) Grosvenor proposed investment. ............................................................................................6
Question 4........................................................................................................................................6
a) Reasons for negative cash balance...........................................................................................6
b) Outflows from cash statements................................................................................................6
REFERENCES................................................................................................................................7

EXECUTIVE SUMMARY
The present report is about the financial analysis of company. The report will reflect the
health and position of company. Various ratios will be used in assessing the financial statements.
Performance of company from previous year has been analysed for Grosvenor to check the
investments viability. Report has given understanding about various accounting concepts and
treatments.
2.2 QUESTIONS
Question 1
a) Descriptions
I) The above description relates to statement of Profit or Loss. Second statement of
description relates to statement of financial position.
II) Transaction for securing the long term debt would be allocated in balance sheet where the
expense related to the hiring of administrator will be charged to the profit or loss.
b) Purpose of financial statements.
SOFP – The above statements represents the financial health of the organisation. Example
customer ; for knowing whether company would be able to continue its supplies.
SPL – This is prepared for knowing the profitability from running a business. User Investors ;
they seek whether company is able to provide adequate returns overt their investments.
SCF – The statements is prepared for knowing the cash inflow and outflow during the year.
Suppliers seek to know whether company has the liquidity to repay the purchases (Williams and
Dobelman, 2017).
c) Treatment for product going out of fashion.
I) As per IAS 2 inventories should be recognised at cost or net realizable value whichever is
lower.
II) This complies with the recognition criteria as company recognises carrying cost of
inventories when they are sold.
III) The effect of writing off could be charged directly to cost of goods sold in the profit or
loss statement or the inventory may be offset from inventory account in balance sheet
(Platonova and et.al., 2018.).
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Question 2
a) Revenue
I) Percentage change in total revenue
Particular 2018 2017 2018
£'000 £'000 Change
Revenues £9,000.00 £5,550.00 62.16%
There is an upward movement of 62.16%.
II) Contribution in percentage
Contribution %
Total Revenue 9000
Retail Operations 6006 66.73%
Online Store 1644 18.27%
Hotel Contract 1350 15.00%
III) The percentage in revenue generated by total revenues is 62.16% where change from
retail operations alone is 66.73% in year 2018. It is assumed that change in retail
operations has same rate as that of the total revenues.
IV) The additional information is useful for Grosvenor for deciding about the investment
decisions as it helped the investments to know the contributions made by each sector
in generating revenues for company. It has helped to calculate the contributions as
well the percentage growth in revenues from last year. Investors invests after
analysing the growth rate of company (Cucchiella, D’Adamo and Gastaldi, 2015).
Investments are not made if company is not able to generate adequate returns using
the available resources.
b) Gross Profit
I) Gross profit shows the efficiency of company to manage its operations at the minimal
costs. Gross profit of company for the year 2018 is £'2875. Company must have an higher
gross profit so that it has enough funds available for carrying out other business activities.
Gross profit margin of company being a manufacturing company should be higher. The
production charges of manufacturing a product are high as company may be using
advanced technology in its operations (Crowther, 2018). Company uses quality raw
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materials for its products that costs high. Company has to adopt for strategies that are
essential for reducing the production costs.
II) Gross margin Ratio
The above table shows that gross margin ratio is lowest in the retail operation of 29.97% and
highest in hotel contract of 43.04%. Online store is having gross margin ratio of 30.05. It could
be analysed from the above table that sector generating highest revenues is having lowest gross
profits. Gross profit margins of the above sectors can be improved further taking the cost
reduction steps. It is the amount left with company for carrying out other operational cost of the
business.
III) Gross Profit margin of hotel contract is higher in comparison to other sectors as company
has made a lucrative agreement with hotel chain. Company is selling its product with
branding of hotel. This is helping company to charge premium prices for its products bot
over hotels and on online store. The premium prices has increased the gross profit from
hotel contract.
c) Other SPL Costs
I) Differences between cost of sales and overheads in profit or loss.
Cost of goods sold or cost of sales refer to cost involved in manufacturing and delivering
the products and services to customers. Salaries of service providers in service company
are cost of sales (Khan and Jain, 2018). It includes raw material, direct material, factory
costs etc. Overheads on other hand are cost incurred for running company. These are the
ongoing costs. These costs include sales, marketing, accounting, human resources and
information technology.
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II) Trend-Analysis
The trend of the distribution and transportation costs shows and upward movement. The
costs have increased from £275 to £453. There has been a change of 64.73% from
previous year. The increase is significant that reduces the profit of company. Therefore
the reason behind the increase is to be identified by the Grosvenor.
2017 2018
Distribution & Transport
costs £275.00 £453.00 64.73%
III) Royalty and distribution costs have increased in current year. The reason behind in the
increase of distribution costs as company has entered into a distribution agreement with
national company for delivering the products at door. The step has taken as customers
were not picking products directly. Rise in royalty is seen due to renting of additional
machinery attaching the luxury logo to products manufactured by company. The
increased use of hotel logo and hotel chain by company has increased the royalty of
company.
d) Operating Profit
I) Operating profit of company represent the amount left after carrying out all the
operations. It represents efficient performance of company after managing its operations.
The operating profit of company is £ 873 against the revenue of £9000. The increase in
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1 2
0
100
200
300
400
500
275
453
Distribution & Transport
costs

operating margin is not significant. The margin is 9.70% for the year and return of
company is adequate as per the industry trend.
II) Operating profit margin ratio
Operating profit
Margin Operating Profit
Operating
Margin
Revenue
Retail Operations £544.00 9.06%
£6,006.00
Online Store £206.00 12.53%
£1,644.00
Hotel Contract £123.00 9.11%
£1,350.00
The operating profits are derived after carrying out all the activities for running a business. There
are two costs incurred by company after the gross profits are administration expenses and the
distribution cost. Margin is 9.06% in retail operations, 12.53% in online stores and 9.11% in
hotel chain. Distribution cost as against its revenues are high in hotel sector this brings the
operating margin even after having highest gross profit margin.
III) Operating margin of online store is highest as compared with other segments. Margin is
high as the over head costs do not increases with additional sales in online stores that are
seen in the retail stores.
Question 3
a) Non Current Assets
I) PPE and development costs are shown separately as PPE represents the tangible fixed
asset of company and the development cost is the cost incurred for preparing the platform
for online store and therefore capitalised in balance sheet. It is not tangible but is
recognised in the balance sheet as an asset (Edwards, Schwab and Shevlin, 2015). It is
an capitalised expense not a physical asset.
II) Depreciation is charged for the wear and tear due to use of assets with time. Value of
asset do not remain the same. The decrease in value is loss and therefore charged as
expense in profit or loss. Depreciation decreases the value of PPE represented in balance
sheet.
III) Research costs are treated as expense and charged to p&l as these are incurred for
innovating new products or techniques. Research do not flow any economic benefit to
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company. Development is the application of research findings to design or plan (West
and Bhattacharya, 2016). This flows economic benefits to company therefore treated as
asset in balance sheet.
b) Grosvenor proposed investment.
I) In cash investment used for paying off overdraft figures that will change in SOFP are
cash balance, overdraft liability and share capital of company. The bank overdraft will
become 0, cash and equivalents to £648000 and share capital will increase to £1575,000.
II) Gearing ratio shows the fund raised by company through borrowings and interest cover
shows interest expenses. High debts means high risks and interest expense will lower the
profits of company. Company having high debts with negative cash may go insolvent.
III) New Gearing Ratio
Gearing Debt 618
Debt + equity 2961
20.87%
IV) As the result of investment company would be considered less riskier as the gross
margin ratio has lowered. Equity is high as against debts.
Question 4
a) Reasons for negative cash balance
Company has negative cash flows because
 Inventories have increased significantly & Trade payables have increased significantly.
 Company has invested in product development and purchase of PPE.
 Dividend has paid very high rate of dividend in comparison to previous year.
b) Outflows from cash statements.
The outflows were necessary for improving the inventory days of company and payables
period. This will help in shortening the cash operating cycle as short cycle requires less cash. The
efficiency ratio were improved because of the outflows in trade receivables. The dividend payout
ratio has increased.
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REFERENCES
Books and Journals
Crowther, D., 2018. A Social Critique of Corporate Reporting: A Semiotic Analysis of Corporate
Financial and Environmental Reporting: A Semiotic Analysis of Corporate Financial and
Environmental Reporting. Routledge.
Cucchiella, F., D’Adamo, I. and Gastaldi, M., 2015. Financial analysis for investment and policy
decisions in the renewable energy sector. Clean Technologies and Environmental
Policy. 17(4). pp.887-904.
Edwards, A., Schwab, C. and Shevlin, T., 2015. Financial constraints and cash tax savings. The
Accounting Review. 91(3). pp.859-881.
Khan, M.Y. and Jain, P.K., 2018. Financial Management: Text, Problems and Cases, 8e.
McGraw-Hill Education.
Platonova, and et.al., 2018. The impact of corporate social responsibility disclosure on financial
performance: Evidence from the GCC Islamic banking sector. Journal of Business
Ethics. 151(2). pp.451-471.
West, J. and Bhattacharya, M., 2016. Intelligent financial fraud detection: a comprehensive
review. Computers & security. 57. pp.47-66.
Williams, E.E. and Dobelman, J.A., 2017. Financial statement analysis. World Scientific Book
Chapters. pp.109-169.
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