The report is about the analysis of financial performance and position of Melotte. Company is performing with high growth rate from last year. the financial position of the company is strong. The analysis is made for checking the viability of investments in company. investment in company will prove to be beneficial for Grosvenor.
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MELMOTTE LTD
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TABLE OF CONTENTS TABLE OF CONTENTS................................................................................................................2 EXECUTIVE SUMMARY.............................................................................................................1 QUESTION 1..................................................................................................................................1 a)..................................................................................................................................................1 b)..................................................................................................................................................1 c)..................................................................................................................................................1 QUESTION 2..................................................................................................................................2 a) Revenue...................................................................................................................................2 b) Goss Profit...............................................................................................................................3 c) Other SPL costs.......................................................................................................................3 d) Operating profit.......................................................................................................................4 QUESTION 3..................................................................................................................................5 a) Non Current Assets..................................................................................................................5 b) Grosvenor’s proposed investment...........................................................................................5 QUESTION 4..................................................................................................................................6 a) Reasons of net cash outflow....................................................................................................6 b) Necessity of outflow................................................................................................................7 REFERENCES................................................................................................................................8
EXECUTIVE SUMMARY The report is about the analysis of financial performance and position of Melotte. Company is performing with high growth rate from last year. the financial position of the company is strong. The analysis is made for checking the viability of investments in company. investment in company will prove to be beneficial for Grosvenor. QUESTION 1 a) i) Description one relates to the Statement of financial position and second one relates to the statement of financial position. ii) First statement will be allocated in the liabilities section of the balances sheet under the noncurrent liabilities. Second statement will be charged as expenses in the profit or loss statement as the operating expenses or professional fees. b) Statement of Financial Position The statement is prepared for reflecting the financial position of the enterprise. It lists the items of assets, liabilities and equity of the company. it represents the wealth of the company and the obligations of company. Statement of Profit or Loss The statement is prepared for assessing the results from carrying out the business for a given period of time. it represents the profits or loss earned after covering all the expenses from the revenues. Statement of Cash Flows It is prepared for analysing the inflow and outflow of cash from the business. This represents the cash flow from operating, investing and financing activities and the actual cash available with company at year end(de Assis and et.al., 2017). c) i) As per IAS 2 inventories should be recognised as lower of cost or net realisable value whichever is lower. Where cost of the inventory is higher than net realisable value it should be recognised in profit or loss as expense. ii) 1
The rule state the company to record its stocks of fashionable products at net realisable value in the balance sheet and the loss over goods going out of cash should be charged as expense in profit or loss statement. iii) If the inventories of Melmotte goes out of fashion than the company will record the inventories at lower of NRV or cost. Also the loss occurred on wring down of inventory will be charged as expense in Profit or loss account and the inventory will be reported at realisable value of the goods in balance sheet. QUESTION 2 a)Revenue i) 20172018Change 5550900062% There has been a increase of 62% in revenues from last year. ii) Total Revenue9000100% Retail Operations600667% Online Store164418% Hotel Contract135015% iii) The retail operations alone have generated 67% of the total revenues of company in the year 2018. The total change in the total revenues and the revenues generated alone by retail operations is 67%. iv) This additional information is useful for Grosvenor to identify the revenues contributed from each of the segment of the company. It will help to identify the growth achieved by the business in two years. The growth rate shows the efficiency of operations of company. The investment company is planning to invest in the retail operations and this will help to identify the contribution of retail sector in overall revenues of company. 2
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b) Goss Profit i) Gross profit shows the financial performance of company in carrying out the business. It tells how efficiently company is managing its activities for earning the profits. Gross profit is the amount left with the company for carrying out its further business operations(Schroeder, Clark and Cathey, 2019). Higher the gross profit better is for the company. ii) Total Retail Operation s Online Store Hotel Contract Total Revenue9000600616441350 Cost of Sales612542061150769 Gross Profit28751800494581 Gross profit ratio32%30%30%43% iii) The total gross profit of hotel sector is 43%. The gross profit is high as the company has secured contract with a hotel chain to use the logo on its products. This enabled the company to sell its products at higher rates than the ordinary market rate. The products with logo of hotel are sold in hotel chain, online and retail sources. For this privilege company is paying a royalty fees. c) Other SPL costs i) Cost of sales refer to the manufacturing costs for producing the product such as raw materials, labour. They are dependent on the amount of production being made by the company. Cost sales are associated only with production activities. On the other overheads are the cost involved in running the business. Overhead expenses are required to be incurred whether or not production istaking placesuch asrent, utilities,insurance. Overhead costsare required periodically by the company that are stopped on shut down. ii) Trend Analysis 3
The trend analysis shows that the disttribution and transport cost have raised by 178 in current year. iii) The distribution cost of the company has incerased from the last year as it has made an arrangement with National companyv for the delivery of products to the door of customers in online and hotel business. This is incerased with the increase in revenues. Royalties cost are raised due to arrangement with hotel chain for using their logo on the products for increasing their sales. It had also rented the machienary for logo of luxury hotel to be used on its products. d) Operating profit i) Operating profit shows whether the company has earned profit or loss during the year by carrying out the business. It is the amount left with the company after carrying out all the costs and expenses of company(Grennan and Michaely, 2019). Profit shows the efficiency of the company in managing its operation in cost efficient manner. ii) Total Retail Operation s Online Store Hotel Contract Total Revenue9000600616441350 Operating profit873544206123 Operating profit10%9%13%9% 4
ratio iii) The company is having profits higher in online store as compared with other departments. The company has incurred additional distribution costs for the business has offset other costs. the online store do not have expenses such as rent, marketing, rates and the additional staff that are incurred in retail stores. The reduces expenses has raised the profit margin of online stores. QUESTION 3 a)Non Current Assets i) The development costs are shown separately from the PPE as it is recognised as intangible asset as per IAS 38 for intangibles. Development cost satisfies the definition of intangible assets and the economic benefits due to this will flow to the company. All the benefits due to this are measureable. PPE are tangible fixed assets therefore does not include the development cost within the same. ii) Every asset due to the wear and tear and use during the significant period oftime loses its value. Depreciation is charged for recognising this loss of assets in the profit or loss. There are different typesof depreciation that is charged as per nature of PPE. It reduces the value of PPE with a fixed amount every during the useful life of asset. iii) Development cost is capitalised when the commercial and technical feasibility of the assets for the use or sale have been established cost. The development costs are capitalised only when it is certain that the future economic benefits will flow to company. Research costs are expensed as they are incurred for the development of intangibles asset. As per IAS 38 costs incurred prior to recognition of intangible assets are charged as expense in profit or loss statement. b) Grosvenor’s proposed investment i) 5
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Bank Overdraft-102 i.e. 0 Equity capital648 Cash648 If the investment is made wholly in cash company, and is used for paying off the overdraft. It will reduce the cash balance by 102 bringing it to 648 and the non current liabilities will be reduced by 102 of the overdraft. The sales consideration is reduced by the amount of liabilities taken over. ii) Gearing ratio show the amount of debt against its equity capital and interest ratio show the ability of company to meet the interest payment on the basis of its profits(Moradi, Abtahi and Zilouchian, 2017).It helps to assess the financial risks in the business. iii) Gearing Rationewold Debt618618 Equity 750 + 1593618+1593 Gearing Ratio26%28% iv) If the Grosvenor invests in the company, it will be considered less riskier as the gearing ratio has declined. The increase in equity capital will decrease the debt in proportion making the company less riskier. QUESTION 4 a)Reasons of net cash outflow. The decrease in net cash outflows is mainly due to : Increase in inventories from last year. Decrease in Trade payables of company. Repayment of long term borrowings. Inflow from operating activities is lower due to increase in working capital requirements. 6
b) Necessity of outflow The out flows were necessary as increase in inventory and trade receivables helped the company to maintain the current ration and liquidity position. It also reduced the inventory days that shows efficiency of inventory management. Repayment of loan was essential for keeping the financial risk of the company low. 7
REFERENCES Books and Journals Moradi, H., Abtahi, A. and Zilouchian, A., 2017, June. Financial Analysis of a Grid-connected PhotovoltaicSysteminSouthFlorida.In2017IEEE44thPhotovoltaicSpecialist Conference (PVSC)(pp. 638-642). IEEE. Grennan, J. and Michaely, R., 2019. Fintechs and the market for financial analysis.Michael J. Brennan Irish Finance Working Paper Series Research Paper, (18-11), pp.19-10. de Assis, C.A. and et.al., 2017. Conversion economics of forest biomaterials: risk and financial analysis of CNC manufacturing.Biofuels, Bioproducts and Biorefining.11(4).pp.682-700. Schroeder,R.G.,Clark,M.W.andCathey,J.M.,2019.Financialaccountingtheoryand analysis: text and cases. John Wiley & Sons. 8