Midterm Examination (Assignment) Spring 2020

Name: Reg #:
_______________
Department & Program: Management sciences – EMBA Class &
Section: EMBA - 2A

Course Code & Name: BE 5202 Business Finance Total Marks: 15

Marks
Important Instructions:

 Solved Assignment must be mailed to the respective faculty by the

due date.
 Non-submissions of the assignments will be considered as absent
for the Midterm.
 The respective faculty will share the necessary details of the
assignments which should include the following

Format Report to the Board of directors

Word count 1500 with ±10%
Plagiarism policy Less than 20% with maximum 5% from
one source
Submission Email @ [email protected]
guidelines
Any other -
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Solve All Questions:

Case Study

Mary’s Café is a well-known, publicly traded, brand in the UK and currently expanding into
other parts of the region. They began as a small soup, salad, and sandwich restaurant that
grew into a multi-million dollars business. Below are the financial statements of the Mary’s
café and your task is to analyze the financial condition of the business by answering the
following questions:

Page 1 of 8
Q 1: Interpret the statement of cash flows by answering the following questions.

a) What has happened to the cash balance of Mary’s café between the start of the year
and the end of the year? (1 Marks)

Solution:

Cash Balance at the beginning of 2019 was negative, so this figure may represent bank
overdraft but at the end of the year Cash balance reached to £29000, which was due to
increase of £507000 in cash & cash equivalents.
b) Take a look at the largest cash flows under Investing and Financing activities. What kind
of cash flows took place? How will you connect the impact of these changes on income
statement and cash flows? (3 Marks)

Solution:

Largest cash inflow from investing activity was sale of assets of 250000 pounds,
due to which depreciation charge for the financial year 2019 was relatively less
than of 2018 due to disposal of assets and cash balance at balance sheet
increased.

Under Financing activity, only cash inflow was the long term loan of 300000 which
increased the cashflows for Mary’s Café but also increased company’s leverage
levels. Due to this activity, impact on income statement was reflected by increase
in finance costs and increase in long term loan section of Balance sheet.

Q 2: Conduct the percentage/change analysis for the following items:

a) Cost of goods sold (1

Marks)
b) Depreciation (1 Marks)
c) Finance cost (1 Marks)
d) Plant & equipment (1
Marks)

Solution:
Mary's Café
Percentage/Change Analysis 2019 2018 % Change
Cost of Goods Sold -200000 -150000 33%
Depreciation -30000 -40000 -25%
Finance Cost -36000 -10000 260%
Plant & Equipment 299 520 -43% Page 2 of 8
Analysis / Interpretation:

Cost of Goods Sold increased by 33% because it is directly related with number of sales a
company makes, increased revenues led COGS of Mary’s Café to increase by 33%.

Depreciation cost was decreased by 25% because fixed assets amounting to about 250000
was disposed of due to which its depreciation was not recorded in 2019.

Finance cost increased by 260%, due to addition long term loan of 300000 in balance sheet.

Property, Plant & Equipment decreased by 43% due to disposal of assets amounting 250000
this year.

Q 3: Calculate the following ratios and interpret the results:

e) Quick ratio (1 Marks)

f) Return on equity (1
Marks)
g) Gearing ratio (1 Marks)
h) Cash operating cycle (3 Marks)
i) Interest coverage ratio (1
Marks)
Solution:

Formulas:

Quick Ratio = (Current Assets – Inventory)/Current Liabilities

Return on Equity = Net Income/ Total Equity

Gearing Ratio = Total Debt/ Total Assets

Cash Operating Cycle = Inventory Days + Receivable Days

Interest Coverage ratio = Earnings before interest & tax/Interest Expense

Mary's Café
Financial Ratios 2019 2018 % Change
Quick Ratio 2.15 1.82 18%
Return on Equity 32% 87% -63%
Gearing ratio 0.82 0.88 -7%
Cash Operating Cycle 123.2 36.5 238%
Inventory Days 96.7 36.5 165%
Recievable Days 26.5 N/A
Interest Coverage Ratio 2.2 9 -75%

Page 3 of 8
Interpretation:
Quick Ratio:

Mary’s Café Quick ratio of 2.15 represents that it has enough current assets to meet its current liabilities
and increase of 18% from previous year is a good sign company’s liquidity.

Return on Equity:

ROE indicates the ability of company to generate profits without needing as much as capital. In 2019 32% is
a good number, but due to limitation of industry data we compare the ratio with previous year which tells
us that Mary was depending more on capital to produce its profit which decreased its ROE by 63%.

Gearing ratio:

Gearing ratio represents financial risk of a company. In this case, Mary has a gearing ratio of less than one
which means it has lower debt as compared to its assets which is good ratio for a cafe.

Cash Operating Cycle:

Cash Operating Cycle refers to a number of days company takes to convert its inventories into cash. It is the
sum of time taken in selling inventories and receiving cash from receivables. In this case, cash operating
cycle for 2018 is 123 days which increased by 238% from previous year. We compare this ratio with
industry data, because some industries tend to have higher operating cycles because complex business
models. Thus, Mary’s operating cycle solely increased due to zero receivables in 2018 and huge in increase
in inventory days.

Interest Coverage Ratio:

Interest Coverage Ratio determines that how easily a company can pay interest on its outstanding debt. In
2019, huge long term loan of 300000 increased debt burden on Mary’s Café due to which interest
coverage ratio was decreased to 2.2 from 9 of previous year. This year company’s ability to cover its
interest payments decreased.

Report Format

 Cover Page

 Table of Contents

 Introduction
Page 4 of 8
 Main Body

 Conclusion/Recommendation

 Reference(if any)

 Appendices

Page 5 of 8
 Mary's Café

Statement of comprehensive income for the year ended 31

December 2019

2019 2018

£'000 £'000

Revenue 400 350

Less: cost of goods sold -200 -150

Gross Profit 200 200

Less: Overheads -90 -70

Depreciation -30 -40

Profit before interest and tax 80 90

Finance costs (interest) -36 -10

Profit before tax 44 80

Income tax expense -8 -5

Profit for the year 36 75

Dividends declared -10 -10

Retained profit 26 65

Mary's Café

Statement of financial position for the year ended 31 December

2019

2019 2018

Assets £'000 £'000

Plant & Equipment 200 450

Property 99 70

Non-Current Assets 299 520

Page 6 of 8
 Cash 250 200

Inventories 53 15

Trade Receivables 29 -

Current Assets 332 215

Total Assets 631 735

Equity and Liabilities

Equity

Issued Share Capital 50 50

Retained Earnings 62 36

Total Equity 112 86

Non-Current Liabilities

Long-term Loan 350 50

Current Liabilities 130 110

Trade Payables 24 10

Interest Payable 5 1

Income Tax Payable 10 0

Dividends Payable 0 478

Bank Overdraft 169 599

Total Liabilities 519 649

Total Liabilities and Equity 631 735

Mary's Café

Statement of Cash Flows for the year ended 31 December 2019

Page 7 of 8
Cash flows from operating activities £'000 £'000

Profit before interest and tax 80

Add back noncash items:

Depreciation 30

110

Changes in working capital:

Increase in inventories -50

Increase in trade receivables -38

Increase in trade payables 20

Cash generated from operations 42

Interest paid -22

Income taxes paid -4

Net cash from operating activities 16

Cash flows from investing activities

Purchase of assets -59

Sale of assets 250

Net cash used in investing activities 191

Cash flows from financing activities

Increase in long term loan 300

Net cash used in financing activities 300

Net decrease in cash and cash equivalents 507

Cash and cash equivalents at beginning of period -478

Cash and cash equivalents at end of period 29

End of Assignment

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