Question 1

Outback Brewery plc is a brewing company. One of the company's main suppliers of
yeast and hops has recently gone out of business and Outback Brewery plc is now
seeking an alternative and reliable supplier. Two companies have been identified as
potential suppliers. Both of these companies prepare accounts to 31 December each
year and Outback Brewery plc has obtained copies of each company's financial
statements for the year ending 31 December 2010. A summary of these statements is
provided as follows:

Income statements for year ending 31 December 2010

Oliver Ramsey
Ltd Ltd
£000 £000
Revenue 5,720 6,310
Cost of sales (3,840) (4,240)
Gross profit 1,880 2,070
Operating expenses (760) (1,080)
Operating profit before interest 1,120 990
Interest payable (50) (350)
Profit before taxation 1,070 640
Taxation (320) (210)
Profit after taxation 750 430

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Statements of financial position at 31 December 2010

Oliver Ramsey Ltd

Ltd
£000 £000 £000 £000
Non-current assets 4,570 6,330
Current assets
Inventories 510 890
Trade receivables 670 1,090
Bank balance 340 -
1,520 1,980
Current liabilities
Trade payables 450 1,130
Other payables 320 210
Bank balance - 440
770 1,780
Net current assets 750 200
5,320 6,530
Non-current liabilities
Loan 500 3,500
4,820 3,030

Share capital 2,000 2,000

Retained earnings 2,820 1,030
4,820 3,030

 Requirement
(a) For Oliver Ltd and Ramsey Ltd calculate three profitability ratios, two liquidity /
efficiency ratios, and any other two relevant ratios which may be used to analyse
the performance of these companies. (14 marks)

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(b) Comment briefly on the results of your calculations from (a), and make a
recommendation to the management of Outback Brewery plc as to which of the two
companies seems likely to be the more reliable supplier. (10 marks)

(c) Identify any limitations in your analysis and state any further information which
should be obtained before a final decision is made. (6 marks)

(Total 30 marks)

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