Please Take Action Now So You Can Participate:

First: Make sure you had connected your headset BEFORE entering the room. If you
connected your headset after joining, you might experience audio issues. If your audio does
not work:
• Exit the room
• Connect your headset
• Go into Windows control panel and make your headset the default for microphone
and speakers
• Rejoin the room
Second: Do the ‘audio set up wizard’ on the top left of your screen. Go to “Meeting” then
select “Audio Set Up Wizard” – follow the instructions.

Third:
Speaker Microphone

Click on the microphone button to enable it. It should turn from white to green.

Mic disconnected Mic Connected Mic Muted

 Welcome to B100 Online Tutorial 4

Please begin by saying hello and where you are from in the Chat
Box so I know that you are all ready to start.

2
A reminder that this tutorial
will not be recorded.
Available Recording are
under the Tutorials tab of
the module website in the
B100 22J Online Room.

3
Online
Tutorial 4

Tutor: Alison Inglis

Block 3 (continued)
Agenda

• Revision
• A case study like TMA03
– how to go about it
– which parts of the book/online activities to use
• TMA03 – early advice
 The Balance Sheet Barrier
Week 10
Watch this soon (if you have not already)
Practise case study –
“Paula’s Pipes”

• Paula Newton’s business (Pipes & Installations Ltd) as it

was some years ago
– financial statements
– simple analysis – what are the issues?
– what should be done?

• In other words – practice for TMA03

Paula's Pipes (a sole trader)
Income Statement
For the years ended 31st December 2009 and 2008
31-Dec-09 31-Dec-08
£ £ £ £

Sales/income 918,000 872,000

Less cost of goods sold :
Opening inventory 63,900 54,300
Purchases 672,000 571,000
735,900 625,300
Less closing inventory 107,400 63,900
Cost of goods sold 628,500 561,400
Gross profit 289,500 310,600
Less expenses:
Transport expenses 2,300 2,000
Rent 30,000 30,000
Rates 27,500 26,500
Insurance 7,950 7,800
Wages and salaries 101,200 97,340
Marketing expenses 3,500 2,160
Administration expenses 25,000 23,000
Interest on long-term loan 2,000 2,000
Depreciation 32,000 28,000
Total Expenses 231,450 218,800
Net profit 58,050 91,800
Changes in income statement
31.12.2009 31.12.2008 % change

sales 918,000 872,000 5.3

cost of sales 628,500 561,400 12.0

transport 2,300 2,000 15.0

rent 30,000 30,000 0.0

rates 27,500 26,500 3.8

insurance 7,950 7,800 1.9

wages and salaries 101,200 97,340 4.0

marketing expenses 3,500 2,160 62.0

administration
expenses 25,000 23,000 8.7

interest 2,000 2,000 0.0

depreciation 32,000 28,000 14.3

Income Statement –
matters of potential concern

• Choose simple, significant issues

– trends in profit, sales, gross profit, simple returns (Book 3 ,
pp.67-79), significant expense lines, compare this year to
last year
• how have things changed?
• good news or bad news?
• what can be done to address issues? (simple answers
work best)
Income Statement –
matters of potential concern

• Profit down (by £33,750 or 37%)

• Sales up, but
• …gross margins down 4.1 percentage points (35.6%-31.5%)
• …reducing profit by £37.6k
• Wages & Salaries up £3,860 or 4%
• Administration expenses up £2,000 or 8.7%
• Marketing expenses up on £1,340 but by 62%
Paula's Pipes (a sole trader)
Balance Sheets
At 31st December 2009 and 2008
31-Dec-09 31-Dec-08
£ £ £ £ £ £
Net book Net book
Non-current assets/Long-term assets Cost Depreciation value Cost Depreciation value
Plant and Equipment 94,000 77,750 16,250 98,000 56,000 42,000
Vehicles 41,000 27,250 13,750 41,000 17,000 24,000
Total non-current assets 135,000 105,000 30,000 139,000 73,000 66,000
Current assets/short-term assets
Inventory 107,400 63,900
Receivables 178,400 164,200
Prepayments 2,300 1,800
288,100 229,900
Current liabilities/short-term liabilities
Payables 99,500 50,400
Bank overdraft 64,750 102,700
164,250 153,100
Net current assets/working capital 123,850 76,800
Total assets less current liabilities 153,850 142,800

Long-term liabilities
Loan at 10% 20,000 20,000
Net Assets 133,850 122,800
Capital/Equity
As at 1 January 122,800 68,100
Net profit for the year 58,050 91,800
180,850 159,900
Less: drawings 47,000 37,100
Equity as at 31 December 133,850 122,800
Changes in balance sheet
31.12.2009 31.12.2008 change

plant and equipment 16,250 42,000 (61.3)

vehicles 13,750 24,000 (42.7)

inventory 107,400 63,900 68.1

receivables 178,400 164,200 8.6

prepayments 2,300 1,800 27.8

payables 99,500 50,400 97.4

overdraft 64,750 102,700 (37.0)

Loan 20,000 20,000 0.0

drawings 47,000 37,100 26.7

Balance sheet –
matters of potential concern

• Again, significant issues only

– usually cash (don’t forget need to repay loans)
– changes in working capital (inventory, receivables,
payables)
– changes in non-current assets (and impact on
cash)
– measurements of health using financial ratios
Further analysis
• “Ratio analysis”
– a “ratio” is one number expressed as a proportion
of another – simple ratios (1:2), fractions (½) and
percentages (50%) are all “ratios”
– see Reading 26 (and associated online activities
in Week 11)
Further analysis
• “Ratio analysis”
– helps to measure and interpret:
• how a business has performed
–simple returns
» return on equity, gross margin, net margin (“return on sales”
• how financially healthy a business is
–other ratios
» quick ratio (“acid test”), receivables collection period,
inventory turnover period, gearing
 Ratios to Analyse Financial Performance

Income
Statement Answer YE Answer
Ratio
What it Shows (IS) and/or Calculation 2009 YE 2008
Location in reader Balance %
%
Sheet (BS)
[(Equity at end of the year –
Return on Equity/ Equity at the beginning of the
Return on Capital Return on the year) / Equity at the beginning of
Employed Balance Sheet the year] x 100% 9
owners’ investment
R26 1.1 133,850-122,800= 11,050
11,050/122,800 x 100% = 8.99
% of revenue that
Gross (Profit) exceeds COGS – (Gross Profit / Sales) x 100%
Margin Income
how well revenue 289500/918000 = 31.5 31.5 35.6
Statement
R26 1.1.2 is being generated 310600/872000 = 35.6
from direct costs.
% of revenue that
Return on exceeds all costs – (Operating Profit / Sales) x 100%
Sales/Operating how well revenue Income 58050/918000 = 6.5
Profit Margin is being generated 6.3 10.5
Statement 91800/872000 =
R26 1.1.3 from all costs.
18
 Ratios to Analyse Financial Performance

Income
Ratio Statement
Answer Answer
What it Shows (IS) and/or Calculation
Location YE 2009 YE 2008
Balance
Sheet (BS)
If business has sufficient
The ‘Quick Ratio’ liquid funds (i.e. cash or
(or ‘Acid Test’) Balance (Current Assets – Inventory)/
assets that can quickly be 1.1 1.08
Sheet Current Liabilities
R26 2.1 turned into cash) to meet
immediate obligations
(Receivables / Sales) x 365
Receivables or How effective a company or
Payables is at credit control –
Collection Period compare with payables IS and BS (Payables / Cost of Sales x 70.9 68.7
collection period 365
R26 2.2

How efficient the

Inventory
company is at turning (Inventory / Cost of Goods
Turnover Period IS and BS 62.4 41.5
inventory into sales. Sold) x 365
R26 2.3
Proportion of business
Gearing (or Balance (Long-Term Liabilities /
funding that is based on 14.9 16.3
‘Leverage’) Sheet Equity) x 100%
debt rather than equity. 19
Balance sheet –
matters of potential concern
• Quick Ratio / Acid Test (Book p79)
– 2008: 1.08:1 (229,900 - 63,900) / 153,100
– 2009: 1.10:1 (288,100 - 107,400) / 164,250
• Change in Receivable Collection Period (Book p81)
– 2008: 69 days (164,200/872,000) x 365
– 2009: 71 days (178,400/918,000) x 365
• Reduction in rapidity of inventory turnover (Book p84)
– 2008: 41.5 days (63,900 / 561,400) x 365
– 2009: 62.4 days (107,400 / 628,500) x 365
– (soaking up £36k in cash)

• NOTE: Reduction in Gearing (Book p.86)

- 2008: 20000/122800 = 16.3
- 2009: 20000/133850 = 14.9
Paula's Pipes (a sole trader)
Cash Flow Statements
For the years ended 31st December 2009 and 2008

31-Dec-09 31-Dec-08
£ £
Operating activity:
Operating profit before interest on long-term loan 60,050 93,800
Add back non-cash expenses:
Depreciation 32,000 28,000

Changes in cash invested in Working Capital:

(Increase)/Decrease in inventory (43,500) (9,600)
(Increase)/Decrease in receivables (14,200) (72,700)
(Increase)/Decrease in prepayments (500) (600)
Increase/(Decrease) in payables 49,100 (600)
Net cash inflow/(outflow) from operating activities 82,950 38,300

Investing activity:
Investment in non-current assets 4,000 (20,000)

Financing activity:
Captal withdrawn ("drawings") (47,000) (37,100)
Interest paid on long-term loan (2,000) (2,000)
Change in Cash Balances 37,950 (20,800)
Opening cash balance (overdraft) at 1 January (102,700) (81,900)
Closing cash balance (overdraft) at 31 December (64,750) (102,700)
Cash Flow Statement –
matters of potential concern

• Again, significant issues only

– overall changes in cash generated consumed
– trends in cash outflows
Further analysis - What should
be done?
• Consider issues from the point of view of the relevant
stakeholder(s) – what should be done?
• Practical suggestions to improve analysis/reverse
adverse trends, for example (in this case):
– Review pricing policy
– Check supplier prices
– Review inventory levels and reduce where possible
– Review wage and salary levels(taking care!)
– Consider whether any non-current assets are surplus
to requirements
– Ask for bank support
– Other suggestions: expense reductions, investment in
marketing) etc. etc. – sensible suggestions will gain
credit
B100 – TMA03
• Q1
– demonstrate understanding of main concepts in Block 3 (the content and
uses of financial statements, and links between them)
• Q2
– carry out some analysis of the financial statements provided in the case
study (performance, financial health, cash management)
– identify issues (arising from your analysis) that might cause concern
• Q3
– are the concerns justified? Why? Suggest practical solutions (these should
be simple to implement) to improve the business’s finances.
B100 – TMA03
• Various Tutor Group TMA support sessions before the
deadline date

– will cover:
• basics of Block 3 (as we have done today, but in more detail)
–in particular to provide an understanding of the links
between the financial statements
• more specific TMA03 preparation
Any questions? ☺

• We are finished
• Well done and thank you for attending!
– if you are happy enough at this stage, please feel free to
leave the tutorial
– please put some feedback on your TGF
– I will stay to answer questions that still remain…