The drop-in profit is attributed to an increase in

The general purpose of the Income Statement is to identify the profit and losses a business has made in a particular financial period, usually a financial year, in relation to income and expenses. It could also refer to a shorter period, like a month, and this is common for management accounts.The income statement would be useful to Home Range Ltd because it would detail how much they’ve gained from sales, renovations, and rentals of their homes, and what expenses have been made in a particular period, and whether there have been any financial losses to the company.The Balance Sheet can be described as a snapshot of the business’ financial affairs. This is an appropriate term because it gives information on the financial health of the business and outlines the assets and liabilities of a business at a particular moment in time. This enables one to know the net worth of a business and also allows the owners of the business and any investors to calculate the risk attached to their investments and the likely reward that will arise depending on the profit earned.The balance sheet for Home Range Ltd would summarise their financial resources and the financial obligations for the chosen period, giving them a clear idea of the business’ financial health, and the opportunity to examine whether there is the need for changes in the way cash resources are handled in the future.The cash flow statement on the other hand, is a summary of the generation and utilisation of cash resources. It explains the change in cash resources of a business by detailing how profit or loss is generated. This, like the income statement, covers an accounting period.Home Range Ltd.’s balance sheet would highlight how cash has been used under operating activities, investing activities, and financial activities. It would also identify any increase or decrease in cash invested in working capital for the given period of time.QUESTION 2 – ANSWER:Areas of concern in financial performance:Of great concern is the 8% decline in profit before and after taxation. This is despite increase in sales revenue from £106,872k to £88,476k, a 20.8% increase. Normally, an increase in sales revenue should follow investments in a different strategy, expansion or significant capital expenditures. However, a closer examination shows that the drop-in profit is attributed to an increase in the cost of goods sold. Although this expected, given the increase in sales, the margin is very high i.e. 48.5%. As a percentage of sales, the cost of goods sold has increased from 44.7% in 2016 to 54.9% in 2017. This might signify an increase in the cost of materials from suppliers. This is a serious issue which needs further explanation from the management of the company. The company can reduce or the cost of goods sold by negotiating better prices from suppliers or purchase raw materials in large quantities to achieve economies of scale. They could also put up cost control measures or adopt new technology to increase efficiency. Home Range Ltd could also decide to raise prices of products and properties. This can be done periodically, maybe an increase of 1-2% per year. Areas of concern in financial health:At first glance, I noticed a fall in the value of non-current assets, from £14,962k to £14,319k in 2016 and 2017 respectively, a 4.03% decline. This requires an explanation from management, especially because the Home Range Ltd is in the property business. A reason for this decline might be a fall in property prices. Stakeholders might want to take a look at property trends in the market. The company’s current ratio, which shows the ability of the company to pay short-term obligations increased from 5.5 to 6.6. This is a good trend since it shows that the company is in a better position to handle its short term debts like accounts payable with its account receivables. This also shows that the company has increased its efficiency, which is good news to shareholders. Another concern is the increase in the value of receivables and inventory. Although this a good trend, an increase in receivables shows that the company may not be good at collecting debt. On the other hand, an increase in inventory may mean poor inventory planning which leads to increase in holding costs. The same can also be said about the company’s payables. Since payables increased by 18.4%, the company may be facing cash flow issues to an extent that it’s not able to pay suppliers. There is also a growing bank loan exposure that is worth investigating, although this is a minor issue. The company had a debt to equity ratio of 0.19 in 2016 and 0.17 in 2017. This is a good trend since it shows there is reduced reliance on creditor financing i.e. the business is more stable. Areas of concern in cash flow management:As discussed earlier, the business has seen an increase in inventory items and receivables that have resulted in significant cash outflows. Inventory and receivable outflows have increased by 136% and 417% respectively. This is an area of concern for the sustainability of the business. There is also a 28% decline in net cash in-flow which is attributed to an increase in inventory and receivables outflows. QUESTION 3 – ANSWER:As noted by Clare’s parents, there has been poor cash management in the business as seen from the cash flow statement and the balance sheet. The biggest issues are inventory management, receivables management, and payables management. Increase in cash held up in inventory and other receivables is a big concern. To manage inventory, the business has to properly forecast and only purchase what it can sell. To properly collect receivables, the business could do with reviewing its debt period policy. Shortening the period can significantly improve cash flow.References