LONDON SCHOOL OF COMMERCE Module: Strategic Financial Management Tutor: Bob Greenwood Assignment Title: Financial Ratios and International Accounting Standards Assignment Length: 2,500 Words Maximum Issue Date: As Per Schedule Submission Deadline: As Per Schedule Learning Outcomes This assessment satisfies the following learning outcomes as specified in your Module Guide. Learning Outcomes Assessment Criteria Demonstrate a knowledge and understanding of financial analysis and international accounting standards and their contribution to financial management. Critically evaluate relevant accounting statements for management and investment decisions. Demonstrate a knowledge and understanding of the theories and technical applications relating to accounting theories. Identify and analyse problems relating to accounting decisions. It is the candidate’s responsibility to familiarise themselves with LSC’s policies on plagiarism and use of unfair means contained within the Student Handbook. This also requires familiarising yourself with the Harvard Author Date system of citing and acknowledging secondary sources. The Assignment contains two Parts A and B. Ensure you answer BOTH Parts thoroughly. ASSIGNMENT QUESTIONS Upholland Plc is thinking of investing in a limited liability company called Orrell. The management team are embarking on an analysis of Orrell to decide whether or not to invest. The summarised financial statements of Orrell are shown below Orrell Income statement for the year ended 31st October 2007 $000 Sales revenue 23,420 Cost of sales (8,245) –––––––– Gross profit 15,175 Expenses (2,460) –––––––– Profit from operations 12,715 Finance cost (50) –––––––– Profit before tax 12,665 Income tax expense (1,515) –––––––– Net profit for the period 11,150 –––––––– Orrell Balance sheet as at 31st October 2007 $000 $000 Assets Non-current assets 31,000 Current assets Inventory 1,450 Trade receivables 2,500 Cash 50 4,000 –––––– ––––––– Total assets 35,000 –––––––– Equity and liabilities Capital and Reserves $0•50 Ordinary Shares 25,000 Reserves 7,520 ––––––– 32,520 Current liabilities Trade payables 860 Tax 620 1,480 –––––– Loan notes 1,000 ––––––– Total equity and liabilities 35,000 –––––––– Additional information (i) During the year Orrell paid dividends of $10 million. (ii) The market share price for Orrell is $1.50. (iii) Orrell’s main competitor is a company called Pemberton which has the following ratios: Dividend per share 10 cents Dividend cover 5 times Earnings per share (EPS) 20 cents Price earnings ratio 13•4 Debt/equity ratio 15% Interest cover 100 times Part A (60%) (a) Calculate the following ratios for Orrell. (i) Dividend per share (ii) Dividend cover (iii) Earnings per share (EPS) (iv) Price earnings ratio (PE ratio) (v) Debt/equity ratio (vi) Interest cover (b) Prepare notes for Upholland Plc that comment on the ratios you have calculated. Use the ratios for Pemberton as a comparator. PART B (40%) (a) Explain the main purposes of the International Accounting Standards Board’s ‘Framework for the Preparation and Presentation of Financial Statements’. (b) Identify any four user groups of financial statements and explain what information they are likely to want from them.