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This scenario relates to three requirements.

 

The summarised consolidated financial statements for the year ended 30 September 20X5 (and the comparative figures) for the Tangier group are shown below.

 

Consolidated statements of profit or loss for the year ended 30 September:

 

 

20X5

20X4

 

$m

$m

Revenue

2,700

1,820

Cost of sales

(1,890)

(1,092)

Gross profit

810

728

Administrative expense

(345)

(200)

Distribution costs

(230)

(130)

Finance costs

(40)

(5)

Profit before taxation

195

393

Income tax expense

(60)

(113)

Profit for the year

135

280

Consolidated statements of financial position as at 30 September:

 

 

20X5

20X4

 

$m

$m

$m

$m

Non-current assets

 

 

 

 

Property, plant and equipment

 

680

 

310

Intangible asset: manufacturing licence

 

300

 

100

 goodwill

 

230

 

200

 

 

1,210

 

610

Current assets

 

 

 

 

Inventory

200

 

110

 

Trade receivables

195

 

75

 

Bank

0

395

120

305

Total assets

 

1,605

 

915

 

 

 

 

 

Equity and liabilities

 

 

 

 

Equity shares of $1 each

 

330

 

250

Other components of equity

 

100

 

0

Retained earnings

 

375

 

295

 

 

805

 

545

Non-current liabilities

 

 

 

 

5% secured loan notes

100

 

100

 

10% secured loan notes

300

400

0

100

 

 

 

 

 

Current liabilities

 

 

 

 

Bank overdraft

110

 

0

 

Trade payables

210

 

160

 

Current tax payable

80

400

110

270

Total equity and liabilities

 

1,605

 

915

 

At 1 October 20X4, the Tangier group consisted of the parent, Tangier Co, and two wholly owned subsidiaries which had been owned for many years. On 1 January 20X5, Tangier Co purchased a third 100% owned investment in a subsidiary called Raremetal Co. The consideration paid for Raremetal Co was a combination of cash and shares. The cash payment was partly funded by the issue of 10% loan notes. On 1 January 20X5, Tangier Co also won a tender for a new contract to supply aircraft engines which Tangier Co manufactures under a recently acquired long-term licence. Raremetal Co was purchased with a view to securing the supply of specialised materials used in the manufacture of these engines. The bidding process had been very competitive and Tangier Co had to increase its manufacturing capacity to fulfil the contract.

Requirements:

Required:

(a) Comment on how the new contract and the purchase of Raremetal Co may have affected the comparability of the consolidated financial statements of Tangier Co for the years ended 30 September 20X4 and 20X5.

(5 marks)

 

(b) Calculate appropriate ratios and comment on Tangier Co's profitability and gearing.  Your analysis should identify where the new contract and the purchase of Raremetal Co have limited the usefulness of the ratios and your analysis.

Note: Your ratios should be based on the consolidated financial statements provided and you should not attempt to adjust for the effects of the new contract or the consolidation.  Working capital and liquidity ratios are not required.  

(12 marks)

 

(c) Explain what further information you might require to make your analysis more meaningful.  

(3 marks)

Marks: 20

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