Charlie’s Toys And Equipment Limited Financial Statements For The Year Ended 31 March, 2017

Financial Statements

Discuss about the Receivable Collection Period Day Sales Outstanding.

Charlie’s Toys and Equipment Limited
Statement of Profit or Loss and Other Comprehensive Income
For the year ended on 31 March, 2017
Particulars	Note Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	2017 ($)
Continuing operations
Sales		1,876,000
Less: Cost of sales	2.1	828,500
Gross Profit		1,047,500
Other operating income	2.2	134,000
Depreciation and amortization expenses		116,400
Employee benefit expenses		100,000
Selling & Distribution expenses		250,000
Administration expenses		268,000
Other operating expenses	2.3	123,250
Operating Profit		323,850
Finance costs	2.4	46,200
Profit before tax from continuing operations		277,650
Income tax expense		77,742
Profit for the year from continuing operations		199,908
Discontinued operations
Loss after tax for the year from discontinued operations		30,000
Profit for the year		169,908
Other comprehensive income
Other comprehensive income not to be reclassified to profit or loss in subsequent periods:
Gain on revaluation of property, plant and equipment		100,000
Total other comprehensive income		100,000
Total comprehensive income for the year, net of tax		269,908

Charlie’s Toys and Equipment Limited
Statement of Changes in Equity
For the year ended 31 March, 2017
			(Amount in $)
Particulars	Retained earnings	Asset revaluation reserve	Total
Balance as at 1 April, 2016	185,000	100,000	285,000
Profit for the year	169,908	–	169,908
Other comprehensive income	–	100,000	100,000
Prior period adjustments *	(6,500)	–	(6,500)
Payment of dividends	(32,000)	–	(32,000)
Balance as at 31 March, 2017	316,408	200,000	516,408

* During the preparation of the 2017 financial statements, it has become apparent that inventory to the value of $6,500 that had been recognized as sold in the year ended 31 March 2016 was incorrectly included in inventory as at 31 March 2016. The directors believe that this amount is material and hence adjustment has been made.

Charlie’s Toys and Equipment Limited
Statement of Financial Position
As at 31 March, 2017
Particulars	Note	2017 ($)	2016 ($)
ASSETS
Non-current assets
Property, plant and equipment	2.5	798,600	550,000
Investment properties		300,000	270,000
Non-current financial assets	2.6	50,000	–
		1,148,600	820,000
Current assets
Inventories		148,000	86,000
Trade and other receivables	2.7	99,750	78,000
Prepayments		1,000	–
Cash and cash equivalents	2.8	3,000	30,000
		251,750	194,000
Total assets		1,400,350	1,014,000
EQUITY AND LIABILITIES
Equity
Issued ordinary share capital	2.9	340,000	240,000
Preference share capital	2.10	100,000	100,000
Retained earnings		316,408	185,000
Asset revaluation reserve		200,000	100,000
Total equity		956,408	625,000
Liabilities
Non-current liabilities
Loans	2.11	192,000	235,000
		192,000	235,000
Current liabilities
Trade and other payables		95,000	88,000
Loans		48,000	45,000
Bank overdraft		52,000	–
Income tax payable		37,742	21,000
Interest payable		19,200	–
		251,942	154,000
Total liabilities		443,942	389,000
Total equities and liabilities		1,400,350	1,014,000

Charlie’s Toys and Equipment Limited
Statement of Cash Flow
For the year ended 31 March, 2017
Particulars		2017 ($)
Cash flow from operating activities
Cash generated from operations (see note 2.14)	311,000
Less: Income tax paid		(61,000)
Cash flow from operating activities		250,000
Cash flow from investing activities
Purchase of land		(200,000)
Purchase of party equipment		(120,000)
Proceeds from sale of party equipment		40,000
Purchase of shares in company		(50,000)
Cash used in investing activities		(330,000)
Cash flow from financing activities
Proceeds from issuance of ordinary share capital	100,000
Repayment of mortgage loan		(280,000)
Proceeds from mortgage loan		240,000
Proceeds from bank overdraft		52,000
Payment of dividend		(32,000)
Payment of financing costs		(27,000)
Cash flow from financing activities		53,000
Net decrease in cash and cash equivalents		(27,000)
Opening cash and cash equivalents		30,000
Closing cash and cash equivalents		3,000

For the year ended on 31 March, 2017

Charlie’s Toys and Equipment Limited (CTEL) imports toys from overseas and sells them to retail stores throughout New Zealand. It also hires out bouncy castles, electric toy cars and other party equipment for children’s parties, as well as audio equipment such as jukeboxes for adult parties.

These financial statements have been prepared in accordance with Generally Accepted Accounting Practice (GAAP), FMCA 2013 and NZX listing rules. They comply with New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS), other applicable Financial Reporting Standards, and authoritative notes as appropriate for profit oriented entities. The financial statements also comply with International Financial Reporting Standards (IFRS).

The financial statements have been prepared on a historical cost basis, except for investment properties, land and warehouse (classified as property, plant and equipment) that have been measured at fair value. The carrying values of recognized assets and liabilities that are designated as hedged items in fair value hedges that would otherwise be carried at amortized cost are adjusted to record changes in the fair values attributable to the risks that are being hedged in effective hedge relationships.

The financial statements are presented in New Zealand dollars, except when otherwise indicated.

The financial statements provide comparative information in respect of the previous period.

Property, plant and equipment are measured at cost less accumulated depreciation and impairment losses. The cost of purchased property, plant and equipment is the value of the consideration given to acquire the assets and the value of other directly attributable costs, which have been incurred in bringing the assets to the location and condition necessary for their intended use.

Property, plant and equipment are depreciated on a straight line basis to allocate the cost, less any residual value, over their useful life. The estimated useful life of property, plant and equipment are as follows:

Warehouse – 50 years

Party Equipment – 5 years

The company have chosen the cost model to account for party equipment and the revaluation model to account for land and the warehouse.  The company annually reviews the carrying amounts of land and warehouse for impairment. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. In assessing whether an asset is impaired, reference is made to individual asset profitability and any other known events or circumstances that may indicate that the carrying amount of an asset may be impaired.

Notes to the Financial Statements

Gains and losses on disposals of assets are determined by comparing proceeds with the carrying amount. These gains and losses are included in the income statement. Costs incurred on repairs and maintenance are charged to the income statement during the financial period in which they are incurred.

Inventories are stated at the lower of cost and net realizable value. Cost is calculated using a first in, first out cost basis method and includes expenditure incurred to purchase the inventory and transport it to its current location. Net realizable value is the estimated selling price of the inventory in the ordinary course of business less costs necessary to make the sale. The cost of inventories consumed during the year are recognized as an expense and included in cost of goods sold in the Income Statement.

Assessing provisions for inventory obsolescence, net realizable value and shrinkage involves making estimates and judgements in relation to future selling prices and expected shrinkage rates between the most recent store stock counts and balance date. Shrinkage is a reduction in inventory due to shoplifting, employee theft, paperwork errors and supplier fraud. The Company considers a wide range of factors, including historical data, current trends and product information from buyers, as part of the process to determine the appropriate value of these provisions.

Goods in transit from overseas are recognized when title to the goods is passed to the Group. Title to the goods is passed when valid documents (which usually include a ‘bill of lading’) are received, and terms, as set out in a supplier’s letter of credit or in the supplier’s terms of trade, are met

During the preparation of the 2017 financial statements, it has become apparent that inventory to the value of $6,500 that had been recognized as sold in the year ended 31 March 2016 was incorrectly included in inventory as at 31 March 2016.

The error has been corrected by restating each of the affected financial statement line items for the prior periods, as follows:

Reduction in retained earnings by $6,500 and increase in cost of sales by $6,500.

Net impact on profit for the year – increase by $6,500

Net impact on retained earnings for the year – No impact.

Charlie’s Toys and Equipment Limited

Notes to the Financial Statements

For the year ended on 31 March, 2017

2.1     Cost of Sales	2017 ($)
Cost of sales	821,500
Add: Freight inwards	5,000
Add: Import duties	2,000
Total	828,500
2.2     Income	2017 ($)
Cash received from hire of party equipment	50,000
Rent received from investment properties	54,000
Total	104,000

2.3     Other operating expenses	2017 ($)
Inventories write down expense	4,000
Directors’ fees	22,000
Payment to auditor’s (refer note below)	55,000
Insurance	12,000
Freight outwards	4,000
Donations paid	3,000
Bad and doubtful debt expense	8,250
Loss on sale of party equipment	15,000
Total	123,250
Payment to auditor’s comprises:
Audit fee	30,000
Advisory services	25,000
Payment to auditor’s	55,000
2.4     Finance costs	2017 ($)
Interest paid – mortgage	33,600
Interest paid – overdraft	4,600
Dividends paid on preference shares	8,000
Total	46,200

Charlie’s Toys and Equipment Limited

Notes to the Financial Statements

Accounting policies

For the year ended on 31 March, 2017

2.5     Property, plant and equipment
Cost	Land	Warehouse	Party equipment for hire	Total
Value as on 1 April, 2015	100,000	320,000	520,000	940,000
Additions/(Disposals)	–	–	–	–
Closing value as on 31 March, 2016	100,000	320,000	520,000	940,000
Additions *	300,000	–	120,000	420,000
Disposals			(90,000)	(90,000)
Closing value as on 31 March, 2017	400,000	320,000	550,000	1,270,000
Accumulated Depreciation	Land	Warehouse	Party equipment for hire	Total
Closing value as on 31 March, 2016	–	120,000	270,000	390,000
Charge for the year		6,400	110,000	116,400
Disposal		–	(35,000)	(35,000)
Closing value as on 31 March, 2017	–	126,400	345,000	471,400
Net block as on 31 March, 2016	100,000	200,000	250,000	550,000
Net block as on 31 March, 2017	400,000	193,600	205,000	798,600

* Includes $100,000 on account of revaluation of Land as on 31 March, 2017.

2.6     Non-current financial assets	2017 ($)	2016 ($)
Shares in New Zealand Company	50,000	–
Total	50,000	–
2.7     Trade and other receivables	2017 ($)	2016 ($)
Accounts receivable	105,000	80,000
Allowance for doubtful debts	(5,250)	(2,000)
Total	99,750	78,000
Charlie’s Toys and Equipment Limited Notes to the Financial Statements For the year ended on 31 March, 2017
2.8     Cash and cash equivalents	2017 ($)	2016 ($)
Cash at bank	–	25,000
Cash on hand	3,000	5,000
Total	3,000	30,000
2.9     Issued ordinary share capital	Numbers	Amount ($)
Shares as at 1 April, 2016 *	120,000	240,000
Add: Issued during the year	50,000	100,000
Shares as at 31 March, 2017	170,000	340,000

* The ordinary share capital on 1 April 2016 comprised of 120,000 ordinary shares issued at a value of $2.00 each

2.10     Preference share capital	Numbers	Amount ($)
Shares as at 1 April, 2016 *	100,000	100,000
Add: Issued during the year	–	–
Shares as at 31 March, 2017	100,000	100,000

* The preference share capital comprises of 100,000 redeemable preference shares which were issued for $1 each and are redeemable at par on 30 September 2021. The coupon rate of these shares is 8% p.a.

2.11     Loan secured by mortgage	2017 ($)	2016 ($)
Loan secured by mortgage *	240,000	280,000
Current maturities	(48,000)	(45,000)
Total	192,000	235,000

* The new mortgage is secured over the warehouse, is fixed at 8% per annum. The old mortgage of $280,000 has been repaid on 1 April, 2016.

The directors have recommend a final dividend of 10 cents per ordinary share at the annual general meeting to be held on 20 May 2017 subject to shareholder’s approval.

In accordance with section 211(1)(h) of the Companies Act 1993, the company records that it donated $3,000 to various charities during the year. In line with Board policy, no political contributions were made in FY17.

Charlie’s Toys and Equipment Limited

Notes to the Financial Statements

For the year ended on 31 March, 2017

2.14  Reconciliation of net operating cash flow to profit or loss
Particulars	2017 ($)
Profit before tax from continuing operations	247,650
Loss before tax from discontinued operations	(30,000)
Prior period items	(6,500)
Add: Non-cash expenses
Depreciation and amortization	116,400
Bad and doubtful debt expense	8,250
Add: Expenses relating to other activities
Loss on sale of party equipment	15,000
Finance costs	46,200
Less: Gain on investment property	(30,000)
Add/(less): Changes in working capital
Increase in inventories	(70,250)
Increase in trade receivables	(21,750)
Increase in prepayments	(1,000)
Increase in trade payables	7,000
Total	311,000

During the year, the following amounts have been paid to the directors.

Name of Director	Amount ($)
John Black (managing director)	7,000
Jane Red	3,000
Carol Green	3,000
Andrew Silver	3,000
Ann Gold	3,000
Chris Brown	3,000

Earnings per share = Net income / Weighted average number of ordinary shares

  Earnings per share = 269,908 / (120000 + (50000/12*6))

  Earnings per share = 269,908/145,000

  Earnings per share = $1.86

The ratio calculation of Charlie’s Toy and Equipment Limited are as below:

Sr. No.	Ratio	Formula	2017
i.	Current ratio	Current Assets/Current Liabilities	1.00
ii.	Debt to equity ratio	Liabilities / Equity	0.46
iii.	Times interest earned	EBIT/Interest expense	7.01
iv.	Average receivable collection period	(Days * Average accounts receivable)/credit sales	17.29
v.	Return on equity ratio	Net income / shareholder’s equity	28.22%
vi.	Price earnings ratio (based on CTEL market price of $5.37 per ordinary share as at 31 March 2017).	MPS/EPS	2.89
vii.	Dividend yield on ordinary shares (assume no final dividend is paid for the current year).	DPS/MPS	3.51%

The ratio analysis is yet another important tool under management accounting. It deals with various aspects of financial accounting and helps in analyzing the financial information giving the bird’s eye view of information present in financials. Thus, it helps in making financial comparison and year on year analysis of the statements. Hence, it is an important analyzing tool for the management and potential investors. With the help of ratio analysis, the potential investors compare the various companies and companies performance and on the basis of this comparison, they decides as to they should invest in a particular company or not and if they are already invested, then it helps them in analyzing whether they should remain invested in this company or should they move on their investments. For not only potential or current investors but also for the management ratio analysis plays a vital role. As it helps in managing finances and liquidity, profitability and solvency position of the company.

Property, plant and equipment

Let’s understand some of the important ratios as per the table below and their comparison with Charlie’s Toy and Equipment Limited and Betty’s Toys Limited.

Current Ratio – Current ratio is the main liquidity ratio and shows the relationship between current assets and current liabilities. It shows the ability or efficiency of the company to utilize its current assets. It is calculated as current assets divided by current liabilities. Current assets are the assets that are realizable within a period of 12 months from the reporting date and similarly the current liabilities are those obligations which are required to be settled with in a period of 12 months from the reporting date.

The ideal current ratio is 2:1 which means that the current assets should be twice of its current liabilities. A ratio lower than 1:1 is a red signal for the company and means that the company’s current assets have fallen below than the company’s current liabilities. It reflects that the company’s liquidity position is not good and there are strong chances that the company may face liquidity issues in the upcoming time. Similarly, a ratio of higher than 3:1 means that the company’s current assets are 3 times of its current liabilities and shows that the company is not utilizing its current assets effectively.

In the current case, the current ratio of CTEL is 1:1 and the current ratio of BTL is 2.53:1. This means that the current assets of CTEL are just equal to its current liabilities whereas the BTL has sufficient current assets to pay off its current liabilities. So, the CTEL is quite low in its current ratio and it is advised to the company to increase its current assets.

Debt to Equity Ratio – This is yet another important capital structure ratio and it defines the debt and equity structure of the company. It is calculated as debt or total liabilities divided by stockholder’s equity of the company. Hence, it shows the proportion of debt and equity of the company. It is also knows as leverage ratio. Ideally a lower debt to equity ratio is preferred as it shows that the external parties have lower stake in the company and the stakeholder’s stake is higher (“Debt to equity ratio – explanation, formula, example and interpretation | Accounting for Management”, 2018).

In the current case, the debt to equity ratio of CTEL is 0.46 whereas in BTL is 1.42. This means that in CTEL 46% stake belongs to creditors and remaining 54% stake belongs to stockholders. On the other side, in BTL the stake of outsiders or creditors is 142% as compared to its equity stockholders. So, CTEL is performing well in this ratio as this ratio is better if lower.

Inventories

Times Interest earned – It shows the amount of income available for payment of interest expenses and thus is calculated by dividing earnings before interest and tax or operating profits with interest cost. It is a major solvency ratio and reflects the company’s ability to pay off the interest expenses. Or in other words, it shows that how many times a company can pay off its interest on debt from available operating profit. It is a major investor ratio as it helps in evaluating the company’s solvency position. This ratio is higher the better and higher ratio shows that the company’s solvency position is less riskier.

In the current case, the times interest earned ratio of CTEL is 7.01 whereas the times interest earned ratio of BTL is 2.67. This means that CTEL interest expenses can be paid 7 times from its operating profits and similarly BTL interest expense can be paid 2.67 times from its operating profits. Hence, this ratio is in favor of CTEL.

Average Receivable collection period – This ratio shows the number of days within which company can convert its accounts receivable in cash or the time frame within which the company’s credit sale will be converted in cash. It is calculated by dividing the accounts receivable turnover ratio with 365 and the accounts receivable turnover ratio is credit sales divided by average accounts receivable. This ratio is as lower as better since lower ratio indicates that the company can convert its accounts receivable earlier in cash (Bragg, 2018).

In the current case, the average receivable collection ratio of CTEL is 17.29 days and for BTL is 48.5 days. This means that CTEL can collect its accounts receivable in 17.29 days and the BTL will take 48.5 days to collect its accounts receivable. So, this ratio is again in the favor of CTEL.

Return on equity ratio – This ratio shows the return on their investment earned by the equity shareholders and is calculated by dividing net income with shareholder’s equity. This ratio is an important ratio for equity investors as they will choose the company which have higher return on equity. As it indicates that they are earning more on their investment. This ratio is as higher as better.

In the current case, the return on equity ratio of CTEL is 28.22% whereas for BTL is 6.17%. This means that the investors who have invested their money in CTEL are receiving $28.22 on their investments of $100 whereas the investors who have invested in BTL are receiving $6.17 against their investment of $100 and hence this ratio is in favor of CTEL.

Price earnings ratio – This ratio values the company against its market price and is calculated by dividing the market price per share with earnings per share. This ratio is also knows as price multiple ratio as it indicates that how much dollar an investor should invest in a company to earn its earnings of $1. A low PE ratio indicates that the company’s shares are undervalued (Staff, 2018).

In the current case, the PE ratio of CTEL is 2.89 whereas for BTL this ratio is 7.36 times. It means that the investors of BTL are expecting higher return or earnings as compared to the investors of CTEL. Hence, this ratio favors BTL.

Dividend Yield on ordinary shares – This ratio indicates that how much the company is paying as dividends to its investors as compared to its earnings and is calculated by dividing the dividend per share with earnings per share. There is no ideal ratio for this as it depends upon the company policy for paying the profits as dividend or retaining them for future expansion (“Dividend Yield”, 2018).

In the given case, the dividend yield ratio for CTEL is 3.51% and for BTL is 8.3%. It means that CTEL is paying 3.51% of its profits as dividend whereas the BTL is paying 8.3% of its profits as dividend.

References:

Debt to equity ratio – explanation, formula, example and interpretation | Accounting for Management. (2018). Retrieved from https://www.accountingformanagement.org/debt-to-equity-ratio/

Dividend Yield. (2018). Retrieved from https://www.investopedia.com/terms/d/dividendyield.asp

Staff, I. (2018). Price-Earnings Ratio – P/E Ratio. Retrieved from https://www.investopedia.com/terms/p/price-earningsratio.asp

Bragg, S. (2018). Accounts receivable collection period | Days sales outstanding. Retrieved from https://www.accountingtools.com/articles/2017/5/13/accounts-receivable-collection-period-days-sales-outstanding