(a) CL Ltd is a wholesaler and retailer of office furniture. Extracts from the company’s financial statements are set out below:
Note:
Non-current assets
During the year the company redesigned its display areas in all of its outlets. The previous displays had cost GHS10million and had been written down by GHS9million. There was an unexpected cost of GHS500,000 for the removal and disposal of the old display areas. Also during the year the company revalued the carrying amount of its property upwards by GHS5million and the accumulated depreciation on these properties of GHS2million was reset to zero.
All depreciation is charged to operating expenses.
Required:
Prepare a statement of cash flows for CL Ltd for the year ended 31 March 2015 in accordance with IAS 7 – Statement of Cash Flows. (15 marks)
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(b) The directors of CL Ltd are concerned at the deterioration in its bank balance and are surprised that the amount of gross profit has not increased for the year ended 31 March 2015. At the beginning of the current accounting period (i.e. on 1 April 2014), the company changed to importing its purchases from a foreign supplier because the trade prices quoted by the new supplier were consistently 10% below those of its previous supplier. However, the new supplier offered a shorter period of credit than the previous supplier (all purchases are on credit). In order to encourage higher sales, CL Ltd increased its credit period to its customers, and some of the cost savings (on trade purchases) were passed on to customers by reducing selling prices on both cash and credit sales by 5% across all products.
Required:
(i) Calculate the gross profit margin that you would have expected CL Ltd to achieve for the year ended 31 March 2015 based on the selling and purchase price changes described by the directors. (2 marks)
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Taking the figures for the year ended 31 March 2014 and applying the 10% reduction in purchase costs and the 5% discount to customers, the directors would have expected the gross profit to be as follows:
The actual gross profit % for the year ended 31 March 2015 is: (22,000/65,800 x 100) =33.4%
(ii) Comment on the directors’ surprise at the unchanged gross profit and suggest what other factors may have affected gross profit for the year ended 31 March 2015. (3 marks)
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The directors should not be surprised at the unchanged gross profit as cost of sales has increased by the same amount as revenue, wiping out any possible increase in gross profit. In fact the actual gross profit margin has fallen from 40% in 2014 to 33.4% in 2015, so despite the 10% reduction in the cost of purchases the company was trading less profitably.
Possible reasons for this could be:
- Shipping costs involved in importing goods having to be borne by the recipient;
- Import duties Currency exchange losses, perhaps exacerbated by having to pay within a shorter period. Inventory losses – uninsured damage, obsolescence etc;
- Selling a larger proportion of goods on which the gross profit % is lower than the average mark-up. Perhaps sales or special offers to customers, which will have to lower the average mark-up. The foreign supplier may have increased his prices at some point during the year;
- Also there may have been changes in accounting policy during the year – perhaps depreciation or distribution costs which were treated as expenses in 2014 and have been charged to cost of sales in 2015. If this has happened it will require retrospective restatement so that 2014 and 2015 can be correctly compared.