Financial Accounting Reporting Coursework 3 Case study Custom Essay

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Financial Accounting & Reporting Coursework 3 Case study

 

Your client is a large engineering group who currently hold a long term investment of 10% of the share capital of DeHavilland Aircraft Services plc (DAS). Your client has asked your advice as to whether they should hold their shares, sell them or increase their shareholding to 25%. An increase to 25% would give them significant influence over the operating and financial policies of DAS.

Your report should be a maximum of 2250 words +/- 10% (excluding

appendices and executive summary) and should include the following:

  • Presentation and style suitable for a report (including an executive summary, introduction, clear sections, a conclusion and a recommendation)   
  • An explanation of the difference between cash flows and profit using the accounts of DAS plc to illustrate your points.     
  • Analysis of DAS plc. This should include: 
    • calculation of ratios (in an appendix, showing workings),
    • interpretation of ratios and other information provided,
    • a demonstration of your understanding of the limitations of ratio analysis, with particular reference to information in this case and the needs of investors.

          (60% including 10% for ratio calculations) 

  • Conclusion and a recommendation which includes details of any further information needed, both financial and non-financial.    

You are given the following.

Background information on the business of DAS plc.

Statement of comprehensive income, Statement of changes in equity, Statement of financial postion and Statement of cash flows for DAS plc for the years ended 30 June 2011 and 30 June 2010.

Selected ratios and extracts from the accounts of DAS plc for the three previous years 2009, 2008 and 2007.

Industry average information for the sector. DAS plc forms about 20% of the sector.

DeHavilland Aircraft Services plc

Background information: 

DAS plc provides aircraft maintenance services. About 50% of its turnover and 60% of its operating profit are generated from its contract with a large national carrier, English Airways. This contract expires on 30 June 2012 and the companies are negotiating a renewal for a further five years.

Very recently DAS has revealed that during September 2011 parts valued at cost at £800,000 were stolen from a warehouse. Initial police investigations suggest that a senior employee of the company was probably involved in the theft and for this reason the insurance company are refusing to cover the loss. The parts stolen were technologically advanced and if they were acquired by competitors would damage the future profitability of DAS.

Inventory of DAS includes stocks of parts and work-in-progress not yet invoiced to customers. The additional debentures were issued on 1 July 2010. The current share price of DAS plc is 792p.

DeHavilland Aircraft Services plc 

Statement of Comprehensive Income for the year ended

30 June 2011

30 June 2010

£’000

£’000

Revenue

53,500

52,000

Cost of sales

(41,500)

(39,000)

Gross profit

12,000

13,000

Administrative, selling and distribution costs

(7,000)

(6,000)

Profit from operations

5,000

7,000

Finance costs

(720)

(1,200)

Profit before tax

4,280

5,800

Taxation

(1,640)

(2,000)

Profit for the year

2,640

3,800

 

Statement of Changes in equity for the year ended 30 June 2011

Share capital

Share premium

Retained earnings

Total

£’000

£’000

£’000

£’000

Balance at 1 July 2010

3,000

1,000

8,000

12,000

Profit for the year

2,640

  2,640

Dividends paid

(2,000)

  (2,000)

Balance at 30 June 2011

3,000

1,000

8,640

12,640

 

Statement of Financial Position as at

30 June 2011

30 June 2010

 

£’000

£’000

Assets

Non-current assets – property plant and equipment

20,150

20,650

Current assets

Inventory

  4,300

  3,850

Trade and other receivables

  6,150

  5,700

Bank

  2,480

 

12,930

  9,550

 

Total assets

33,080

30,200

 

Equity and Liabilities

Equity

Ordinary shares of £1 each

  3,000

  3,000

Share premium account

  1,000

  1,000

Retained earnings

  8,640

  8,000

 

12,640

12,000

Non-current liabilities

5% Debentures – repayable Sept 2012

  8,000

  8,000

8% Debentures – repayable 2030

  4,000

12,000

  8,000

Current liabilities

Trade and other payables

  6,800

  4,800

Bank overdraft

  3,400

Tax payable

  1,640

  2,000

 

  8,440

10,200

Total Equity and Liabilities

33,080

30,200

 


DeHavilland Aircraft Services plc

Statement of cash flows for the year ended

30 June 2011

30 June 2010

 

£’000

£’000

£’000

£’000

Cash flows from operating activities

  Profit before tax

4,280

5,800

  Adjustments for:

  Depreciation

   2,150

2,200

  Interest expense

     720

2,870

1,200

3,400

 

7,150

9,200

  (Increase) in inventories

(450)

(150)

  (Increase)/decrease in receivables

(450)

50

  Increase in payables

   2,000

1,100

      200

100

Cash generated from operations

      8,250

9,300

  Interest paid

     (720)

(1,200)

  Income taxes paid

  (2,000)

(2,100)

Net cash flow from operating activities

5,530

  6,000

 

Cash flows from investing activities

  Purchase of property, plant and equip.

(1,650)

(1,000)

Net cash flow from investing activities

(1,650)

(1,000)

 

Cash flows from financing activities

  Proceeds of issue of debentures

4,000

  Dividends paid

(2,000)

(2,000)

Net cash flow from financing activities

2,000

(2,000)

 

Net inc/(dec) in cash and cash equivalents

 5,880

3,000

Cash and cash equivalents at 1 July

   (3,400)

(6,400)

Cash and cash equivalents at 30 June

 2,480

 (3,400)

DeHavilland Aircraft Services plc

Key figures

DAS plc

Industry average

 

2009

2008

2007

2011

2010

 

£’000

£’000

£’000

£’000

£’000

Revenue

50,200

48,200

45,000

15,500

14,200

Operating profit

     7,028

     6,266

     5,400

     1,860

    1,846

Capital employed

21,963

20,887

19,286

6,643

6,837

Key ratios

DAS plc

Industry average

 

2009

2008

2007

2011

2010

ROCE

32%

30%

28%

28%

27%

Gross profit margin

24%

26%

23%

20%

22%

Operating profit margin

14%

13%

12%

12%

13%

Inventory days

34 days

33 days

33 days

40 days

38 days

Trade receivables days

38 days

36 days

35 days

42 days

45 days

Trade payable days

40 days

38 days

39 days

36days

38 days

Current ratio

0.7:1

0.9:1

1.3:1

1.4:1

1.3:1

Acid test ratio

0.4:1

0.6:1

0.9:1

0.7:1

0.8:1

Gearing

46%

48%

50%

35%

37%

Earnings per share

Cash generated from operations per share

308p

300p

320p

A typical price/earnings ratio for this sector would be 14

** The calculation of ratios (in an appendix, showing workings) didn’t included in word count ( the course work have to be 2250 words +/- 10% excluding the appendix) .

 

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