Financial Analysis
Question Paper, Answers and
Examiners Comments
Level 5 Diploma
June 2013
June 2013
continued
9FIA/PQP/1

Copyright of the Institute of Credit Management
Institute of Credit Management
The Water Mill, Station Road, South Luffenham, Oakham, Leicestershire LE15 8NB
Bookshop Tel: 01780 722901. Education Tel: 01780 722909
Switchboard Tel: 01780 722900. Fax: 01780 721333
June 2013
continued
9FIA/PQP/2
Financial Analysis Questions, Answers and
Examiners’ Comments
LEVEL 5 DIPLOMA IN CREDIT MANAGEMENT
JUNE 2013
Instructions to candidates
Answer all questions
Time allowed: 3 hours
This particular paper was slightly easier for students than previous papers as there was an
increased availability of marks for the calculation of ratios. Future candidates should expect a
greater emphasis on analysis in these types of questions.
Candidates that attempted this paper did very well, with one candidate achieving over 90%.
It was obvious from answers given that all candidates had prepared well by studying both
the study guide and previous exam papers.
Candidates should be reminded that all questions carry equal marks and therefore they
should plan their time accordingly.
June 2013
continued
9FIA/PQP/3
Your company, Comptronics Ltd, sells components to the electronics industry and has an
annual turnover of £5m.
Recently the sales director has put pressure on you, the senior credit manager of the
company, to approve a credit limit of £500k for a new customer. He is very excited about
this new customer who has placed a large order with your company and expects to make
similar orders on a regular basis.
However, you have some reservations about the customer’s ability to pay and are conducting
a review of their latest published financial statements in order to collect some evidence to
support your professional opinion that a much lower limit should be offered to the client.
The new customer, Chargebag Ltd, is relatively new having been incorporated only 3 years
ago. Three young, graduate entrepreneurs, Don Gales, Mary Stuart and Mike Stevens who
developed a fashionable new product, So-Lite, a bag that contains a recharging port for
mobile devices, own it. The bag makes use of a new flexible material used in the solar panel
industry, but incorporates stylish design and artwork that appeals to teenagers and young
adults.
After an appearance in a national TV programme, Crocodiles’ Cave, demand for their product
has soared, especially among young consumers. One of the ‘Crocodiles’, a well known
entrepreneur of the UK, has agreed to invest in Chargebag provided all the material and
production is sourced in the UK. Chargebag has found it difficult to obtain sufficient
quantities of good quality electronic components in the UK to meet production demand and
have approached your company. The young entrepreneurs agree with the ‘Crocodile’ that
they need to source their supplies from the UK as they require quick production in keeping
with the changing fashion trends and the demand for cutting edge technology. Hence the
excitement of your sales director.
You have obtained a copy of Chargebag Ltd’s latest financial statements, dated 31
December, and are considering the following:
1.
Explain to the sales director who has limited accounting knowledge:
a) The relevance of any independent audit report on published financial statements to a
credit manager. You should include both its advantages and disadvantages.
(10 marks)
b) The significance of the specific audit opinion in the audit report of Chargebag Ltd in
supporting your case for a reduced credit limit.
(10 marks)
Total 20 marks
June 2013
continued
9FIA/PQP/4
This answer should include points made in the guidebook and textbook. It is an opportunity
for the candidate to demonstrate what they have learnt about audit, and so any reasonable
comment will be given marks.
The answer must contain the following for 6 marks:
An audit is an ‘Independent examination of evidence from which the financial statements
are derived, in order to give an opinion as to whether they show a true and fair view’
An unqualified audit report indicates that the auditor’s opinion is that the financial
statements show a true and fair view,
If the auditors disagree with any of the directors’ judgments or if they haven’t been able
to obtain sufficient evidence for their opinion, they will qualify their report.
The remaining four marks could come from any of the examples below:
 The audit report should make the information in the financial statements more
reliable and comparable for decision making purposes because the auditor has access
to all the company’s records and any explanation they require in order to support
their opinion

The financial statements are the income statement, balance sheet and notes, but
also include some other items by exception, e.g. that the director’s report is
consistent with the accounts and that the financial statements agree with the
underlying records.

Additionally if they come across a matter that is crucial to an understanding of the
financial statements they will modify their report to highlight the matter. This is
useful to the credit manager as it identifies the potential risk of trading with such
companies.

Indeed the auditor has no duty of care in law to any user of the statements apart
from the shareholders. Therefore if the credit manager relies on these statements
and the auditor is proved negligent there is no redress for them.


Audit evidence is sample based, the auditor does not look at all the records
Audit report confirms that the accounting policies applied are consistent with
accounting standards.
b) The answer must contain the following:
 The auditor has issued a qualified report. It is qualified due to a material limitation
in scope.
 The auditor has been limited in the scope of their audit. They have not been able to
access the information that would have enabled them to give an opinion on whether
the warranty provision is true and fair.
June 2013
continued
9FIA/PQP/5
The remaining four marks could come from any of the examples below

By qualifying their opinion rather than giving an DISCLAIMER opinion (i.e. unable to
form an opinion) the auditors are advising users of the financial statements, that
apart from this one issue that affects liabilities, the financial statements do show a
true and fair view.

The auditor gives information about the qualification in the ‘Basis of Opinion’
paragraph, which enables the user of the statements to consider the potential effect
of the issue on the financial statements.

In this case, the creation of a liability would reduce profits and also reduce net
assets in the Balance Sheet. It may also have future cashflow implications.

Confirms that the accounts have been prepared according to Companies Act and
accounting standards.
Candidates can expect to be examined on the significance of at least one of the six
examinable forms of Audit Report. Well-prepared candidates should have no problems with
this type of question because it is predictable.
In this particular examination, students were expected to understand that auditors had issued
a qualified report. They had qualified it because of a material limitation in scope. Often
candidates will recognise the limitation in scope or disagreement but lose marks by failing to
comment on the relative severity of the qualification. In this case candidates were expected to
explain that the limitation only affected one figure in the Balance Sheet, not the whole
statement.
June 2013
continued
9FIA/PQP/6
2. a)
Calculate the liquidity ratios and the three elements of the working capital cycle for
the two years.
(10 marks)
b)
Compare and comment, in the light of the figures you have calculated whether or not
the granting of credit is viable.
(10 marks)
Total 20 marks
Suggested answer
2012
2011
Current Ratio
1.05
2.62
Acid Test
0.74
1.71
Stock Days
44
39
Debtor Days
54
32
140
43
Creditor Days
Candidates appear to have little difficulty in calculating ratios correctly and achieved a high
mark in this question. Ratios have no meaning unless and until they are compared. Therefore
the interpretation of the ratios will always attract equal if not more marks than calculation,
with highest marks gained by those who place their analysis within the context of the credit
decision. For example, in this question the working capital cycle has fallen because the
company has increased the use of supplier credit to fund its operations, which poses an
increased liquidity risk for creditors.
June 2013
continued
9FIA/PQP/7
3. It is understood that in August 2013, the well known business entrepreneur (Crocodile)
hopes to invest £120,000 in shares and provide an additional loan of £500,000.
a)
Assuming the balance sheet as at 31 December 2012 will continue to remain the
same until the investment and loan is provided in August 2013, calculate the
gearing.
(16 marks)
b)
Discuss the medium to long-term risks that you see in the environment in which
Chargebag Ltd operates.
(4 marks)
Total 20 marks
Suggested answer
Gearing
After shares of
£120k and loan
of £500k
85%
2010
2010
88%
89%
Relating to the environment
This is an opportunity for the students to apply their learning in a well-argued manner
exploring all the pros and cons of the trade of Chargebag Ltd. Comments such as the
viability of high tech fashion items with short life-cycles, the threats of imitation, the
problems and the uncertainties created by the Euro crisis, the continuing economic doldrums
and other PESTEL matters as described in the manual should be applied appropriately.
Final Reasoned Opinion
For stating that gearing is a measure of risk and that there has been an improvement in
gearing from 2011 to 2012 and although there is a marginal improvement in gearing after
the investment it is still quite serious. The better students, however, will also comment on
the guidance and the advice that would be available from the “Crocodile” and may seek a
personal guarantee from him.
Mention should be made that gearing is a measure of risk and that the level of risk is
unacceptable. The better students, however, will also comment on the guidance and the
advice that would be available from the “Crocodile” and may seek a personal guarantee from
him.
As in question 2, the ratios required in this question were correctly calculated and those
candidates placing their analysis within the credit decision context gained higher marks. The
ICM manual on the topic gives an extensive number of tools, with helpful mnemonics, which,
when applied correctly, addresses almost all the requirements of the answer to this question.
June 2013
continued
9FIA/PQP/8
Candidates should be aware that Financial Analysis is not a subject that exists in a vacuum. It
is a vibrant and interactive subject. Candidates who will excel in this subject will be aware of
the constantly changing environment within which this subject exists and will give reasoned
arguments and opinions to attract higher marks. One candidate gained very high marks in
this question for this reason.
Candidates should note that in future this type of question will require more written analysis
for the marks allocated.
June 2013
continued
9FIA/PQP/9
4.
The company has made a profit in the year 31 December 2012, yet has generated a
cash outflow of £89,813.
a)
Explain, using both facts and figures, how Chargebag Ltd has made a profit yet
has suffered a significant negative cash outflow. What significance does this have
for the credit decision?
(10
marks)
b)
Evaluate the usefulness of the cash flow statement in supporting your case for
reducing the credit limit of this new customer.
(6 marks)
c)
What effect might the issue highlighted in the audit opinion have on both the
company’s future profit and on its cash flow?
(4 marks)
Total 20 marks
Suggested answer
a) The cashflow note provides a link between profit in the Income statement and the
cashflow from operating activities.
As can be seen from the note below, the trading which resulted in an operating profit of
£135,773 has also resulted in a positive cash INFLOW of £156,373. The lower profit
figure is a result of depreciation charges and an increase in creditors, being greater than
the increase in stock and debtors.
That is, although the company is using cash to buy more stock and extend credit terms
to its customers, it is extending its own credit terms with suppliers to fund this, so
cashflow is largely unaffected by working capital management.
The amount of cash used to pay the company’s interest commitments, £50,357, is more
than covered by the cash generated from operations, leaving £106,016, net cash inflow.
2 marks
The company has spent £595,829 on new assets a clear sign of rapid growth. These
purchases have been financed by:
 An increase in long term loan of £400,000
 The net cash inflow of £106,016 from trading after paying interest on loans
 An increase on the overdraft of £89, 813.
What significance does this have for the credit decision?
This rapid growth using a large amount of short-term finance, i.e. trade creditors, and
overdraft, has potential solvency issues for this company because:
 The bank may refuse to extend/maintain the overdraft.
 Suppliers may start to reduce terms or demand cash on delivery.
Although the company is generating cash from trading, which is a good sign for potential
suppliers, the use of that cash to fund asset purchases rather than pay suppliers may
indicate that payment may be at risk.
June 2013
continued
9FIA/PQP/10
b) The information is reliable:
 Isn’t subject to accounting policies or estimation
 It is audited.
The information is comparable with other companies as it is subject to accounting
standards governing its format and the definition of cash.
The information is relevant as it gives the credit manager an indication of how the
company generates and uses its cash, e.g. in Chargebags case the company generates
cash from operating because it uses suppliers credit to fund the credit offered to its
customers. This leaves cash available for funding new fixed asset purchases.
However the information is reduced in relevance due to the length of time it takes to be
published (6 to 9 months). The company’s liquidity may be much worse once the
accounts are published.
c) If claims are made under the warranty and bags are replaced, without a provision, future
profits will be lowered by the cost of replacements.
Future cash flows would also be affected as revenue would be reduced relative to costs
of production.
Bad publicity if claims are handled incorrectly could tarnish the brand and reduce future
revenue.
If the number of claims becomes a threat to the future of the company then the
shareholders could liquidate the company, setting up a new one without the liabilities.
A question on cashflow statements should be expected by all cohorts. As stated in the guide
you will not be expected to prepare a cashflow statement but you will be expected to
demonstrate an understanding of how it analyses the difference between net cashflow and
profit. In this particular question candidates demonstrated a good understanding of how
increases and decreases in working capital impact cash flows. The key point here however was
that it was not working capital that had affected cashflow it was the purchase of new long
term assets.
Candidates appear prepared for questions on the advantages and limitations of the cashflow
statement, but achieved fewer marks when asked to explain the possible impact of the
warranty on future cash flows. This aspect of the question is designed to stretch the more able
and better-prepared candidates.
June 2013
continued
9FIA/PQP/11
5.
Using the whole annual report of Chargebag Ltd as illustration:
a) Evaluate which types of information in a company’s annual report are the most
useful for informing credit decisions.
(12 marks)
Note: Your answers must give a reasoned explanation and be illustrated using
examples from the annual report of Chargebag.
b)
What information, currently absent from annual reports, would have been useful to
aid your decision on the appropriate level of credit to offer Chargebag Ltd?
(8 marks)
Total 20 marks
Suggested answer
This question is a chance for the candidate to apply their knowledge to a work place
situation.
Again, there is no definitive answer and any well-reasoned, factually correct answer will gain
marks. There are 2 marks available for each reasoned opinion and 2 marks for each example
given from the annual report of Chargebag Ltd.
Examples:
Balance sheet gives information about a company’s assets and liabilities, showing the credit
manager the level of liquidity a company has.
Example from Chargebag
Cashflow statement gives the credit manager more objective information that is not subject
to estimation or adjustment for accounting policies/standards.
Example from Chargebag.
Income statement gives the credit manager information on the company’s turnover and
margins, enabling an assessment of long term viability to be made.
Example from Chargebag.
Directors Report gives reliable information reviewed by the auditor that is relevant to the
credit decision such as: Resignation of directors may indicate severe problems in the
company; gives creditor days, i.e. length of time taken to pay creditors.
Example from Chargebag.
June 2013
continued
9FIA/PQP/12
Audit opinion gives the credit manager information as to the reliability of some of the
information in the annual report.
Example from Chargebag.
b)
Is expected to vary from candidate to candidate, but examples of what could be written
are:
 Financial forecasts

Information on future orders

New product offerings for the future

Details of any legal commitments made, e.g. delivery numbers, and any potential
penalties if not met

Any reasonable comment will be given marks.
This question was designed to allow candidates to demonstrate those skills acquired as a
credit practitioner. There is flexibility within the marking scheme to award marks for wellevidenced opinion, however the key phrase is ‘well evidenced’. Candidates MUST qualify
any opinions &/ analysis with evidence from the case study given. The better the use of
the case study the higher the mark achieved by candidates in part a.
Part b) tested the ability of candidates to problem solve rather than repeat knowledge
and in this particular cohort this was well done.
---oOo---
© Institute of Credit Management
Chargebag Ltd.
Directors' Report and Financial Statements
for the year ended 31 December 2012
Registered in England
Registered Number 9999999
Chargebag Ltd.
Directors' report and financial statements
31 December 2012
Directors’ report
The directors present their directors’ report and financial statements for the year ended 31 December 2012.
Principal activities
The principal activities of the company during the year was the manufacture and sale of hand
bags with a recharging unit for mobile electronic equipment. This year the manufacturing was
done within the company.
Business Review
The company experienced a rapid growth after exposure from a TV programme
Objectives of the Company
The Company's main objective is to expand with the help of a well-known entrepreneur.
Strategy
The key areas that the company has focused on are:
·
To expand the market
·
To improve the efficiency of the new production unit.
·
To introduce a new branded range for men
·
To reduce the overhead cost base.
Performance
The gross margins of the company continued to be encouraging reflecting the fact that the
product is innovative. The patent has been registered and therefore competition has been
curtailed in the UK. There are, however, risks emanating from foreign production infringing the
intellectual property rights of the Company.
The Company needs to continue its Research and Development efforts to innovate additional
products in keeping with the market that it serves.
The company uses a number of financial key performance indicators (‘KPIs’) to measure its
performance. The principal KPIs used are measuring the time taken for production and the
number of complaints due to lack of quality. These analyses are used on a daily and weekly
basis. Warehouse labour and transport costs are monitored on a weekly basis. Extensive
collaboration is being carried out to obtain feedback from the retailers of the handbags.
Page 2 of 15
Risks and uncertainties
The company is operating in the cutting edge of technology. The quality of the former
manufacturing source was unsatisfactory in terms of the time taken to manufacture and in terms
of the equality of the product. Therefore manufacturing is now dome in-house. This can cause
additional risks as compared with last year due to the new operation. The Directors regularly
carry out risk portfolio analyses and take every possible effort to minimise risk.
Employees
The company recognises its social and statutory duty to employ disabled persons and considers
such persons for employment where the requirements for the job are such that they can be
effectively and safely covered by a handicapped or disabled person.
The directors have always recognised the importance of good communications and have
continued to communicate with staff through regular newsletters, which allow information to be
shared with all employees.
Dividends
The directors do not recommend the payment of a dividend (2011 nil)
Directors
The directors who held office during the year were as follows:
Donald Gales
Mary Stuart
Mike Stevens
Political and charitable contributions
Neither the Company nor its subsidiary made any political or charitable donations or incurred any
political expenditure during the year or previous year.
Statement of directors’ responsibilities in respect of the Directors’ Report and the
financial statements.
The directors are responsible for preparing the Directors’ Report and the financial statements in
accordance with applicable law and regulations.
Company law requires the directors to prepare financial statements for each financial year.
Under that law they have elected to prepare the company's financial statements in accordance
with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice).
The company's financial statements are required by law to give a true and fair view of the state
of affairs of the company and of the profit or loss for that period.
In preparing these financial statements, the directors are required to:
Page 3 of 15
·
Select suitable accounting policies and then apply them consistently,
·
Make judgments and estimates that are reasonable and prudent,
·
Make judgments and estimates that are reasonable and prudent,
·
State whether applicable accounting standards have been followed, subject
to any material departures disclosed and explained in the financial statements,
·
Prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the company will continue in business.
The directors are responsible for keeping proper accounting records that disclose with
reasonable accuracy at any time the financial position of company and enable them to ensure
that its financial statements comply with the Companies Act 2006. They have general
responsibility for taking such steps as are reasonably open to them to safeguard the assets of
the company and to prevent and detect fraud and other irregularities.
Disclosure of information to auditors
The directors who held office at the date of approval of this directors’ report confirm that, so far
as they are each aware, there is no relevant audit information of which the Company’s auditors
are unaware, and each director has taken all the steps that he ought to have taken as a director
to make himself aware of any relevant audit information and to establish that the Company’s
auditors are aware of that information.
Auditors
A resolution for the re-appointment of CHECKIT LLP as auditors of the company is to be
proposed at the forthcoming Annual General Meeting.
By order of the Board
52 Spider's Lane
Sunderton
Wessex W45 1QR
Mary Stuart
Director
7 April 2013
Page 4 of 15
Independent auditors’ report to the members of Chargebag Ltd.
We have audited the group and parent company financial statements (the ‘financial
statements’) of Chargebag Ltd. for the year ended 31 December 2012, which comprise the
Profit and Loss Account, the Company Balance Sheet, the Cash Flow Statement, the
Reconciliation of Movements in Shareholders’ Funds and the related notes. These financial
statements have been prepared under the accounting policies set therein.
This report is made solely to the company’s members, as a body, in accordance with
Chapter 3 of part16 of the Companies Act 2006. Our audit work has been undertaken so
that we might state to the company’s members those matters we are required to state to
them in an auditor’s report and for no other purpose. To the fullest extent permitted by law,
we do not accept or assume responsibility to anyone other than the company and the
company’s members as a body, for our audit work, for this report, or for the opinions we
have formed
Respective responsibilities of directors and auditors
The directors’ responsibilities for preparing the financial statements in accordance with
applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice)
are set out in the Director’s Report on page .
Our responsibility is to express an opinion on the financial statements in accordance with
relevant legal and regulator requirements and International Standards on Auditing (UK and
Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical
Standards for Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial
statements sufficient to give reasonable assurance that the financial statements are free
from material misstatement, whether caused by fraud or error. This includes an assessment
of whether the accounting policies are appropriate to the company’s circumstances and
have been consistently applied and adequately disclosed, the reasonableness of significant
accounting estimates made by directors, and the overall presentation of the financial
statements. In addition, we read all the financial and non-financial information in the
published statements to identify material inconsistencies with the audited financial
statements. If we become aware of any apparent material misstatements or inconsistencies
we consider the implications for our report
Basis for a qualified opinion on the financial statements
Early sales of the company's innovative product contained a guarantee of 5 years. When
the directors realised the product was unlikely to have a useful life beyond 2 years the
guarentee was amended. Unfortunately the company didn't keep adequate records over
early sales and it has been impossible to estimate the provision that might be required to
cover the cost of claims against the guarantee. Had records been kept this provision would
likely have reduced profits and increased liabilities.
Page 5 of 15
Opinion on the financial statements
In our opinion, except for the possible effects of the matter described in the Basis for
Qualified Opinion paragraph, the financial statements:
·
give a true and fair view of the state of the company’s affairs as at 31
December 2012 and of its profit for the year then ended
·
give a true and fair view of the state of the company’s affairs as at 31
December 2012 and of its profit for the year then ended
·
have been properly prepared in accordance with United Kingdom Generally
Accepted Accounting Practice, and
·
have been properly prepared in accordance with the requirements of the
Companies Act 2006,
Opinion on other matters prescribed by the Companies Act 2006
In our opinion the information given in the director’s report for the financial year for which
the financial statements are prepared is consistent with the financial statements.
Matters on which we are required to report by exception
In respect solely of the limitation on our work relating to the assessment of a possible
warranty provision in the financial statements, described above, we have not obtained all the
information and explanations that we considered necessary for the purpose of our audit.
We have nothing to report in respect of the following matters where the companies Act 2006
requires us to report to you if, in our opinion
·
adequate accounting records have not been kept, or returns adequate for
our audit have not been received from branches not visited by us, or
·
the financial statements are not in agreement with the accounting records
and returns, or
·
certain disclosures of directors’ remuneration specified by law are not
made, or
·
we have not received all the information and explanations we require for our
audit
CHECKIT LLP
Chartered Accountants
Registered Auditor
21 April 2013
Page 6 of 15
Chargebag Ltd.
Directors' report and financial statements
31 December 2012
Profit and Loss Account
for the year ended 31 December 2012
Note
2012
2011
1,503,225
(785,452)
795,296
(352,222)
Gross profit
717,773
443,074
Administrative expenses
582,000
402,556
Operating Profit
135,773
40,518
6
(50,357)
(30,555)
3 to 5
9
85,416
15,083
9,963
1,950
70,333
11,913
Turnover
Cost of sales
3
Interest payable and similar charges
Profit on ordinary activities before taxation
Taxation
Profit for the financial year
The company had no gains or losses other than the result for the year which arises entirely from continuing
operations.
Page 7 of 15
Chargebag Ltd.
Directors' report and financial statements
31 December 2012
Balance Sheet
at 31 December 2012
Note
2012
2011
Fixed assets
Tangible assets
8
Current assets
Stocks
Debtors
9
10
95,295
222,562
37,195
70,256
Creditors amounts falling due within one year
11
317,857
(301,795)
107,451
(41,035)
Net currents assets/(liabilities)
Total assets less current liabilities
Long-Term Liabilities
Bank Loan
12
Net assets
Capital reserves
Called up share capital
Profit and loss account
13
14
Shareholder's funds
1,126,133
605,446
16,062
66,416
1,142,195
671,862
1,000,000
600,000
142,195
71,862
120,000
22,195
120,000
(48,138)
142,195
71,862
These financial statements were approved by the board of directors on 31 March 2013 and were signed on its behalf by:
M I Stuart
Director
Page 8 of 15
Chargebag Ltd.
Directors' report and financial statements
31 December 2012
Cash Flow Statement
for the year ended 31 December 2012
Note
2012
£000
2011
£000
15
16
156,373
(50,357)
13,255
(30,555)
16
(595,829)
(323,069)
Financing- new loan finance
400,000
400,000
Increase/(Decrease) in cash in the year
(89,813)
59,631
Cash Flow Statement
Cash flow from operating activities
Returns on investments and servicing of finance
Taxation
Capital expenditure and financial investments
Page 9 of 15
Chargebag Ltd.
Directors' report and financial statements
31 December 2012
Reconciliation of Movements in Shareholder's Funds
for the year ended 31 December 2012
2012
£000
Profit for the year
Opening shareholder's funds
Closing shareholder's funds
Page 10 of 15
2011
£000
70,333
71,862
11,913
59,949
142,195
71,862
Chargebag Ltd.
Directors' report and financial statements
31 December 2012
Notes
forming part of the financial statements
1. Accounting Policies
The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the financial
statements.
The financial statements are prepared on a going concern basis which the directors believe to be appropriate for the following reasons. For short
periods of the year the comany meets its day to day working capital requirements through an overdraft facility which is payable on demand. The nature
of the comapny's business is such that there can be unpredictable variations in the timing of cash inflows. The directors have prepared projected cash
flow information for the period ending 12 months from the date of their approval of these financial statements which assumes some additional support for
working capital funding. They believe that the company will achieve its cash flow forecasts and therefore continue to operate within the current facility
and any future possible funding.
However, as with all forecasts, there can be no certainty that the cash flow forecasts will be achieved and the margin of any possible future funding
requirement is dependent on growth in activity. Further, although the directors have verbally agreed a funding agreement with a well-known
entrepreneur in a TV programme there are still conditions to be met such as carrying out all production within the UK.
There can be no certainty that the bank will grant a facility in 2013, or that the well-known entrepreneur will provide additional funds required for
significant growth. However the Directors have the option of curtailing growth if proper funding is not obtainable. The directors feel that the working
capital requirements are, therefore, within their full control and do not believe that there is an uncontrollable threat to the going concern concept.
Tangible fixed assets and depreciation
Depreciation is provided on a reducing balance method using the following percentages
25%
20%
Plant and Machinery
Fixtures, fittings and equipment -
Stocks
Stocks are stated at the lower of cost and net realisable value.
Taxation
The charge for taxation is based on the result for the year and takes into account taxation deferred because of timing differences between the treatment
of certain items for taxation and accounting purposes.
Deferred taxation is recognised, without discounting, in respect of all timing differences between the treatment of certain items for taxation and
accounting purposes which have arisen but not reversed by the balance sheet date, except as otherwise required by FRS 19.
Turnover
Turnover represents the amounts (excluding value added tax) derived from the provision of goods and services to third-party customers. Turnover is
recognised at the point of sale to customers.
Cash, for the purpose of the cash flow statement, comprises cash in hand and deposits repayable on demand, less overdraft payable on demand.
Dividends on shares presented within shareholders’ funds
Dividends unpaid at the balance sheet are only recognised as a liability at that date to the extent that they are appropriately authorised and are no longer
at the discretion of the Company. Unpaid dividends that do not meet these criteria are disclosed in the notes to the financial statements.
2. Turnover
Turnover is wholly derived from the company's principal activities and arises in the UK.
Page 11 of 15
Chargebag Ltd.
Directors' report and financial statements
31 December 2012
3. Notes to the profit and loss account
2012
£
2011
£
Profit on ordinary activities before taxation is stated after charging
Depreciation and other amounts written off tangible fixed assets - Owned
75,142
2012
£
Auditor's remuneration
Audit
Other Services - Taxation
1,701
2011
£
9,500
2,120
6,000
4. Remuneration of directors
2012
£
2011
£
Directors' emoluments
162,512
103,251
162,512
103,251
There were no directors who were paid more than £60,000 for the year.
5. Staff numbers and costs
The average number of persons employed by Company (including directors) during the year, analysed by category, was as follows:
2012
Production
Sales and distribution
Administration
Number of employees
2011
21
7
5
9
4
4
33
17
2012
£
265,436
36,991
-
2011
£
180,110
17,555
302,427
197,665
The aggregate payroll costs of these persons were as follows:
Wages and salaries
Social security costs
Other pension costs (note 19)
6. Interest payable and similar charges
2012
£
Bank overdraft
Bank Loan Interest
Page 12 of 15
2011
£
10,357
40,000
5,555
25,000
50,357
30,555
Chargebag Ltd.
Directors' report and financial statements
31 December 2012
7. Taxation
Analysis of charge in period
2012
£
2011
£
UK Corporation Tax
Current tax on income for the period
Adjustments in respect of prior periods
15,083
2,010
(3,960)
Total current tax
15,083
(1,950)
Deferred tax (note 15) - current year
Deferred tax (note 15) - prior years
-
Tax loss on ordinary activities
-
15,083
(1,950)
8. Tangible fixed assets
Plant &
Machinery
£
Cost
At beginning of year
Additions
Disposals
Fixtures,
fittings and
equipment
£
Total
£
890,938
573,283
-
58,682
22,546
949,620
595,829
-
1,464,221
81,228
1,545,449
Depreciation
At beginning of year
Charge for year
On disposals
334,029
70,976
-
10,145
4,166
344,174
75,142
-
At end of year
405,005
14,311
419,316
Net book value
At 31 December 2012
1,059,216
66,917
1,126,133
At 31 December 2011
556,909
48,537
605,446
At end of year
9. Stocks
2012
£
Raw Materials
Work-in-Progress
Finished Goods
35,556
5,225
54,514
25,347
4,653
7,195
95,295
37,195
10. Debtors
2012
£
Trade debtors
Other debtors-corporation tax
Prepayments
Company
2011
£
Company
2011
£
208,180
Page 13 of 15
14,382
65,160
1,950
3,146
222,562
70,256
Chargebag Ltd.
Directors' report and financial statements
31 December 2012
11. Creditors: amounts falling due within one year
2012
£
Trade creditors
Corporation tax
Other taxes and social security
Accruals
Bank overdraft
Company
2011
£
158,539
13,133
22,993
7,005
100,125
13,502
301,795
41,035
12,051
5,170
10,312
12. Long Term Liabilities
2012
£
1,000,000
2011
£
400,000
During 2012 the Company obtained a loan to finance the working capital requirements of its rapid growth. The loan is secured against the assets owned
by the parents of the Directors. The loan is repayable at the end of five years. Interest of 5% over the base rate of Barclays Bank plc is payable. The
creditors also have the right to convert the loan into ordinary shares if the strict conditions attached to the loan are not observed. It is also a condition
that no further shares can be issued without the unanimous consent of the creditors.
13. Called up share capital
2012
£
Authorised
1,000,000 Ordinary shares of £1 each
Allotted, called up and fully paid
120,000 Ordinary shared of £1 each
2011
£
1,000,000
1,000,000
120,000
120,000
14. Reserves
Profit and loss
account
£
At beginning of year
Profit for the year
(48,138)
70,333
At end of year
22,195
15. Reconciliation of operating profit to operating cash flows
2012
£
Operating profit
Depreciation and impairment charges
Decrease/(increase) in stocks
(Increase)/decrease in debtors
Increase/(decrease) in creditors
Net cash inflow from operating activities
Page 14 of 15
2011
£
135,773
75,142
(58,100)
(154,256)
157,814
40,518
53,025
(25,122)
(100,563)
45,367
156,373
13,225
Chargebag Ltd.
Directors' report and financial statements
31 December 2012
16. Analysis of cash flows
2012
£
Returns on investment and servicing of finance
Interest received
Interest paid
2011
£
£
50,357
30,555
50,357
Capital expenditure and financial investment
Purchase of tangible fixed assets
Sale of tangible fixed assets
30,555
(595,829)
-
(323,069)
(595,829)
17. Analysis of net funds
At beginning
of year
Cash at bank, and in hand
(10,312)
Page 15 of 15
£
(323,069)
Cash flow
(89,813)
At end of year
(100,125)