FR – May 2015 – L2 – SB – Q3 – Statement of Cash Flows (IAS 7)

Calculate and analyze financial ratios and prepare cash flows from operating activities for Galadanci Plc.

Question

(a) Galadanci Plc, a telecommunications company, has the following financial statements for the years ending 31 December 2013 and 2014. Using the statements below, calculate specific ratios and analyze Galadanci Plc’s performance:

Statements of Profit or Loss and Other Comprehensive Income for the year ended

	2014 (N’billion)	2013 (N’billion)
Revenue	2,430	1,638
Cost of Sales	(1,701)	(983)
Gross Profit	729	655
Administrative Costs	(311)	(180)
Distribution Costs	(207)	(117)
Finance Costs	(36)	(6)
Profit before Taxation	175	352
Income Tax Expense	(54)	(102)
Profit for the Year	121	250

Statements of Financial Position as at 31 December

Additional Information for 2014

Galadanci Plc acquired 60% of Papanga Plc’s shares to diversify into agriculture.
The company increased its mobile subscriber base, raising the average revenue per user.
No dividends were received from Papanga Plc, and the share value remained constant.

Required:

Calculate the following ratios for the year ended 31 December 2014, analyze Galadanci Plc’s performance, and comment on qualitative factors impacting the company:
- Gross Profit Percentage
- Return on Capital Employed (where capital employed = Total Assets – Current Liabilities)
- Net Profit (PBIT) Percentage
- Asset Turnover
- Gearing Ratio
- Debt/Equity Ratio (16 Marks)
Prepare Galadanci Plc’s Cash Flows from Operating Activities using the indirect method according to IAS 7. (4 Marks)

Answer

(a) Ratio Calculations and Analysis for Galadanci Plc (2014)

Analysis of Galadanci Plc’s Operating Performance

Revenue Growth: The revenue increased from N1,638 billion in 2013 to N2,430 billion in 2014, indicating growth in operations.
Gross Profit Decline: Despite revenue growth, gross profit percentage declined from 40% to 30% due to increased cost of sales, potentially from high customer acquisition costs.
Decreased PBIT Margin: The PBIT percentage fell from 22% in 2013 to 9% in 2014, indicating increased operating costs that outpaced revenue growth.
Asset Turnover Efficiency: Asset turnover of 1.79 suggests efficient asset use, though slightly less than the previous year’s 1.98.
Higher Gearing and Debt/Equity Ratios: Gearing increased significantly, reflecting the higher reliance on debt. The company’s 12% secured loan increased liabilities, raising the debt/equity ratio.
Strategic Diversification: Acquisition in the agriculture sector represents a strategic move, although no immediate income was realized from Papanga Plc.

(b) Galadanci Plc’s Cash Flows from Operating Activities (Indirect Method)