Question 1
Panorama Coach Tours Ltd have history dating back almost a hundred years, when Arthur Knack used his lorry to provide haulage transport to and from a market. Soon he transported miners to and from collieries, and later added day trips to seaside resorts. It became a limited company in 1961 and today the majority shareholders are descendants of Arthur.
The company has maintained its focus on the provision of transport and coach trips. Current services include coach hire, day trips, UK breaks and European holidays.
Panorama are proud to own their fleet of coaches, even though they took out a loan to help finance this.
Isabel Travel Ltd was founded in the 1960’s. They offer the same services as Panorama. The biggest difference between the two companies is that Isabel lease most of their vehicles on operating leases and have no loans.
A first draft of the 2017 accounts for Panorama Coach Tours Ltd is shown below:
Income Statement for the Year Ended 31st December 2017
£’000
Revenue 18,600
Cost of sales 15,400
GROSS PROFIT 3,200
Administration expenses 2,400
Operating Profit 800
Interest payments 300
NET PROFIT BEFORE TAX 500
Taxation 100
NET PROFIT AFTER TAX 400
Statement of Financial Position as at 31st December 2017
£’000
Non- Current Assets 11,900
Current Assets
Inventory 100
Receivables 300
Bank 600
1,000
Total Assets 12,900
Equity
Ordinary shares (£2 Nominal) 1,000
Retained earnings 4,200
Total Equity 5,200
Current Liabilities
Trade payables 1,600
Taxation 100
1,700
Non-current Liabilities
Loan 6,000
Total Equity & Liabilities 12,900
At a board meeting to discuss the draft accounts of Panorama Coach Tours Ltd, one of the directors has brought along the financial statements of Isabel Travel Ltd for the year ending 30th June 2017. He makes the following comments:
“Isabel Travel Ltd has a much better return on capital employed and a much better non-current asset turnover than we do”.
“Isabel Travel Ltd have no debt. Meanwhile we are highly geared. Is this a problem?”
Their gross profit margin (GPM) is just 9% and operating profit margin (OPM) 2.5% Our GPM last year was 19% and OPM 5%. The whole industry has struggled”.
Required:
Write a short report to the director which comparatively analyses the financial position and performance of Panorama Coach Tours Ltd to that of Isabel Travel Ltd and addresses his comments.
(25 marks)
(Note: Approximately half of the marks are for calculations and half are for the narrative)
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