SECTION A
Question A1 is COMPULSORY Question A1

Below are extracts from the financial statements of a listed company which operates a chain of bakery and sandwich retail outlets in the United Kingdom.

Income statements | 2009
£’000 | 2008
£’000 | Revenue | 658,186 | 628,198 | Cost of sales | (252,284) | (241,939) | Gross profit | 405,902 | 386,259 | Distribution costs | (321,686) | (309,735) | Administrative expenses | (35,783) | (35,944) | Other income | - | 8,033 | Operating profit | 48,433 | 48,613 | Interest receivable and similar income | 346 | 857 | Profit before taxation | 48,779 | 49,470 | Taxation | (14,405) | (15,375) | Profit for the year | 34,374 | 34,095 |

Balance sheets | 2009
£’000 | 2008
£’000 | Non-current assets | | | Intangible assets | 579 | 686 | Property, plant and equipment | 211,155 | 210,455 | | | | Current assets | | | Inventories | 11,886 | 12,152 | Trade and other receivables | 21,206 | 22,698 | | | | Cash and cash equivalents | 34,619 | 4,433 | | | | Current liabilities | | | | | | Trade and other payables | (71,738) | (62,761) | Current tax liabilities | (8,857) | (8,337) | Provisions for liabilities and charges | (857) | (2,843) | | | | Net current liabilities | (13,741) | (34,658) | Non-current liabilities | | | Other payables | (30,460) | (26,108) | Provisions for liabilities and charges | (3,296) | (2,428) | | | | Net assets | 164,237 | 147,947 | Capital and reserves | | | Share capital | 2,080 | 2,080 | Share premium account | 13,533 | 13,533 | Other reserves | 359 | 359 | Retained earnings | 148,265 | 131,975 | Total equity | 164,237 | 147,947 |

Cash flow statements

| 2009
£’000 | 2008
£’000 | Cash flows from operating activities | | | Cash generated from operations | 87,944 | 59,163 | Tax paid | (14,731) | (14,807) | Net cash generated from operating activities | 73,213 | 44,356 | Cash flows from investing activities | | | Purchase of property, plant and equipment | (30,296) | (40,758) | Purchase of intangible assets | - | (686) | Proceeds from sale of property, plant and equipment | 2,368 | 2,200 | Interest received | 346 | 857 | Net cash used in investing activities | (27,582) | (38,387) | Cash flows from financing activities | | | Sale of own shares | 1,182 | 698 | Shares purchased and cancelled | - | (9,738) | Dividends paid | (15,339) | (14,535) | Other financing cash flows | 1,087 | 8,083 | Net cash used in financing activities | (13,070) | (15,492) | Net increase/(decrease) in cash and cash equivalents | 32,561 | (9,523) |

Notes:

* The market value of the company’s shares at the year end was £4.37
(2008: £3.50).

* Share capital consists of 104 million shares with a nominal value of 2p per share.

Requirements:

a) Prepare a report describing how the liquidity of the company has changed between 2008 and 2009. Comment on why these changes may have occurred. What possible changes in the business’s activities and /or efficiency may have had an effect on the changes in liquidity? You should use appropriate ratios in your analysis.
(10 marks)

b) Imagine you are a prospective investor in this company’s shares. Calculate 3 investor ratios for 2009 and 2008 which would help you to decide whether to invest, and briefly explain the meaning of each one.
(10 marks)

c) Explain why financial statements include an accounting policies note. Give examples of how users of financial statements would find such a note useful, illustrating your answer with respect to the financial statements in this question.
(5 marks)

Total: 25 marks

Requirement:

a) Prepare a report describing how the liquidity of the company has changed between 2008 and 2009. Comment on why these changes may have occurred.