The directors of L Ltd appointed a new sales manager towards the end of 20X2. This manager devised a plan to increase sales and profit by means of a reduction in selling price and extended credit terms to customers. This involved considerable investment in new machinery early in 20X3 in order to meet the demand which the change in sales policy had created.

The financial statements for the years ended 31 December 20X2 and 20X3 are shown below. The sales manager has argued that the new policy has been a resounding success because sales and, more importantly, profits have increased dramatically.

(a) You are required to explain whether you believe that the performance for the year ended 31 December 20X3 and the financial position at that date have improved as a result of the new policies adopted by the company. You should support your answer with appropriate ratios.

(b) All of L Ltd’s sales are on credit. The finance director has asked you to calculate the immediate financial impact of reducing the credit period offered to customers. Calculate the amount of cash which would be released if the company could impose a collection period of 45 days.

Transcribed Image Text:

Profit and loss accounts Sales Cost of sales Gross profit Selling expenses Bad debts Depreciation Interest Net profit Balance b/fwd Balance sheets Fixed assets Factory Machinery £000 20X2 20X2 £000 900 (360) 540 (150) (18) (58) (12) 302 327 629 £000 450 490 940 £000 20X3 £000 2,800 (1,680) 1,120 (270) (140) (208) (192) 310 629 939 20X3 £000 441 1,791 2,232