The directors of L Ltd appointed a new sales manager towards the end of 2015. This manager devised a plan to increase revenue 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 2016 in order to meet the demand which the change in sales policy had created.

The financial statements for the years ended 31 December 2015 and 2016 are shown below. The sales manager has argued that the new policy has been a resounding success because revenue 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 2016 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.

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Statements of profit or loss Revenue Cost of sales Gross profit Selling expenses Bad debts Depreciation Interest Net profit Statements of financial position Non-current assets Factory Machinery Current assets Inventory Accounts receivable Bank Total assets Current liabilities Accounts payable Bank Non-current liabilities Borrowings Equity Share capital Retained profits 2016 £000 238 583 175 11 186 1,600 £000 441 1,791 2,232 821 3,053 (1,786) 1,267 328 939 1,267 2016 £000 2,800 (1,680) 1,120 (270) (140) (208) (192) 310 2015 £000 30 83 12 36 == 36 100 2015 £000 900 (360) 540 (150) (18) (58) (12) 302 £000 450 490 940 125 1,065 (136) 929 300 629 929