Case study:

Willen Ltd

Note: For the purposes of this case study, you should assume that Willen Ltd traded normally throughout 2020 and that the COVID-19 pandemic and associated lockdown did not occur.

Sisters Zara and Sofia come from a family that has been in the cosmetics business for over 70 years. Zara and Sofia decided to start their own business in their hometown, Edinburgh, and formed Willen Ltd in 2012, specialising in supplying high quality cosmetic products. The company procures these products from national and international suppliers and then packs the products for sale to various local businesses and on online platforms.

Zara and Sofia are the major shareholders of Willen Ltd owning 70% of the shares and the rest of the shares are owned by their Uncle Sameer, who also acts as the financial adviser to Willen Ltd.

Willen Ltd started out on a small scale with just Zara and Sofia running and managing all aspect of the business from operations to marketing to finance. The business expanded gradually over the course of 8 years that saw a number of warehouses and distribution centres opened to store the products and deal with the returns. Most of the expansion was financed by long-term loans from banks and out of retained earnings. Occasionally, Zara and Sofia also rely on short-term loans such as overdrafts.

Willen Ltd has always taken pride in its reputation for high quality and a loyal local customer base, mostly due to its exceptional customer service. Its success has been through a combination of recommendations by satisfied customers and by marketing and advertising.

Willen Ltd has been profitable for most of its existence. Over the past few years, with the exception of the current year, revenues have increased on average by 8% per annum. In the year ending 31 December 2020 the company achieved a return on equity of 13.5%. The companys financial performance has significantly benefited from a surge in demand for one of its specialist skin care product line over the years, however, the demand for this is starting to flatten out.

Zara, with a huge passion for the environment, has recently introduced environmentally friendly products. She continues to promote these products, with a hope that the demand for these will gradually increase, even though they offer lower margins. Zara proposed to extend the business in this direction and source more locally produced products. To do so, Willen Ltd required another bank loan to fund the expansion. Zara and Sofia both agreed on this, given historically low rates of interest, and took out a loan of 900,000 from the bank at an interest rate of 6% in 2021.

Uncle Sameer, however, had reservations and was not in favour of another bank loan. He is concerned about how the business has been doing recently, its profitability and financial health. Uncle Sameer wishes to understand more about the latest financial statements, any trends indicated by an analysis of the financial statements and the implications of the recent bank loan taken out by Willen Ltd.

Briefly explain the general purpose of each of the three financial statements (the income statement, the balance sheet and the cash flow statement) and the usefulness of each of them for Willen Ltd. (15 marks) [Guidance The three main financial statements were introduced to you in Readings 2325. You should use your own words to describe the purpose of the three statements and also their usefulness. Ensure you discuss the purpose AND usefulness of all three statements both in general and specifically to Willen Ltd.] Willen Ltd income statements for the years ended 31 December 2021 and 31 December 2020 Year to 31 Dec 2021 Year to 31 Dec 2020 EK EK EK Ek 20,500 21.479 Sales revenue Less cost of goods sold: Opening inventory Purchases 2,400 2,100 12,800 11,500 15,200 13.700 Less closing inventory 3,700 2,400 Cost of goods sold 11,500 11,300 Gross profit 9,000 10,179 Less expenses: Salaries 5,500 5,250 Rent and insurance 700 728 Delivery conta 744 1,323 Marketing and advertising expenses 300 750 Energy and other utilities 224 450 Depreciation 300 270 110 100 Accountant's fees 7,878 8.871 Total Expenses 1,122 1,308 Operating Profit 126 72 Less Interest cost 996 1.236 Profit before taxation 199 247 Less Corporation tax 797 989 Profit after taxation Willen Ltd balance sheets at 31 December 2021 and 31 December 2020 At 31 December 2021 At 31 December 2020 EK EK Ek Non-current assets Property and equipment for hire 6,228 5,465 Vehicles 300 200 6,528 5,665 Total non-current assets Current assets 3,700 2.400 Inventory 1,361 1497 Receivables 120 426 Cash at bank 5,181 4,323 Total current assets Current liabilities 624 552 Payables 199 247 Corporation tax 823 799 Total current liabilities 2.524 4358 Net current assets/working capital 092 Corporation tax 199 247 Total current liabilities 823 799 Net current assets/working capital 4,358 3.524 Total assets less current liabilities 10,886 9,189 Long-term liabilities Bank loan 1,800 900 Net Assets 9,086 8.289 Equity Share capital 7.000 7.000 Reserve retained earnings 2.096 1289 9,086 8.289 Total Equity Willen Ltd cash flow statement for the years ended 31 December 2021 and 31 December 2020 Year to 31 Dec 2021 Year to 31 Dec 2020 Ek EK Operating activity: Operating profit 1,122 1,308 Corporation tax paid (247) (280) Non-cash expenses: Depreciation 300 270 Changes in cash invested in working capital: (Increase)/Decrease in inventory (1.300) (300) 136 (215) (Increase)Decrease in receivables 72 50 83 833 Increase (Decrease) in payables Net cash inflow from operating activities Investing activity: (1.163) (775) Purchase of non-current assets (1,163) (775 Net cash outflow from investing activities Financing activity 900 Bank loan 126) 72) Interest paid on bank loan 774 (72) Net cash outflow generated by financing activities (306) Change in cash balances 440 426 Opening cash balance at 1st January 426 120 Closing cash balance at 31st December