Case study november 2011 illustrative script 2 ICAEW

SECOND ILLUSTRATIVE SCRIPT AND EXAMINERS’ COMMENTS In the commentary below extracts from the scripts are shown in quotation marks and in italics; spelling, grammar, sentence construction and punctuation from the original script have been retained The commentary follows the order and numbering of the script with references to the topics in the marking key It should be read in conjunction with the review of the First Illustrative Script and also the full Examiners’ Report for this session Examiners’ comments – overview This script failed the exam It is around average length (but as always this depends on the actual handwriting), addresses all the key issues and contains some strong sections In terms of professional skills this candidate achieved overall competent grades – Clearly Competent (CC) and Sufficiently Competent (SC) – in out of grade boxes for Assimilating and Using Information; in out of 12 for Structuring Problems and Solutions; out of 12 for Applying Judgement and out of for Conclusions and Recommendations The original 21-page length of the manuscript version was broken down as follows: • • • • Cover and contents – pages Executive summary – pages Report (main body) – 12 pages Appendices/workings – pages The 12 pages of the main body of the report address the key issues and together with the appropriate appendices demonstrate good planning and a good balance in answering the main requirements This candidate achieved sufficient competent grades in Executive Summary and Requirement (audit adjustments and meeting with the bank) but did not achieve sufficient competent grades in either Requirement (financial analysis) or Requirement (evaluation of Foment proposal) Terms of reference and executive summary This internal report starts with a terms of reference section, which is not necessary, but which is seen as being part of a contents summary The executive summary (ES) has an overall introduction and then addresses each of the sections of the report It is properly headed up but given the introduction it is shorter on each of the main sections than average – although there is evidence of planning in compiling this summary, there is possibly some evidence of time pressure The two main pages of the ES are split fairly evenly between the introduction and the three topics The summary of the financial analysis of 4D’s management accounts contains a few of the numbers which are part of the main numerical analysis, but these are insufficient and are mostly absolute figures Mention is made of “profit after tax” which was not required and is irrelevant One paragraph out of the four under this heading is indicative of the erroneous analysis and tone of this section: “However, there are signs that the results for the year are not so bad as they initially seem If the one off revenue from the BBC in 2010 of £1 million is removed from the comparative, revenue has fallen by just over £1 million which in the current economic climate is not too bad” This apologetic approach and inability to summarise and analyse the actual declining results is a real weakness In the section dealing with the proposed audit adjustments the ES again contains an unnecessary reference to after-tax figures and then provides only the broad, bland advice that “4D communicate regularly and effectively with the bank” with no clear, positive cash analysis provided In the review of the Foment proposal section the candidate presents a very brief summary of the financial benefits against a brief, broad analysis of the risks to brand damage with no real consideration of any ethical issues Copyright @ ICAEW 2011 All rights reserved Page of 18 Although the executive summary covered all areas it was only sufficiently competent in presenting the basic information from the report but was insufficiently competent on judgement, conclusions and recommendations To score better grades on this section, the candidate could have provided better judgement and conclusions on each of the sections required in the report Review of 4D’s 2011 financial performance [Requirement 1] The financial statement analysis in this section is accompanied by Appendices & (see detailed commentary below) These appendices support the comparative analysis of revenue, gross profit and revenue streams in percentage and absolute terms, as well as providing an EBITDA figure This section starts with a brief, but not wholly relevant introduction The analysis of revenue then starts by detailing the fact that 2009 was a bumper year for the film industry as a whole Unfortunately, although correct, it is probably not relevant to 4D’s current (2011) position The candidate then spends time concentrating on the “£1 million one-off” BBC income – if it were removed from 2010 then the fall in 2011 would not “appear too concerning” – which does not address the problem at all (Amongst other things it would just mean the fall and situation in 2010 would have been worse.) The analysis continues with an appropriate commentary on the reduction in the DfE budget and possible associated declines in 4D revenue It also identifies that advertisement production is a successful revenue stream The analysis of gross profit and part of the analysis of EBITDA (as far as it goes) is clear and accurate – as is the judgement on these items However there is no mention of the word depreciation, despite it being part of the EBITDA calculation in the appendix, and the loss on disposal does not feature at all Instead the analysis under the heading of EBITDA contains some irrelevant and unnecessary commentary on overheads There is no analysis of non-current assets which was specifically emphasised in the requirement The conclusions and recommendations follow the scattered quality of the analysis and contain weak and bland advice: “They also need to reconsider staff numbers in times of economic downturn and ensure they are not paying for unnecessary staff hours However, in doing this they also need to ensure that the long term strategy of the company is considered” Throughout this section although there is some evidence of awareness of both the broader economic situation and impact on 4D’s results, the style of the analysis seems to be to want to soften the blow of a difficult year, rather than addressing the harsh reality of events – in particular an unwillingness to mention the disposal of non-current assets at a huge loss! This was a weak section of the answer To score better grades on Requirement 1, the candidate could have: • • • • Provided better comparative analysis of actual revenue/streams for 2011 against 2010 Included the loss on disposal in EBITDA and considered its implications for 4D Provided some detailed analysis of non-current assets including: acquisitions, disposals and depreciation and the possible implications on the value of remaining assets and reported profits Provided stronger conclusions and relevant recommendations Proposed audit adjustments [Requirement 2] The financial data analysis in this section is accompanied by Appendices 3-5, which provide a good, clear and relevant numerical platform from which to comment on the proposed adjustments These appendices contain accurate calculations, but stop one step short of completion In the introductory section the candidate sets the scene for 4D: “The company finds itself between needing to make the required audit adjustments in order to get an unmodified audit report; and not wanting to make the audit adjustments in order to stay within the loan covenant limits” – the dilemma succinctly expressed ‘in a nutshell’ Copyright @ ICAEW 2011 All rights reserved Page of 18 The critical impact of the adjustments is correctly stated: “If all four adjustments were processed this would bring operating profit down to just £206k from £381k as shown in Appendix 3” However, the candidate then spends time calculating percentage margins on various decreasing figures – all of which are irrelevant to the question in this topic of how to deal with the bank Sadly, despite having calculated all the steps correctly this candidate failed to present the final calculation of just how much the breach actually was and therefore what the negotiation with the bank would focus on Despite having already identified the potential problem the candidate then spends two whole sections within this topic assessing the adjustments against the existing and new covenant conditions In fact it is not until the concluding paragraph under Section 2.3 that the script contains the starting point for the negotiation with the bank: “The main problem of this company is its ability to control and manage costs [and, dare one say, the losses on disposal] Its statement of financial position and asset values appears healthy” However these (positive) points are not then developed by querying whether the asset values might, in fact, be overstated Although this script deals with the audit adjustments and the implications of processing (or not processing and causing a modified report) correctly, the report is much less clear on the negotiations with the bank – not least because the actual figure of the interest cover covenant breach is never established, either in the report or in the appendix The result of the absence of a clear figure is apparent in some of the broader and more vague suggestions made concerning the meeting: “You can discuss with the bank what detailed forecasts can be done and what immediate plans can be put in place for cutting costs for example monitoring staff numbers in line with revenue” Although the report does mention the change from opening overdraft to closing positive balance at the bank, it offers no positive story, for the meeting, for the route between those two figures The final conclusions and recommendations, particularly as far as the bank meeting is concerned, are not strong or convincing To score better grades on Requirement 2, the candidate could have: • • • • Provided absolute figures for the interest cover covenant breach in the body of the report Discussed the one-off impact of the loss on disposal on the covenant breach Analysed the movements on the statement of cash flows providing a full positive story to the bank Expressed more practical and precise conclusions and recommendations Foment’s proposal [Requirement 3] The candidate has a scene-setting paragraph concerning the Foment proposal in the opening section: “This proposal is not only asking 4D to create a ‘ground breaking advertising campaign’ but is also requesting that the Spindles characters feature in this campaign” The report continues by presenting the significant financial benefits and the potential positive spin-offs for Spindles and 4D Although there is a need to balance the risks, relating to future revenue, this candidate actually makes conflicting statements concerning the Spindles ‘life’ in the risks section: “The key risk is that the Spindles characters could be nearing the end of their product life cycle and by associating them with a new product, neither the product nor Spindles would succeed There is also the risk that by using them in such an extensive campaign over a year period that it could drain any life the Spindles characters had and exhaust the revenue potential” This conflict over whether to exploit Spindles ‘remaining life’ is difficult to unravel Some of the other non-financial risks identified are totally marginal (or wrong): “4D has never operated overseas before and therefore clarification needs to be sought regarding any foreign exchange” The report does recognise the immediate positive financial benefits that this proposal might bring, as well as touching on some of the possible opportunities which might flow to 4D but it is an imprecise discussion: “It could also open up more opportunities to work on big advertising campaigns, both with Copyright @ ICAEW 2011 All rights reserved Page of 18 and without the Spindles characters It is an area their creative expertise excels in and this should continue to be built on” Although there is a short section on the ethics relating to this venture it is a rather woolly series of paragraphs and does not focus on the real ethical problems which such a link-up might create This section on conclusions and recommendations does not, in fact, arrive at a conclusion and the recommendations are weak To score better grades on Requirement 3, the candidate could have: • • • • Provided a more comprehensive analysis of the financial risks of this proposal Provided a more detailed analysis of the non-financial benefits and risks of this proposal Discussed confirming the nature of the Foment products Addressed the ethical concerns in more detail Provided a firm conclusion and clear recommendations Appendices Appendices & These relate to the financial statement analysis (Requirement 1) Appendix provides a series of clearly laid out columnar analyses of the 4D revenue streams for 2011 compared with 2010 The analysis of movements between the years is made in both absolute and percentage terms In the detail provided a clear analysis of sales mix has been calculated, including a column on 2009 – which may be seen to be appropriate in terms of trend analysis Importantly the correct movement in gross profit margin has been identified In Appendix the calculation of EBITDA indicates that the candidate understands what should be included under this heading, for both 2011 and 2010, but does not include the significant loss on disposal or make the comparison with revenue, which would have completed this analysis Overall these are relevant working documents which provide a partial basis for the analysis provided in the body of the report Appendix - These appendices relate to the proposed audit adjustments (Requirement 2) The calculations shown concerning the proposed adjustments are correct together with their impact on 4D’s management accounts The appendices also show the impact of these adjustments on the two original loan covenants conditions and the (correct – net current asset) new loan covenant condition The figures are clearly analysed in both percentage and absolute terms Despite the fact that the final calculation for the actual loan cover breach is not provided these appendices are good working documents which provide a clear basis for the numerical information shown in the body of the report These appendices demonstrate that the candidate knew what had to be done and provided much of the numerical evidence from which to write some clear analysis Overall paper Despite the fact that the content was weak in sections the overall script was well structured and clear following a logical format in answering the requirements There were some lapses in style and grammar but overall the language used was appropriate The report was balanced appropriately between the three sections but the ES was very short There were some unnecessary facts presented given the target audience, but the report had good financial explanations where needed The competent grades awarded for the overall paper rewarded a clearly written, if fundamentally weak, script Copyright @ ICAEW 2011 All rights reserved Page of 18 SECOND ILLUSTRATIVE SCRIPT AND EXAMINERS’ COMMENTS Report to the Board of Directors to Analyse 4D’s recent results and evaluate future strategy for the company From - Ali Monet Date - November 2011 Copyright @ ICAEW 2011 All rights reserved Page of 18 Terms of Reference As requested this report has been prepared to deal with the proposed audit adjustments and future strategies of 4D This report covers • A review of 4D’s results for its year to 30 September 2011 • The impact of the proposed audit adjustments on 4D’s draft management accounts and any implications for loan covenants • An evaluation of a proposed advertising campaign using the Spindles characters The report is based on information provided by our management and has been prepared for the Board of Directors of 4D Limited, it is private and confidential Executive Summary 4D has benefited from historic growth and remains a profitable company However, with poor working capital management, a high investment in fixed assets and a recent downturn in the economy, the company has started to suffer The market is extremely competitive with substitute products and new entrants, but with the creation of the ‘Spindles’ characters, 4D have managed to capitalise on this success With a strong reputation and experienced Directors, 4D should be able to formulate a clear strategy to enable them to confirm future funding and help see them survive the recession This report analyses the current financial position and results of 4D and goes on to look at potential future strategies – Review of 4D’s results for the year With revenue falling by £2,009 million in the year to just £13,928 and profit after tax falling to just £187, it appears that 4D have had a tough year However, there are signs that the results for the year are not so bad as they initially seem If the one off revenue from the BBC in 2010 of £1 million is removed from the comparative, revenue has fallen by just over £1 million which in the current economic climate is not too bad Gross profit has also remained fairly consistent despite the fall in revenue which means gross profit margin has improved to be 40.4% This is most likely to be as a result of changes in revenue mix as the balance has shifted towards those revenue streams generating greater profits Operating costs however are where the results for the year are not so successful as costs have not been managed in line with falls in revenue Copyright @ ICAEW 2011 All rights reserved Page of 18 – Impact of proposed audit adjustments The total effect of the proposed audit adjustments is a reduction in profit of £175 While this may not seem detrimental or material, with profit levels sitting very low, it has a big effect on the bottom line of the company, reducing profit after tax to just £12 It is this effect on profit which then has an effect on the covenants in place from the bank loan The covenant regarding the operating profit levels is no longer met and as a result, 4D risk having their funding withdrawn If this funding was withdrawn it would bring into question the going concern of the company In light of this inability to meet the covenant, it is essential that 4D communicate regularly and effectively with the bank and work with bank to ensure forecasts and cash management is in place to improve the situation – Advertising proposal The proposal to work as an advertising campaign with an existing client would potentially bring in £6 million revenue and £2.97 m of gross profit as well as generating more revenue from DVD and merchandise sales This has big financial advantages to a company which is struggling to secure its future However, there are many risks involved with this proposal such as the remaining popularity of the Spindles characters, further reliance on the Spindles characters and the time scales involved Further to this the directors also need to consider whether they want to associate themselves and their work with foods and products which can lead to obesity Copyright @ ICAEW 2011 All rights reserved Page of 18 1) Review of 4D’s results for the year to 30 September 2011 Since revenue peaked in 2009, it has been clear that conditions are tough for 4D both as a result of the downturn in the economy and as a result of the company not having a clear direction for future growth The 2010 and the 2011 management accounts highlight how difficult conditions currently are for 4D 1.1 Revenue Revenue has fallen by £2,009 million to £13,928k in 2011 Revenue was at its peak in 2009 but we are aware that 2009 was a bumper year in the UK film industry with total UK gross box office takings for the year up 11% on 2008 While 4D’s revenue does not all come from film commissions, 4D may well have benefited from this boost in the industry In 2010 however, the only revenue stream to grow was that of commission of films boosted by a £1 million contract from the BBC for Spindles programmes If this £1 million one off revenue is removed, the decrease in revenue between 2011 and 2010 is just over £1 million at 6.8% fall In light of tough economic trading conditions this doesn’t appear too concerning As Appendix shows the revenue mix between the revenue streams appears to have shifted in 2011 Again, if we remove the £1 million one off revenue from commissions, the proportion of this stream in 2010 reduces from 26.4% of revenue to 21.8% which then doesn’t make 2011’s proportion of 21.4% appear unreasonable The sale of DVD’s and the sale of merchandise have continued to fall with income of £6.7 million (4078 + 2638) in 2011 compared to £7.7 million (4611 + 3134) in 2010 A majority of these sales come from Spindles products and the contract with the Department of Education In October 2010, the government announced that the Department of Education would have its budget cut by between 10% and 20% which may have had an effect on the contract with 4D This fall in revenue may also further indicate that the Spindles products and characters are nearing the end of their product cycle and failing to bring in revenue as was seen in 2009 Despite this, as Appendix shows the contribution in % terms is relatively consistent The only revenue stream which has increased is that of advertisement which has increased by £861 to £1,889 as shown in Appendix While it may have been thought that companies would be reducing such expenditure because of the recession, the opposite appears to have happened whereby companies are actually doing more aggressive, innovative advertising in order to get sales 4D pride themselves on their reputation for innovation and creative advertising and this seems to have benefited them here in 2011 Gross profit Gross profit has only fallen by £265 from £5,898 to £5633 as shown in Appendix With gross profit remaining fairly consistent despite the falls in revenue, gross profit has actually improved to 40.4% While this may be as a result of better cost management and planning, it is more likely to lie in the revenue mix While accurate profit margins cannot be calculated for each profit stream, by taking typical contracts, the margins generated by advertising is 49.5% with an increase in advertising revenue and a bigger contribution, with a relatively high profit margin, it is going to help overall gross profit margins Also with a decrease in commissions and DVD/merchandise sales, which only brought in approximately between 26% and 31.6% gross profit margins, this will have an effect on overall profit margins EBITDA As Appendix shows, EBITDA has fallen from £1209 to £955 This is despite an improvement in gross profit margins Copyright @ ICAEW 2011 All rights reserved Page of 18 This therefore suggests that overheads and operating costs have not been managed as well as costs of sales If we take salaries and wages, these have only reduced by £62 from £2967 to £2905 Salaries contribute 55.3% of overhead costs and if these are not managed it has a detrimental effect on operating profits and further to the EBITDA calculation as shown Conclusions and recommendations 2011 has proved to be somewhat of a mixed year While revenues appear to have been drastically reduced by removing the £1 million one off revenue, they have actually only reduced by 6.8% and gross profit margins have improved However, it appears that the improvement in gross profit margins is as a result of the change in revenue rather than cost management as overheads and operating costs have continued to cause problems and reducing the bottom line profit 4D needs to focus on winning new work and building on the improvements in advertising revenue stream It is also key that they generate a succession plan for Spindles They also need to reconsider staff numbers in times of economic downturn and ensure they are not paying for unnecessary staff hours However, in doing this they also need to ensure that the long term strategy of the company is considered Copyright @ ICAEW 2011 All rights reserved Page of 18 2) Impact of the proposed audit adjustments 4D are currently financed by the £2 million loan and although their cash balance has improved in the year, there are limited alternative sources of funding available As a result, if the loan was recalled through failure to meet the covenants, it would bring into question the company’s ability to continue as a going concern The company therefore finds itself between needing to make the required audit adjustments in order to get an unmodified audit report; and not wanting to make the audit adjustments in order to stay within the loan covenant limits 2.1 Impact on the management accounts Individually the four adjustments proposed by the auditors not have a significant effect on the management accounts, but if all four adjustments were processed this would bring operating profit down to just £206 from £381 as shown in Appendix This reduction in operating profit of £175 then has a further impact on operating profit margins and profit after tax for the year Prior to any adjustments, operating profit margin was just 2.7%, but with the proposed adjustments this reduces even further to 1.5% This brings into serious question the entity and the managements’ ability to control costs After the proposed adjustments, profit after tax is just £12 (£187 - £175) Profit was at its peak in 2008 at £683, so to reduce profits to £12 will bring into question the future of the company and put off any future investors 2.2 Assessment against existing loan agreement Under the existing loan agreement, there are two covenants on the financial statements One regarding the value of non-current assets and one regarding operating profit None of the audit adjustments affect non-current assets and despite the amount of assets that have been disposed of in the year after review of surplus and obsolete assets this covenant is still met In 2011, as show in Appendix 4, there would have to be a minimum net book value of £1,320 and value on the SOFP is £1,610 However, all of the audit adjustments affect operating profit and even before any adjustments were processed, operating profit at £381 was very close to not meeting the required level of £342 as calculated in Appendix A fall of just £39 would have been required for this covenant to no longer be met Therefore, with a fall in profit of £175 from the proposed audit adjustments this covenant is no longer met All of the required adjustments go the same way and reduce profit and while it may be possible to try and compromise on some of the adjustments (the inventory provision ones) it is still not likely to increase profits enough to meet the covenant The WIP and deferred income adjustments would be difficult to compromise on and these alone reduce profit by £50 which would take operating profit below the required level Copyright @ ICAEW 2011 All rights reserved Page 10 of 18 2.3 Assessment against proposed loan agreement As Appendix shows, the proposed agreement stipulates that net current assets should be 150% of the outstanding loan and accrued finance expense Both before and after the proposed adjustments, this covenant is met See Appendix for workings Even after the proposed audit adjustments, net current assets would have to fall by a further £481 (£2281 - £1800) for this proposed covenant not to be met This highlights again that the main problem of this company is its ability to control and manage costs Its statement of financial position and asset values appear healthy 2.4 Proposed meeting with NP Bank In the proposed meeting with NP Bank it is worth highlighting to the bank, that even after the proposed audit adjustments, the only covenant which is not met is that regarding operating profits It can then be discussed how this can be monitored and amended going forwards by careful planning and cost management In order to this, you can discuss with the bank what detailed forecasts can be done and what immediate plans can be put in place for cutting costs for example monitoring staff numbers in line with revenue It is also worth highlighting to them that the cash position has improved considerably over the year increasing from £84 overdraft at the end of 2010 year to a positive cash balance of £419 This increase in cash then opens up more options for future strategies as it means cash is available for possible investments and expenditure Conclusions and recommendations Overall the proposed audit adjustments have a detrimental effect on the profit of the company, but the adjustments may need to be processed in order to maintain an unmodified audit report Action needs to be taken in order to improve profitability and reduce pressure on loan covenants Both the auditors and the bank need to be communicated with, with regards to processing the adjustments and management need to ensure they are proactive with the bank The bank need to be made aware of the difficult trading conditions and may allow 4D to refinance while they are sorting out their cash management problems Management should also prepare quarterly management accounts which will allow them to identify any problems on a more timely basis Copyright @ ICAEW 2011 All rights reserved Page 11 of 18 3) Evaluation of a new advertising campaign 4D have always taken pride in their original and creative work and have won awards for their artistic excellence So the fact that advertising revenue increased in 2011 is testament to their skills – clients want to use them for advertising campaigns during this tough economic climate However, this proposal is not only asking 4D to create a ‘ground breaking advertising campaign’ but is also requesting that the Spindles characters feature in this campaign Benefits to 4D Foment plc are suggesting a fee of £6 million for this project which would have a direct impact on revenues going forwards for the 2012 year The average gross profit margin for an advert contract is 49.5% which would mean that contribution from this contract would be £2.97 million There is also then the benefits and impact it could have on other revenue streams A majority of the revenue from DVD and merchandise sales comes from Spindles related products and this advert could help boost these sales Sales appear to have fallen over the past years, but by potentially reaching wider, multinational audiences, more revenue could be generated and back catalogues continue to be sold There are also advantages to it being an existing client that has proposed this campaign 4D have already built a relationship with this client who clearly approves of 4Ds work In the industry, costs for an advert are almost irrelevant as it is that one idea that can generate future revenues, and by working with an existing client the directors will already have an idea as to how they work and what they like Risks to 4D Despite the obvious financial benefits to the company, there are also many risks which would need to be considered The key risk is that the Spindles characters could be nearing the end of their product life cycle and by associating them with a new product, neither the product nor Spindles would succeed There is also the risk that by using them in such an extensive campaign over a year period that it could drain any life the Spindles characters had and exhaust the revenue potential There is also the risk that the Department of Education could cut their contract as they would not want their safety videos to be associated with products such as soft drinks and iced products This would lose 4D not only revenue but a contract and relationship with the government, which would be detrimental going forwards If the advert doesn’t work it could impact on other work that 4D for Foment such as filming their annual conferences and could lead to losing the client entirely; and there is also the risk that the Spindles characters will not translate into foreign cultures successfully Not only is there a language barrier, but cultures and sense of humour differs also and this doesn’t appear to have been considered A further concern for 4D is the timing of the advert in their busy period leading up to Christmas and the fact that Foment have requested the specific use of directors This reduces directors’ time to spend on other projects and may reduce margins on the project as their salaries are higher There is also the risk of operating overseas – 4D has never operated overseas before and therefore clarification needs to be sought regarding any foreign exchange Copyright @ ICAEW 2011 All rights reserved Page 12 of 18 Impact now and in the future The fact that Foment are willing to pay an upfront fee of 25% to 4D would have an instant positive impact Currently the company is struggling with its cash flow and this would be a boost, and perhaps convince the bank to continue funding them In the longer term, it could also open up more opportunities to work on big advertising campaigns, both with and without the Spindles characters It is an area their creative expertise excels in and this should continue to be built on Ethical concerns There are many concerns over the use of adverts for children and aimed at children as they have an inability or difficulty in distinguishing between advertising and reality 4D therefore need to ensure that the advert complies with all of the relevant advertising regulations regarding children There are also concerns over the product which 4D will be associating their Spindles characters with Previously, the characters have been used to promote safety, but now they are being used to promote food items where 4D have not control over the quality of the product itself With obesity rising, 4D need to consider whether such products are what they want to be associated with Conclusions and recommendations Despite the financial benefits to 4D and the possibility of getting further life out of the Spindles products there are many risks and concerns of the proposal which need to be addressed by management Before they discuss the proposal further they need to • Communicate with the Department of Education to try and gauge any reaction • Investigate the products in question to see whether they are healthy or what nutrition value they have • Investigate further Foments expansion into the Middle East and whether these products are likely to be advertised there Copyright @ ICAEW 2011 All rights reserved Page 13 of 18 Appendix Revenue variance and growth Commissions Sale of DVDs Sale of merchandise Corporate DVDs Advertisement Hiring out 2011 2010 Variance 2977 4078 2638 1917 1889 429 4216 4611 3134 2413 1028 535 -1239 -533 -496 -496 861 -106 13928 15937 -2009 2011 2010 2009 21.4 29.3 18.9 13.8 13.6 3.0 26.4 28.9 19.7 15.1 6.5 3.4 22.0 28.1 20.2 15.2 8.3 6.2 2011 2010 2009 5633 40.4% 5898 37.0% % growth -29.4 -11.6 -15.8 -20.6 83.4 -19.8 Revenue mix (%) Commissions Sale of DVDs Sale of merchandise Corporate DVDs Advertisement Hiring out Gross profit Gross profit Gross profit margin Copyright @ ICAEW 2011 All rights reserved 6879 39.4% Page 14 of 18 Appendix EBITDA calculations 2011 2010 Profit for the year 187 248 Add back Interest Tax Depr Charge Amortisation 114 80 574 - 132 107 722 - EBITDA 955 Copyright @ ICAEW 2011 All rights reserved 1209 Page 15 of 18 Appendix Proposed adjustments to financial statements Income Statement £000s Revenue Draft amount Adj for deferred income £000s 13928 (30) 13898 Cost of sales Draft amount Adj for DVD provision Adj for merchandise Adj for WIP (8295) (65) (60) (20) (8440) 5458 (5252) Gross Profit Overheads Operating Profit 206 Statement of Financial Position £000s Non-current assets £000s 1610 Current Assets Inventory Draft amount Less adj in cost of sales 964 (145) AC receivable Draft amount Add back deferred income 2218 30 819 Cash 2248 419 TOTAL ASSETS 5096 Copyright @ ICAEW 2011 All rights reserved Page 16 of 18 Appendix 1) NCA must be a minimum of 110% of loan outstanding 2011 – Value of loan outstanding Interest accruing Minimum value of NCA 1200 110% x 1200 Actual NCA value 2) 1320 1610 Operating profit must be 300% of net finance expense 2011 – 2011 – Before audit adjustments: Net finance expense 114 Minimum value of operating profit – 300% x 114 342 Actual operating profit 381 After audit adjustments: Net finance expense 114 Minimum value of operating profit – 300% x 114 342 Actual operating profit 206 Copyright @ ICAEW 2011 All rights reserved Page 17 of 18 Appendix Net current assets should be 150% of outstanding loan and accrued finance expense Before audit adjustments Value of loan + accrued interest 1200 Minimum value of net current assets Actual Current assets Current liabilities 1800 3601 (1205) 2396 After audit adjustments Actual Current assets Current liabilities Copyright @ ICAEW 2011 All rights reserved 3486 (1205) 2281 Page 18 of 18 ... 4078 26 38 1917 1889 429 421 6 4611 3134 24 13 1 028 535 - 123 9 -533 -496 -496 861 -106 13 928 15937 -20 09 20 11 20 10 20 09 21 .4 29 .3 18.9 13.8 13.6 3.0 26 .4 28 .9 19.7 15.1 6.5 3.4 22 .0 28 .1 20 .2 15 .2 8.3... deferred income 22 18 30 819 Cash 22 48 419 TOTAL ASSETS 5096 Copyright @ ICAEW 20 11 All rights reserved Page 16 of 18 Appendix 1) NCA must be a minimum of 110% of loan outstanding 20 11 – Value of... Copyright @ ICAEW 20 11 All rights reserved 6879 39.4% Page 14 of 18 Appendix EBITDA calculations 20 11 20 10 Profit for the year 187 24 8 Add back Interest Tax Depr Charge Amortisation 114 80 574 - 1 32 107