Page 23 - CIMA MCS Workbook May 2019 - Day 1 Suggested Solutions

SUGGESTED SOLUTIONS

Analysis

All references to 2018 / 2017 are referring to the accounting period ended 31 December 2018 and 31
December 2017 respectively.

Financial performance
The revenue of Jord increased by 3.1% in 2018 compared to the previous year, along with a
significant increase in pre‐tax profit of 9.2%, indicating tight control of costs during 2018.

Factors that may help to explain the growth in revenue from 2017 to 2018 could be Jord’s
reputation and its focus upon quality, even though it is operating in a very competitive
environment.

Jord’s return on capital employed (ROCE) fell from 115% to 95.5% from 2017 to 2018. Whilst
there was an increase in operating profit of almost 9%, this was counterbalanced by an increase in
capital employed (all equity) of almost 30%. The main elements contributing to the increase in
capital employed were an increase in property, plant and equipment of 16% and an increase in
cash and equivalents of over 55% to almost C$26.5m.

Both the gross profit margin and operating profit margin improved in 2018 from 2017 by
approximately 1%. For 2018 the gross profit margin was 33.0%, and operating profit margin was
24.8%. Both ratios indicate a firm control of costs, given the modest growth in revenue from 2017
to 2018.

There was a fall in non‐current asset utilisation from 4.6 times to 4.1 times. Although revenue
increased by 3.1% over the two years, there was significant investment in property, plant and
equipment during 2018, representing an increase in its carrying amount of almost 16%. There is
insufficient detail to quantify movements in property, plant and equipment during the year to
identify additions made during 2018. However, given that Jord is operating at full capacity, it
would seem reasonable to expect that the capital additions made during 2018 will bring benefits
in 2019 and beyond.

Jord does not disclose any intangible assets in its statement of financial position. If there has been
expenditure that meets the criteria specified in IAS 38 Intangible Assets to require capitalisation
of development expenditure, then IAS 38 should be complied with. For example, there is
reference to the use of ‘sophisticated scheduling software’ and ‘production scheduling software’.
It may be that, if this was purchased from an external software provider, it could (or should) be
capitalised. Similarly, if it was developed in‐house, it may have met the criteria for capitalisation
as development expenditure per IAS 38. There is no indication of capitalisation of such costs
based upon the available information.

Based upon its results for 2017, Jord paid a dividend of C$13m during 2018, and will pay a
dividend of C$17m during 2019, based upon its 2018 results. This represents an increase in the
dividend paid of over 30%. As there was a significant increase in cash and equivalent balances
over the same period, Jord has adequate cash resources to make such payments. There is no

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