80.2K

Verified Solution

Link Copied!

The following financial information relates to BTM Ltd for last two financial years ended on the 31st December 2020 and 2021.

	31/12/2021 000	31/12/2020 000
Sales	96,360	87,600
Gross profit	38,544	36,792
General and administrative expenses	26,472	21,600
Operating profit	12,072	15,192

BTM Ltd income statement for the year ended

	31/12/2021 000	31/12/2020 000
Non-current assets at cost	60,000	55,520
Accumulated depreciation	-12,000	-8,000
	48,000	47,520
Current assets	33,600	29,160
Total assets	81,600	76,680
Current liabilities	13,200	10,680
Non-current liabilities	24,000	24,000
Total liabilities	37,200	34,680
Net assets	44,400	42,000
Total equity	44,400	42,000
Total liabilities and equity	81,600	76,680

BTM Ltd statement of financial position

Notes to some numbers reported in the income statement and statement of financial position: All the following ten notes have been already included in the numbers reported in the income statement and statement of financial position.

1- Industry operating profit margin, Industry inventory holding period, and Industry trade receivable collection period are 25%, 90 days and 80 days respectively.

2. For the year ended at 31 December 2021, the statement of financial position reported a cost of non-current assets as follows; Machines
   • f 20,000,000, Vehicles of 16,000,000, Land of 6,000,000 and Buildings of 18,000,000.
     • The company applies the following
   • depreciation policies:
     10. per annum straight-line method.
3. The cost of sales for the year ended at 31/12/2020 was calculated based on opening inventory of 26,000,000.
4. Total purchases were 62,712,000 and 41,512,000 for the year ended at 31 December 2021 and 2020 respectively.
5. Credit sales represent %60 and 50% of total reported sales in the income statement for the year ended at 31 December 2021 and 2020 respectively.
6. During 2021, the company already collected 36,624,000 from its credit customers.
7. In the income statement for the year ended at 31 December 2021, the reported general and administrative expenses include total electricity of 300,000 and rent of 115,000.
8. Trade receivables, as on 31 December 2020, are 9,600,000.
9. In the financial statements for the year ended at 31 December 2021, closing inventory were reported at its cost.
10. No trade receivables have been written-off during 2020 and
    • 2021.

• Machines
  20. per annum straight-line method.
• Vehicles
• Building straight-line method over 50 years.
• The company policy is a full years depreciation is provided in the year of purchase of the asset, and none in the year
  • f sale. In addition, in the income statement for the year ended at 31 December 2021, the reported general and administrative expenses include total depreciation charge for the year of 5,562,340.

Additional information:

After the preparation of the income statement and statement of financial position at 31 December 2021, it was later found;

1. An invoice of 50,000 for work done to upgrade machines which will improve the efficiency of the machines was added to the General and administrative expenses.
2. A building purchased on January 1, 2016, at a cost of 500,000 with estimated useful life of 50 years, with an

estimated salvage value of zero. On January 1, 2021, BTM ltd revised the total estimated useful life to 45 years with a revised salvage value of 10,000. However, the accountant used old estimates in the preparation of the financial statements. 3- Included in the non-current assets, a building which had a cost of 1,000,000 on 1st January 2014. The building was revalued to 858,000 on 1st January 2020 with no change in the estimated useful life and this was already recorded in 2020. On 1st January 2021, this building was revalued again to 1,032,000 with no change in its estimated useful life. However, as on 31 of December 2021, the accountant used the previous estimates in the preparation of the financial statements. 4- Rent should be paid quarterly in advance on 1st January, 1st April, 1st July and 1st October. The annual rent was increased from 120,000 to 144,000 in October 2021. 5- Prepaid electricity at 31 December 2020 was 15,000. Outstanding electricity at 31 December 2021 was 30,000 and the total amount of paid electricity during the year ended at 31 December 2021was 300,000.

6. At the end of 2021, the inventory net realizable value was estimated at 22,200,000.
7. For the year ended at 31 December 2021, General and administrative expenses include 125,000 paid immediately in respect of a contract with a supplier to provide cleaning services from 1st September 2021 31st December 2021.

Required:

Discuss whether you agree or disagree with how BTM ltd treated these seven transactions (show all your working). Based on your decision, calculate the new balance of non-current assets, operating profit, and, as compared with the industry, evaluate the operating profit margin, inventory holding period and receivable period for the year ended at 31 December 2021 after considering any adjustments you feel appropriate based on the above information.

Answer & Explanation Solved by verified expert

See Answer