CORPORATE REPORTING AND ANALYSIS
TIME ALLOWED: TWO Hours
INSTRUCTIONS TO CANDIDATES
The use of a University approved calculator is permitted during this exam. The calculator must have been purchased from the Guild of Students and must be stamped with the University crest.
The use of non-approved calculators is not permitted.
Answer ANY THREE QUESTIONS.
1. Ensure the required details are written on the front of your answer booklet.
2. Answers to each question must begin on a new page and must be clearly numbered. Use both sides of the paper in your answer booklet.
3. The examiner will take account of the way in which answers are presented.
4. Show all relevant workings.
Merton plc (Merton) is a small listed company that operates in the independent music publishing sector. It signs contracts with recording artists and then produces and distributes their music either on compact disc (CD) or via downloads from its website. It also receives income from a range of music copyrights that it holds.
You are a business analyst for Merton. The finance director has asked you to prepare the first draft report of an analysis of the financial statements for the year ended 31 March 2014. He will utilise your report containing notes and suggestions for further investigation as part of his preparations for a meeting with investors in Merton.
You are aware of the following principal business events that have happened during the year:
A major recording artist was due to release a new music album in December 2013. However, the release has been delayed until September 2014. No other major recording artists released new music albums during the year.
A contractual dispute with Eyemusic Ltd, an online music distribution company, resulted in the payment of a settlement of £2 million to Eyemusic Ltd in February 2014. This amount has been recognised within operating expenses.
The classical music division was sold. The division was responsible for the worldwide distribution of classical sheet music. It met the IFRS 5, Non-current Assets Held For Sale and Discontinued Operations, ‘held for sale’ criteria in January 2013 and it was disposed of on 10 July 2013.
Major investment has been made over the past two years in the company’s website. It allows customers to download digital music at high speeds. It has a niche following within its chosen markets.
The company holds the copyrights to a large catalogue of music that it has acquired over the past five years. Merton has received increasing levels of royalty income from this catalogue.
The following information has been provided for Merton:
Statement of profit or loss for the year ended 31 March
£’000 £’000 Continuing operations
47,890 Cost of sales (27,160) (29,700) Gross profit 14,870 18,190 Operating expenses (7,460) (5,360) Operating profit 7,410 12,830 Finance costs (120) (420) Profit before tax 7,290 12,410 Income tax (2,550) (4,350) Profit from continuing operations 4,740 8,060 Discontinued operations
Loss on discontinued operations (550) (2,300) Profit for the period 4,190 5,760
Extract from statement of changes in equity for the year ended 31 March 2014
Retained earnings £’000 Balance at 1 April 2013 2,670 Profit for the period 4,190 Final 2013 dividend on ordinary shares (25.63p per ordinary share) (2,050) Balance at 31 March 2014 4,810
A final dividend in respect of the year ended 31 March 2014 of £4.0 million (50p per share) was declared in May 2014. This amount includes a special dividend of 24p per share in respect of part of the proceeds from the sale of the classical music division.
Statement of financial position as at 31 March
£’000 £’000 £’000 £’000 ASSETS
22,500 Current assets
Inventories and receivables 3,450