Financial Analysis Question Paper, Answers and Examiners Comments Level 5 Diploma June 2013

Transcription

1 Financial Analysis Question Paper, Answers and Examiners Comments Level 5 Diploma June 2013 June FIA/PQP/1 continued

2 Copyright of the Institute of Credit Management Institute of Credit Management The Water Mill, Station Road, South Luffenham, Oakham, Leicestershire LE15 8NB Bookshop Tel: Education Tel: Switchboard Tel: Fax: June FIA/PQP/2 continued

3 Financial Analysis Questions, Answers and Examiners Comments LEVEL 5 DIPLOMA IN CREDIT MANAGEMENT JUNE 2013 Instructions to candidates Answer all questions Time allowed: 3 hours This particular paper was slightly easier for students than previous papers as there was an increased availability of marks for the calculation of ratios. Future candidates should expect a greater emphasis on analysis in these types of questions. Candidates that attempted this paper did very well, with one candidate achieving over 90%. It was obvious from answers given that all candidates had prepared well by studying both the study guide and previous exam papers. Candidates should be reminded that all questions carry equal marks and therefore they should plan their time accordingly. June FIA/PQP/3 continued

4 Your company, Comptronics Ltd, sells components to the electronics industry and has an annual turnover of 5m. Recently the sales director has put pressure on you, the senior credit manager of the company, to approve a credit limit of 500k for a new customer. He is very excited about this new customer who has placed a large order with your company and expects to make similar orders on a regular basis. However, you have some reservations about the customer s ability to pay and are conducting a review of their latest published financial statements in order to collect some evidence to support your professional opinion that a much lower limit should be offered to the client. The new customer, Chargebag Ltd, is relatively new having been incorporated only 3 years ago. Three young, graduate entrepreneurs, Don Gales, Mary Stuart and Mike Stevens who developed a fashionable new product, So-Lite, a bag that contains a recharging port for mobile devices, own it. The bag makes use of a new flexible material used in the solar panel industry, but incorporates stylish design and artwork that appeals to teenagers and young adults. After an appearance in a national TV programme, Crocodiles Cave, demand for their product has soared, especially among young consumers. One of the Crocodiles, a well known entrepreneur of the UK, has agreed to invest in Chargebag provided all the material and production is sourced in the UK. Chargebag has found it difficult to obtain sufficient quantities of good quality electronic components in the UK to meet production demand and have approached your company. The young entrepreneurs agree with the Crocodile that they need to source their supplies from the UK as they require quick production in keeping with the changing fashion trends and the demand for cutting edge technology. Hence the excitement of your sales director. You have obtained a copy of Chargebag Ltd s latest financial statements, dated 31 December, and are considering the following: 1. Explain to the sales director who has limited accounting knowledge: a) The relevance of any independent audit report on published financial statements to a credit manager. You should include both its advantages and disadvantages. (10 marks) b) The significance of the specific audit opinion in the audit report of Chargebag Ltd in supporting your case for a reduced credit limit. (10 marks) Total 20 marks June FIA/PQP/4 continued

5 This answer should include points made in the guidebook and textbook. It is an opportunity for the candidate to demonstrate what they have learnt about audit, and so any reasonable comment will be given marks. The answer must contain the following for 6 marks: An audit is an Independent examination of evidence from which the financial statements are derived, in order to give an opinion as to whether they show a true and fair view An unqualified audit report indicates that the auditor s opinion is that the financial statements show a true and fair view, If the auditors disagree with any of the directors judgments or if they haven t been able to obtain sufficient evidence for their opinion, they will qualify their report. The remaining four marks could come from any of the examples below: The audit report should make the information in the financial statements more reliable and comparable for decision making purposes because the auditor has access to all the company s records and any explanation they require in order to support their opinion The financial statements are the income statement, balance sheet and notes, but also include some other items by exception, e.g. that the director s report is consistent with the accounts and that the financial statements agree with the underlying records. Additionally if they come across a matter that is crucial to an understanding of the financial statements they will modify their report to highlight the matter. This is useful to the credit manager as it identifies the potential risk of trading with such companies. Indeed the auditor has no duty of care in law to any user of the statements apart from the shareholders. Therefore if the credit manager relies on these statements and the auditor is proved negligent there is no redress for them. Audit evidence is sample based, the auditor does not look at all the records Audit report confirms that the accounting policies applied are consistent with accounting standards. b) The answer must contain the following: The auditor has issued a qualified report. It is qualified due to a material limitation in scope. The auditor has been limited in the scope of their audit. They have not been able to access the information that would have enabled them to give an opinion on whether the warranty provision is true and fair. June FIA/PQP/5 continued

6 The remaining four marks could come from any of the examples below By qualifying their opinion rather than giving an DISCLAIMER opinion (i.e. unable to form an opinion) the auditors are advising users of the financial statements, that apart from this one issue that affects liabilities, the financial statements do show a true and fair view. The auditor gives information about the qualification in the Basis of Opinion paragraph, which enables the user of the statements to consider the potential effect of the issue on the financial statements. In this case, the creation of a liability would reduce profits and also reduce net assets in the Balance Sheet. It may also have future cashflow implications. Confirms that the accounts have been prepared according to Companies Act and accounting standards. Candidates can expect to be examined on the significance of at least one of the six examinable forms of Audit Report. Well-prepared candidates should have no problems with this type of question because it is predictable. In this particular examination, students were expected to understand that auditors had issued a qualified report. They had qualified it because of a material limitation in scope. Often candidates will recognise the limitation in scope or disagreement but lose marks by failing to comment on the relative severity of the qualification. In this case candidates were expected to explain that the limitation only affected one figure in the Balance Sheet, not the whole statement. June FIA/PQP/6 continued

7 2. a) Calculate the liquidity ratios and the three elements of the working capital cycle for the two years. (10 marks) b) Compare and comment, in the light of the figures you have calculated whether or not the granting of credit is viable. (10 marks) Total 20 marks Suggested answer Current Ratio Acid Test Stock Days Debtor Days Creditor Days Candidates appear to have little difficulty in calculating ratios correctly and achieved a high mark in this question. Ratios have no meaning unless and until they are compared. Therefore the interpretation of the ratios will always attract equal if not more marks than calculation, with highest marks gained by those who place their analysis within the context of the credit decision. For example, in this question the working capital cycle has fallen because the company has increased the use of supplier credit to fund its operations, which poses an increased liquidity risk for creditors. June FIA/PQP/7 continued

8 3. It is understood that in August 2013, the well known business entrepreneur (Crocodile) hopes to invest 120,000 in shares and provide an additional loan of 500,000. a) Assuming the balance sheet as at 31 December 2012 will continue to remain the same until the investment and loan is provided in August 2013, calculate the gearing. (16 marks) b) Discuss the medium to long-term risks that you see in the environment in which Chargebag Ltd operates. (4 marks) Suggested answer Total 20 marks Gearing After shares of 120k and loan of 500k % 88% 89% Relating to the environment This is an opportunity for the students to apply their learning in a well-argued manner exploring all the pros and cons of the trade of Chargebag Ltd. Comments such as the viability of high tech fashion items with short life-cycles, the threats of imitation, the problems and the uncertainties created by the Euro crisis, the continuing economic doldrums and other PESTEL matters as described in the manual should be applied appropriately. Final Reasoned Opinion For stating that gearing is a measure of risk and that there has been an improvement in gearing from 2011 to 2012 and although there is a marginal improvement in gearing after the investment it is still quite serious. The better students, however, will also comment on the guidance and the advice that would be available from the Crocodile and may seek a personal guarantee from him. Mention should be made that gearing is a measure of risk and that the level of risk is unacceptable. The better students, however, will also comment on the guidance and the advice that would be available from the Crocodile and may seek a personal guarantee from him. As in question 2, the ratios required in this question were correctly calculated and those candidates placing their analysis within the credit decision context gained higher marks. The ICM manual on the topic gives an extensive number of tools, with helpful mnemonics, which, when applied correctly, addresses almost all the requirements of the answer to this question. June FIA/PQP/8 continued

9 Candidates should be aware that Financial Analysis is not a subject that exists in a vacuum. It is a vibrant and interactive subject. Candidates who will excel in this subject will be aware of the constantly changing environment within which this subject exists and will give reasoned arguments and opinions to attract higher marks. One candidate gained very high marks in this question for this reason. Candidates should note that in future this type of question will require more written analysis for the marks allocated. June FIA/PQP/9 continued

10 4. The company has made a profit in the year 31 December 2012, yet has generated a cash outflow of 89,813. a) Explain, using both facts and figures, how Chargebag Ltd has made a profit yet has suffered a significant negative cash outflow. What significance does this have for the credit decision? (10 marks) b) Evaluate the usefulness of the cash flow statement in supporting your case for reducing the credit limit of this new customer. (6 marks) c) What effect might the issue highlighted in the audit opinion have on both the company s future profit and on its cash flow? (4 marks) Suggested answer Total 20 marks a) The cashflow note provides a link between profit in the Income statement and the cashflow from operating activities. As can be seen from the note below, the trading which resulted in an operating profit of 135,773 has also resulted in a positive cash INFLOW of 156,373. The lower profit figure is a result of depreciation charges and an increase in creditors, being greater than the increase in stock and debtors. That is, although the company is using cash to buy more stock and extend credit terms to its customers, it is extending its own credit terms with suppliers to fund this, so cashflow is largely unaffected by working capital management. The amount of cash used to pay the company s interest commitments, 50,357, is more than covered by the cash generated from operations, leaving 106,016, net cash inflow. 2 marks The company has spent 595,829 on new assets a clear sign of rapid growth. These purchases have been financed by: An increase in long term loan of 400,000 The net cash inflow of 106,016 from trading after paying interest on loans An increase on the overdraft of 89, 813. What significance does this have for the credit decision? This rapid growth using a large amount of short-term finance, i.e. trade creditors, and overdraft, has potential solvency issues for this company because: The bank may refuse to extend/maintain the overdraft. Suppliers may start to reduce terms or demand cash on delivery. Although the company is generating cash from trading, which is a good sign for potential suppliers, the use of that cash to fund asset purchases rather than pay suppliers may indicate that payment may be at risk. June FIA/PQP/10 continued

11 b) The information is reliable: Isn t subject to accounting policies or estimation It is audited. The information is comparable with other companies as it is subject to accounting standards governing its format and the definition of cash. The information is relevant as it gives the credit manager an indication of how the company generates and uses its cash, e.g. in Chargebags case the company generates cash from operating because it uses suppliers credit to fund the credit offered to its customers. This leaves cash available for funding new fixed asset purchases. However the information is reduced in relevance due to the length of time it takes to be published (6 to 9 months). The company s liquidity may be much worse once the accounts are published. c) If claims are made under the warranty and bags are replaced, without a provision, future profits will be lowered by the cost of replacements. Future cash flows would also be affected as revenue would be reduced relative to costs of production. Bad publicity if claims are handled incorrectly could tarnish the brand and reduce future revenue. If the number of claims becomes a threat to the future of the company then the shareholders could liquidate the company, setting up a new one without the liabilities. A question on cashflow statements should be expected by all cohorts. As stated in the guide you will not be expected to prepare a cashflow statement but you will be expected to demonstrate an understanding of how it analyses the difference between net cashflow and profit. In this particular question candidates demonstrated a good understanding of how increases and decreases in working capital impact cash flows. The key point here however was that it was not working capital that had affected cashflow it was the purchase of new long term assets. Candidates appear prepared for questions on the advantages and limitations of the cashflow statement, but achieved fewer marks when asked to explain the possible impact of the warranty on future cash flows. This aspect of the question is designed to stretch the more able and better-prepared candidates. June FIA/PQP/11 continued

12 5. Using the whole annual report of Chargebag Ltd as illustration: a) Evaluate which types of information in a company s annual report are the most useful for informing credit decisions. (12 marks) Note: Your answers must give a reasoned explanation and be illustrated using examples from the annual report of Chargebag. b) What information, currently absent from annual reports, would have been useful to aid your decision on the appropriate level of credit to offer Chargebag Ltd? (8 marks) Suggested answer Total 20 marks This question is a chance for the candidate to apply their knowledge to a work place situation. Again, there is no definitive answer and any well-reasoned, factually correct answer will gain marks. There are 2 marks available for each reasoned opinion and 2 marks for each example given from the annual report of Chargebag Ltd. Examples: Balance sheet gives information about a company s assets and liabilities, showing the credit manager the level of liquidity a company has. Example from Chargebag Cashflow statement gives the credit manager more objective information that is not subject to estimation or adjustment for accounting policies/standards. Example from Chargebag. Income statement gives the credit manager information on the company s turnover and margins, enabling an assessment of long term viability to be made. Example from Chargebag. Directors Report gives reliable information reviewed by the auditor that is relevant to the credit decision such as: Resignation of directors may indicate severe problems in the company; gives creditor days, i.e. length of time taken to pay creditors. Example from Chargebag. June FIA/PQP/12 continued

13 Audit opinion gives the credit manager information as to the reliability of some of the information in the annual report. Example from Chargebag. b) Is expected to vary from candidate to candidate, but examples of what could be written are: Financial forecasts Information on future orders New product offerings for the future Details of any legal commitments made, e.g. delivery numbers, and any potential penalties if not met Any reasonable comment will be given marks. This question was designed to allow candidates to demonstrate those skills acquired as a credit practitioner. There is flexibility within the marking scheme to award marks for wellevidenced opinion, however the key phrase is well evidenced. Candidates MUST qualify any opinions &/ analysis with evidence from the case study given. The better the use of the case study the higher the mark achieved by candidates in part a. Part b) tested the ability of candidates to problem solve rather than repeat knowledge and in this particular cohort this was well done. ---ooo--- Institute of Credit Management

14 Chargebag Ltd. Directors' Report and Financial Statements for the year ended 31 December 2012 Registered in England Registered Number

15 Chargebag Ltd. Directors' report and financial statements 31 December 2012 Directors report The directors present their directors report and financial statements for the year ended 31 December Principal activities The principal activities of the company during the year was the manufacture and sale of hand bags with a recharging unit for mobile electronic equipment. This year the manufacturing was done within the company. Business Review The company experienced a rapid growth after exposure from a TV programme Objectives of the Company The Company's main objective is to expand with the help of a well-known entrepreneur. Strategy The key areas that the company has focused on are: Performance To expand the market To improve the efficiency of the new production unit. To introduce a new branded range for men To reduce the overhead cost base. The gross margins of the company continued to be encouraging reflecting the fact that the product is innovative. The patent has been registered and therefore competition has been curtailed in the UK. There are, however, risks emanating from foreign production infringing the intellectual property rights of the Company. The Company needs to continue its Research and Development efforts to innovate additional products in keeping with the market that it serves. The company uses a number of financial key performance indicators ( KPIs ) to measure its performance. The principal KPIs used are measuring the time taken for production and the number of complaints due to lack of quality. These analyses are used on a daily and weekly basis. Warehouse labour and transport costs are monitored on a weekly basis. Extensive collaboration is being carried out to obtain feedback from the retailers of the handbags. Page 2 of 15

16 Risks and uncertainties The company is operating in the cutting edge of technology. The quality of the former manufacturing source was unsatisfactory in terms of the time taken to manufacture and in terms of the equality of the product. Therefore manufacturing is now dome in-house. This can cause additional risks as compared with last year due to the new operation. The Directors regularly carry out risk portfolio analyses and take every possible effort to minimise risk. Employees The company recognises its social and statutory duty to employ disabled persons and considers such persons for employment where the requirements for the job are such that they can be effectively and safely covered by a handicapped or disabled person. The directors have always recognised the importance of good communications and have continued to communicate with staff through regular newsletters, which allow information to be shared with all employees. Dividends The directors do not recommend the payment of a dividend (2011 nil) Directors The directors who held office during the year were as follows: Donald Gales Mary Stuart Mike Stevens Political and charitable contributions Neither the Company nor its subsidiary made any political or charitable donations or incurred any political expenditure during the year or previous year. Statement of directors responsibilities in respect of the Directors Report and the financial statements. The directors are responsible for preparing the Directors Report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law they have elected to prepare the company's financial statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice). The company's financial statements are required by law to give a true and fair view of the state of affairs of the company and of the profit or loss for that period. In preparing these financial statements, the directors are required to: Page 3 of 15

17 Select suitable accounting policies and then apply them consistently, Make judgments and estimates that are reasonable and prudent, Make judgments and estimates that are reasonable and prudent, State whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements, Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of company and enable them to ensure that its financial statements comply with the Companies Act They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the company and to prevent and detect fraud and other irregularities. Disclosure of information to auditors The directors who held office at the date of approval of this directors report confirm that, so far as they are each aware, there is no relevant audit information of which the Company s auditors are unaware, and each director has taken all the steps that he ought to have taken as a director to make himself aware of any relevant audit information and to establish that the Company s auditors are aware of that information. Auditors A resolution for the re-appointment of CHECKIT LLP as auditors of the company is to be proposed at the forthcoming Annual General Meeting. By order of the Board Mary Stuart 52 Spider's Lane Director Sunderton 7 April 2013 Wessex W45 1QR Page 4 of 15

18 Independent auditors report to the members of Chargebag Ltd. We have audited the group and parent company financial statements (the financial statements ) of Chargebag Ltd. for the year ended 31 December 2012, which comprise the Profit and Loss Account, the Company Balance Sheet, the Cash Flow Statement, the Reconciliation of Movements in Shareholders Funds and the related notes. These financial statements have been prepared under the accounting policies set therein. This report is made solely to the company s members, as a body, in accordance with Chapter 3 of part16 of the Companies Act Our audit work has been undertaken so that we might state to the company s members those matters we are required to state to them in an auditor s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company s members as a body, for our audit work, for this report, or for the opinions we have formed Respective responsibilities of directors and auditors The directors responsibilities for preparing the financial statements in accordance with applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice) are set out in the Director s Report on page. Our responsibility is to express an opinion on the financial statements in accordance with relevant legal and regulator requirements and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board s Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of whether the accounting policies are appropriate to the company s circumstances and have been consistently applied and adequately disclosed, the reasonableness of significant accounting estimates made by directors, and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the published statements to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report Basis for a qualified opinion on the financial statements Early sales of the company's innovative product contained a guarantee of 5 years. When the directors realised the product was unlikely to have a useful life beyond 2 years the guarentee was amended. Unfortunately the company didn't keep adequate records over early sales and it has been impossible to estimate the provision that might be required to cover the cost of claims against the guarantee. Had records been kept this provision would likely have reduced profits and increased liabilities. Page 5 of 15

19 Opinion on the financial statements In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements: give a true and fair view of the state of the company s affairs as at 31 December 2012 and of its profit for the year then ended give a true and fair view of the state of the company s affairs as at 31 December 2012 and of its profit for the year then ended have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice, and have been properly prepared in accordance with the requirements of the Companies Act 2006, Opinion on other matters prescribed by the Companies Act 2006 In our opinion the information given in the director s report for the financial year for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception In respect solely of the limitation on our work relating to the assessment of a possible warranty provision in the financial statements, described above, we have not obtained all the information and explanations that we considered necessary for the purpose of our audit. We have nothing to report in respect of the following matters where the companies Act 2006 requires us to report to you if, in our opinion adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us, or the financial statements are not in agreement with the accounting records and returns, or certain disclosures of directors remuneration specified by law are not made, or we have not received all the information and explanations we require for our audit CHECKIT LLP Chartered Accountants Registered Auditor 21 April 2013 Page 6 of 15

20 Chargebag Ltd. Directors' report and financial statements 31 December 2012 Profit and Loss Account for the year ended 31 December 2012 Note Turnover 3 1,503, ,296 Cost of sales (785,452) (352,222) Gross profit 717, ,074 Administrative expenses 582, ,556 Operating Profit 135,773 40,518 Interest payable and similar charges 6 (50,357) (30,555) Profit on ordinary activities before taxation 3 to 5 85,416 9,963 Taxation 9 15,083 1,950 Profit for the financial year 70,333 11,913 The company had no gains or losses other than the result for the year which arises entirely from continuing operations. Page 7 of 15

21 Chargebag Ltd. Directors' report and financial statements 31 December 2012 Balance Sheet at 31 December 2012 Note Fixed assets Tangible assets 8 1,126, ,446 Current assets Stocks 9 95,295 37,195 Debtors ,562 70, , ,451 Creditors amounts falling due within one year 11 (301,795) (41,035) Net currents assets/(liabilities) 16,062 66,416 Total assets less current liabilities 1,142, ,862 Long-Term Liabilities Bank Loan 12 1,000, ,000 Net assets 142,195 71,862 Capital reserves Called up share capital , ,000 Profit and loss account 14 22,195 (48,138) Shareholder's funds 142,195 71,862 These financial statements were approved by the board of directors on 31 March 2013 and were signed on its behalf by: M I Stuart Director Page 8 of 15

22 Chargebag Ltd. Directors' report and financial statements 31 December 2012 Cash Flow Statement for the year ended 31 December 2012 Cash Flow Statement Note Cash flow from operating activities ,373 13,255 Returns on investments and servicing of finance 16 (50,357) (30,555) Taxation Capital expenditure and financial investments 16 (595,829) (323,069) Financing- new loan finance 400, ,000 Increase/(Decrease) in cash in the year (89,813) 59,631 Page 9 of 15

23 Chargebag Ltd. Directors' report and financial statements 31 December 2012 Reconciliation of Movements in Shareholder's Funds for the year ended 31 December Profit for the year 70,333 11,913 Opening shareholder's funds 71,862 59,949 Closing shareholder's funds 142,195 71,862 Page 10 of 15

24 Chargebag Ltd. Directors' report and financial statements 31 December 2012 Notes forming part of the financial statements 1. Accounting Policies The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the financial statements. The financial statements are prepared on a going concern basis which the directors believe to be appropriate for the following reasons. For short periods of the year the comany meets its day to day working capital requirements through an overdraft facility which is payable on demand. The nature of the comapny's business is such that there can be unpredictable variations in the timing of cash inflows. The directors have prepared projected cash flow information for the period ending 12 months from the date of their approval of these financial statements which assumes some additional support for working capital funding. They believe that the company will achieve its cash flow forecasts and therefore continue to operate within the current facility and any future possible funding. However, as with all forecasts, there can be no certainty that the cash flow forecasts will be achieved and the margin of any possible future funding requirement is dependent on growth in activity. Further, although the directors have verbally agreed a funding agreement with a well-known entrepreneur in a TV programme there are still conditions to be met such as carrying out all production within the UK. There can be no certainty that the bank will grant a facility in 2013, or that the well-known entrepreneur will provide additional funds required for significant growth. However the Directors have the option of curtailing growth if proper funding is not obtainable. The directors feel that the working capital requirements are, therefore, within their full control and do not believe that there is an uncontrollable threat to the going concern concept. Tangible fixed assets and depreciation Depreciation is provided on a reducing balance method using the following percentages Plant and Machinery Fixtures, fittings and equipment - 25% 20% Stocks Stocks are stated at the lower of cost and net realisable value. Taxation The charge for taxation is based on the result for the year and takes into account taxation deferred because of timing differences between the treatment of certain items for taxation and accounting purposes. Deferred taxation is recognised, without discounting, in respect of all timing differences between the treatment of certain items for taxation and accounting purposes which have arisen but not reversed by the balance sheet date, except as otherwise required by FRS 19. Turnover Turnover represents the amounts (excluding value added tax) derived from the provision of goods and services to third-party customers. Turnover is recognised at the point of sale to customers. Cash, for the purpose of the cash flow statement, comprises cash in hand and deposits repayable on demand, less overdraft payable on demand. Dividends on shares presented within shareholders funds Dividends unpaid at the balance sheet are only recognised as a liability at that date to the extent that they are appropriately authorised and are no longer at the discretion of the Company. Unpaid dividends that do not meet these criteria are disclosed in the notes to the financial statements. 2. Turnover Turnover is wholly derived from the company's principal activities and arises in the UK. Page 11 of 15

25 Chargebag Ltd. Directors' report and financial statements 31 December Notes to the profit and loss account Profit on ordinary activities before taxation is stated after charging Depreciation and other amounts written off tangible fixed assets - Owned 75,142 1, Auditor's remuneration Audit 9,500 6,000 Other Services - Taxation 2, Remuneration of directors Directors' emoluments 162, , , ,251 There were no directors who were paid more than 60,000 for the year. 5. Staff numbers and costs The average number of persons employed by Company (including directors) during the year, analysed by category, was as follows: Number of employees Production 21 9 Sales and distribution 7 4 Administration The aggregate payroll costs of these persons were as follows: Wages and salaries 265, ,110 Social security costs 36,991 17,555 Other pension costs (note 19) - 302, , Interest payable and similar charges Bank overdraft 10,357 5,555 Bank Loan Interest 40,000 25,000 50,357 30,555 Page 12 of 15

26 Chargebag Ltd. Directors' report and financial statements 31 December Taxation Analysis of charge in period UK Corporation Tax Current tax on income for the period 15,083 2,010 Adjustments in respect of prior periods (3,960) Total current tax 15,083 (1,950) Deferred tax (note 15) - current year - - Deferred tax (note 15) - prior years - - Tax loss on ordinary activities 15,083 (1,950) 8. Tangible fixed assets Plant & Machinery Fixtures, fittings and equipment Total Cost At beginning of year 890,938 58, ,620 Additions 573,283 22, ,829 Disposals - - At end of year 1,464,221 81,228 1,545,449 Depreciation At beginning of year 334,029 10, ,174 Charge for year 70,976 4,166 75,142 On disposals - - At end of year 405,005 14, ,316 Net book value At 31 December ,059,216 66,917 1,126,133 At 31 December ,909 48, , Stocks Company Raw Materials 35,556 25,347 Work-in-Progress 5,225 4,653 Finished Goods 54,514 7,195 95,295 37, Debtors Company Trade debtors 208,180 65,160 Other debtors-corporation tax 1,950 Prepayments 14,382 3, ,562 70,256 Page 13 of 15

27 Chargebag Ltd. Directors' report and financial statements 31 December Creditors: amounts falling due within one year Company Trade creditors 158,539 13,502 Corporation tax 13,133 Other taxes and social security 22,993 12,051 Accruals 7,005 5,170 Bank overdraft 100,125 10, ,795 41, Long Term Liabilities ,000, ,000 During 2012 the Company obtained a loan to finance the working capital requirements of its rapid growth. The loan is secured against the assets owned by the parents of the Directors. The loan is repayable at the end of five years. Interest of 5% over the base rate of Barclays Bank plc is payable. The creditors also have the right to convert the loan into ordinary shares if the strict conditions attached to the loan are not observed. It is also a condition that no further shares can be issued without the unanimous consent of the creditors. 13. Called up share capital Authorised 1,000,000 Ordinary shares of 1 each 1,000,000 1,000,000 Allotted, called up and fully paid 120,000 Ordinary shared of 1 each 120, , Reserves Profit and loss account At beginning of year (48,138) Profit for the year 70,333 At end of year 22, Reconciliation of operating profit to operating cash flows Operating profit 135,773 40,518 Depreciation and impairment charges 75,142 53,025 Decrease/(increase) in stocks (58,100) (25,122) (Increase)/decrease in debtors (154,256) (100,563) Increase/(decrease) in creditors 157,814 45,367 Net cash inflow from operating activities 156,373 13,225 Page 14 of 15

28 Chargebag Ltd. Directors' report and financial statements 31 December Analysis of cash flows Returns on investment and servicing of finance Interest received Interest paid 50,357 30,555 50,357 30,555 Capital expenditure and financial investment Purchase of tangible fixed assets (595,829) (323,069) Sale of tangible fixed assets - - (595,829) (323,069) 17. Analysis of net funds At beginning of year Cash flow At end of year Cash at bank, and in hand (10,312) (89,813) (100,125) Page 15 of 15