Financial Analysis Question Paper, Answers and Examiners ... · It was obvious from answers given...

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9FIA/PQP/1

Financial Analysis

Question Paper, Answers and

Examiners Comments

Level 5 Diploma June 2013

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9FIA/PQP/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: 01780 722901. Education Tel: 01780 722909

Switchboard Tel: 01780 722900. Fax: 01780 721333

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9FIA/PQP/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.

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9FIA/PQP/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

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9FIA/PQP/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.

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9FIA/PQP/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.

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9FIA/PQP/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

2012 2011

Current Ratio 1.05 2.62

Acid Test 0.74 1.71

Stock Days 44 39

Debtor Days 54 32

Creditor Days 140 43

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.

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9FIA/PQP/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)

Total 20 marks Suggested answer

Gearing

After shares of

£120k and loan

of £500k

2010 2010

85% 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.

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9FIA/PQP/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.

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9FIA/PQP/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)

Total 20 marks

Suggested answer

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.

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9FIA/PQP/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.

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9FIA/PQP/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)

Total 20 marks

Suggested answer

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.


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.


© Institute of Credit Management

Audit opinion gives the credit manager information as to the reliability of some of the

information in the annual report.


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 well-

evidenced 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---

Chargebag Ltd.

Directors' Report and Financial Statements

for the year ended 31 December 2012

Registered in England

Registered Number 9999999

Principal activities

Strategy

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.

· To improve the efficiency of the new production unit.

· To introduce a new branded range for men

· To reduce the overhead cost base.

Performance

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.

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.

The key areas that the company has focused on are:

· To expand the market

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 2012.

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.

Page 2 of 15

Mary Stuart

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:

The directors who held office during the year were as follows:

Donald Gales

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.

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

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.

Page 3 of 15

Disclosure of information to auditors

Auditors

Mary Stuart

Director Sunderton

7 April 2013 Wessex W45 1QR

52 Spider's Lane

By order of the Board

· 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 2006. 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.

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.

A resolution for the re-appointment of CHECKIT LLP as auditors of the company is to be

proposed at the forthcoming Annual General Meeting.

· Select suitable accounting policies and then apply them consistently,

· Make judgments and estimates that are reasonable and prudent,

Page 4 of 15

Respective responsibilities of directors and auditors

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.

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 2006. 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

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

Page 5 of 15

CHECKIT LLP

Registered Auditor 21 April 2013

In our opinion, except for the possible effects of the matter described in the Basis for

Qualified Opinion paragraph, the financial statements:

· adequate accounting records have not been kept, or returns adequate for

our audit have not been received from branches not visited by us, or

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

· 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

Chartered Accountants

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.

Opinion on 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,

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.

Matters on which we are required to report by exception

Opinion on other matters prescribed by the Companies Act 2006

Page 6 of 15


Note 2012 2011

Turnover 3 1,503,225 795,296

Cost of sales (785,452) (352,222)

Gross profit 717,773 443,074

Administrative expenses 582,000 402,556

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


Chargebag Ltd.

31 December 2012

Profit and Loss Account

The company had no gains or losses other than the result for the year which arises entirely from continuing

operations.

Page 7 of 15

Note

Fixed assets

Tangible assets 8 1,126,133 605,446

Current assets

Stocks 9 95,295 37,195

Debtors 10 222,562 70,256

317,857 107,451

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 1,142,195 671,862

Long-Term Liabilities

Bank Loan 12 1,000,000 600,000

Net assets 142,195 71,862

Capital reserves

Called up share capital 13 120,000 120,000

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

Chargebag Ltd.


31 December 2012

Balance Sheet

at 31 December 2012

2012 2011

Page 8 of 15

Note 2012 2011

£000 £000

Cash Flow Statement

Cash flow from operating activities 15 156,373 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 400,000 400,000

Increase/(Decrease) in cash in the year (89,813) 59,631


Chargebag Ltd.

31 December 2012

Cash Flow Statement


Page 9 of 15

Reconciliation of Movements in Shareholder's Funds


2012 2011

£000 £000

Profit for the year 70,333 11,913

Opening shareholder's funds 71,862 59,949

Closing shareholder's funds 142,195 71,862

Chargebag Ltd.


31 December 2012

Page 10 of 15

Notes

forming part of the financial statements

1. Accounting Policies

Tangible fixed assets and depreciation

Plant and Machinery

Fixtures, fittings and equipment -

Stocks

Taxation

Turnover

Dividends on shares presented within shareholders’ funds

2. Turnover

Turnover is wholly derived from the company's principal activities and arises in the UK.

Chargebag Ltd.

31 December 2012

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.


Depreciation is provided on a reducing balance method using the following percentages

25%

20%

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 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 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.

Stocks are stated at the lower of cost and net realisable value.

Page 11 of 15

Chargebag Ltd.

31 December 2012


3. Notes to the profit and loss account

2012 2011

£ £

Profit on ordinary activities before taxation is stated after charging

Depreciation and other amounts written off tangible fixed assets - Owned 75,142 1,701

2012 2011

Auditor's remuneration £ £

Audit 9,500 6,000

Other Services - Taxation 2,120

4. Remuneration of directors 2012 2011

£ £

Directors' emoluments 162,512 103,251

162,512 103,251

5. Staff numbers and costs

2012 2011

Production 21 9

Sales and distribution 7 4

Administration 5 4

33 17

The aggregate payroll costs of these persons were as follows:

2012 2011

£ £

Wages and salaries 265,436 180,110

Social security costs 36,991 17,555

Other pension costs (note 19) -

302,427 197,665

6. Interest payable and similar charges 2012 2011

£ £

Bank overdraft 10,357 5,555

Bank Loan Interest 40,000 25,000

50,357 30,555

There were no directors who were paid more than £60,000 for the year.

The average number of persons employed by Company (including directors) during the year, analysed by category, was as follows:

Number of employees

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Chargebag Ltd.

31 December 2012


7. Taxation 2012 2011

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 58,682 949,620

Additions 573,283 22,546 595,829

Disposals - -

At end of year 1,464,221 81,228 1,545,449

Depreciation

At beginning of year 334,029 10,145 344,174

Charge for year 70,976 4,166 75,142

On disposals - -

At end of year 405,005 14,311 419,316

Net book value

At 31 December 2012 1,059,216 66,917 1,126,133

At 31 December 2011 556,909 48,537 605,446

9. Stocks

2012 2011

£ £

Raw Materials 35,556 25,347

Work-in-Progress 5,225 4,653

Finished Goods 54,514 7,195

95,295 37,195

10. Debtors

2012 2011

£ £

Trade debtors 208,180 65,160

Other debtors-corporation tax 1,950

Prepayments 14,382 3,146

222,562 70,256

Company

Company

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Chargebag Ltd.

31 December 2012


11. Creditors: amounts falling due within one year

2012 2011

£ £

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 10,312

301,795 41,035

12. Long Term Liabilities

2012 2011

£ £

1,000,000 400,000

13. Called up share capital

2012 2011

£ £

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 120,000 120,000

14. Reserves

Profit and loss

account

£

At beginning of year (48,138)

Profit for the year 70,333

At end of year 22,195

15. Reconciliation of operating profit to operating cash flows 2012 2011

£ £

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

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.

Company

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Chargebag Ltd.

31 December 2012


16. 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)

2012 2011

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