6ea69ba1a0bd7f6fb72976eefb2d4afc

The Institute of Chartered Accountants in England and Wales
CASE STUDY
Advanced Stage
For exams in 2013
Study Manual
www.icaew.com
Case Study
The Institute of Chartered Accountants in England and Wales Advanced Stage
ISBN: 978-0-85760-489-7
Previous ISBN: 978-0-85760-259-6
First edition 2009

Fourth edition 2012
All rights reserved. No part of this publication may be reproduced or
transmitted in any form or by any means or stored in any retrieval system,
electronic, mechanical, photocopying, recording or otherwise without prior
permission of the publisher.
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
We would like to thank
Sam Binks
Harvey Freeman
Neil Russell
for their assistance in the preparation of the Case Study Learning Materials
Printed in the United Kingdom by Polestar Wheatons
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Hennock Road
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Your learning materials are printed on paper obtained from traceable,

sustainable sources.
The Institute of Chartered Accountants in England and Wales
Welcome to ICAEW
I am delighted to welcome you as a student studying our chartered accountancy qualification, the
ACA.
The ACA will open doors to a highly rewarding career as a financial expert or business leader. Once
you are an ICAEW member, you will join over 138,000 others around the world who work at the
highest levels across all industry sectors, providing valuable financial and business advice. Some of
our earlier members formed todays global Big Four firms, and you can find an ICAEW Chartered
Accountant on the boards of 80% of the UK FTSE 100 companies.
We are here to help you every step of the way. As part of a worldwide network of over 19,000
students, you will have access to a range of resources including the online student community,
where you can interact with fellow students, and our student support team. Take a look at the key
resources on page xv.
I wish you the very best of luck with your studies and look forward to supporting you throughout
your career.
Michael Izza
Chief Executive
ICAEW
iii
iv
Contents
Introduction
vii
Case Study
ix
Key Resources
xv
Faculties and Special Interest Groups
xvi
ICAEW publications for further reading
xvi
1.
Introduction to the Case Study
2.
Financial analysis skills
21
3.
Ethics
81
4.
Introduction to Elite Case Study
99
5.
Elite Cars Case Study
127
6.
Elite exam paper
159
7.
Debrief of Elite Case Study
167
vi
1 Introduction
1.1
What is the Case Study and how does it fit within the
Advanced Stage?
Structure
The syllabus has been designed to develop core technical, commercial, and ethical skills and knowledge
in a structured and rigorous manner.
The diagram below shows the three modules at the Advanced Stage, which comprises two technical
integration modules and the Case Study, where the focus is on the acquisition of more sophisticated
technical skills and knowledge and their application in more complex scenarios.
The knowledge base

There is no new knowledge to be acquired for the Case Study. However, students will require a strong
core of knowledge of the subjects (Audit and Assurance, Business Analysis, Corporate Reporting, Ethics
and Taxation) that they have studied at Professional Stage and Technical Integration, and a good
understanding of how this knowledge should be applied in complex situations across different subjects.
Progression from Professional Stage and Technical Integration

The aim of the Case Study is to ensure students are able to apply analysis techniques, technical
knowledge and professional skills to resolve real-life issues faced by businesses.
The above illustrates how this paper is the final examination in the ACA qualification, linking the
knowledge and application of the five subjects to complex real world problems.
The table below illustrates how the assessment of professional skills progresses through the Professional
and Advanced Stages and how, within the Advanced Stage, the assessment in the Case Study differs
from that in the Technical Integration examinations.
Introduction
vii
1.2
viii
Skills progression through the ACA qualification
Case Study
2 Case Study
2.1
Overview
The overall aim of the Case Study module is to ensure that candidates can provide advice in respect of
complex business issues in the form of a written report.
The objective of the Case Study is to assess understanding of complex business issues and the ability to
analyse financial and non-financial data, exercise professional and ethical judgement, and develop
conclusions and recommendations. The limited class time available with a tutor, even when
supplemented by extensive home study, is insufficient for success in the Case Study. Students must
bring work experience into their preparation and development programme.
Success at the Case Study requires an integration of the technical knowledge and skills acquired from all
of the ACA modules, namely:
The core technical knowledge and skills and practical application acquired at the Professional
Stage;
The technical, analytical, evaluative and integration skills from the Business Change and Business
Reporting modules; and
The advisory, judgemental and communication skills acquired through practical work experience
undertaken during the training contract.
All areas of the syllabus may be tested over time.

The Case Study is designed to reproduce a typical situation in which chartered accountants find
themselves. This may involve information arising from meetings and communicated in memoranda,
letters or reports. The situation will generally involve a business plan or transaction and will involve
preparation for meetings and submission of reports. The transactions and plans may involve a variety of
business and professional advisors and stakeholders and meetings that they may attend.
The reality of such situations is that before any meeting you would:
Expect to receive some materials in advance

Carry out some work beforehand and refer to it during the meeting
Not know the questions that you will be asked in the meeting
Perform tasks as a result of the meeting
Be expected to discuss and advise on relevant matters
The Case Study scenario may be based on any one of a variety of different organisational structures or
operations. Students will be provided with advance information on the organisation and its business
environment ahead of the exam.
This information will not give specific indication of the eventual requirements of the Case Study.
Students will be expected to familiarise themselves with the information provided about the
organisation and the industry in which it operates, undertaking some additional analysis and research.
Students may take the results of their work into the examination room.
The Case Study will not require the detailed computations needed for the Professional Stage or
Technical Integration modules at the Advanced Stage, but students will be required to undertake
financial and business analysis.
Requirements will be open in that there will be no predetermined correct answers to the Case Study.
Introduction
ix
2.2
Professional skills
(a)
Cognitive, analytical and evaluative skills

1
Identification of business, technical and ethical issues
Application of technical knowledge to identified issues
Understanding of scenario and wider business issues
Understanding of the relevance of data and information based on learnt, experienced and
inferred knowledge
Selection of appropriate analytical tools
Analysis of requirements, situation and data
Assessment of quality of information
Candidates balanced judgement of priorities, strengths, weaknesses, opportunities and

threats
Consideration of other perspectives, including competitive reaction and internal reaction
10
Conclusions and recommendations based on evidence, implications, assumptions and

information generated
(b) Communication and articulation skills

1
2
3
4
5
2.3
Structure in presentation of data and written work

Integration and positioning of data within and alongside written work
Tact in presentation
Objectivity in presentation
Format and language
ACA Skills Development Grid
Case Study
2.4
The link to work experience

The work experience requirements for students provide a framework to develop appropriate work
experience, completion of which is essential in order to qualify for membership. Work experience is also
an essential component for examination preparation.
The work experience framework is built around five key areas:
Business awareness being aware of the internal and external issues and pressure for change facing
an organisation and assessing an organisations performance.
Technical and functional expertise applying syllabus learning outcomes and where appropriate,
further technical knowledge to real situations.
Ethics and professionalism recognising issues, using knowledge and experience to assess
implications, making confident decisions and recommendations.
Professional judgement making recommendations and adding value with appropriate, targeted
and relevant solutions.
Personal effectiveness developing, maintaining and exercising skills and personal attributes
necessary for the role and responsibilities.
The examinations embrace all of these skills.

The link between work experience and the examinations will be made explicit through input to the
work experience framework by the examiners.
This will help students see that their practical knowledge and skills gained in the workplace feed back
into the exam room and vice-versa.
The message is clear students should use the work experience framework and skills development grids
to ensure success in exam performance and success in their workplace performance.
2.5
Professional skills and the Case Study

Because there is no new technical knowledge for the Case Study, all the marks are awarded for the
demonstration of professional skills. The following pages set out a description of:
The specific skills that are assessed

How these skills are assessed
Introduction
xi
Case study: Skills and how they are assessed

Assessed skills
How skills are assessed
Assimilating and using information
Understanding the subject matter
Accessing, evaluating and managing data and

information provided in multiple sources
(some pre-disclosed) and from independent
research plans
Uses the Advance Information (AI), Exam

Paper (EP), knowledge of ethical codes and
professional experience to define the specific
issue / situation
Uses own understanding of context and

findings
Describes wider context
Identifies business issues
xii
Using technical knowledge and professional

experience to assess interaction of information
from different sources
Understanding an organisational framework:

evaluating the strengths and weaknesses of an
organisation and comparing with benchmarks
Planning, controlling and evaluating

operations in a global context
Understanding the needs of customers/clients

(internal and external)
Demonstrating an understanding of the

significance of ethics in the business
environment and the importance of ethical
behaviour
Using relevant content of the International

and ICAEW Codes of Ethics

regulatory structure of the profession, its
ethos, culture and role in corporate and social
responsibility
Case Study
Understanding of business entity

Understanding of position in industry
sector
Appreciation of wider economy
Recognises where business is in its life cycle
Assessed skills
Structuring problems & solutions
Using the information given: analysing and

evaluating requirements, information, issues
and business context
Analysing, evaluating and synthesising new
and complex ideas
Displaying an enquiring and questioning
mind
Identifying faults in arguments and gaps in

evidence

pressures on professional ethical behaviour,
including the interaction between professional
ethics, the law and other value systems
Identifies and uses key information
Demonstrates technical knowledge
Uses professional experience
Uses relevant strategic analytical tools (SWOT,

PESTEL, Porters 5 Forces)
Performs relevant analysis
Produces quality analysis
Uses knowledge of ethical codes and

professional experience to perform relevant
analysis
Financial data analysis:
Uses appropriate analytical tools (valuation

methodologies, sensitivity analysis)
Performs relevant analysis on
Depth
Breadth
Logic
Reasonableness
analysing and evaluating data by

selecting appropriate analytical and
technical tools and applying technical
knowledge and professional experience
demonstrating an understanding of
sensitivities to change: flexing a range of
inputs and evaluating potential
outcomes
Numerical data
Other information
Integrates numbers and words
evaluating, prioritising and trading off

solutions to complex problems,
considering various perspectives,
including those of competitors and
internal audiences
Financial statement analysis:
Uses appropriate analytical tools to measure

financial performance, identify trends and
make comparisons
Performs relevant analysis on
analysing and evaluating financial

statements by selecting appropriate
analytical and technical tools and
applying technical knowledge &
professional experience
linking all elements of financial
statements, evaluating & making
comparisons where there are complex
interactions
Financial statements
Other information
Integrates numbers and words
evaluating financial statements in the

context of other business information
Introduction
xiii
Assessed skills
Applying judgement
Using technical knowledge, & professional

experience and evidence to support reasoning
Builds on implications of analysis
Identifies and uses key financial information
Applying discrimination: filtering information

to identify key factors
Recognises linkages
Applying a sceptical and critical approach
Evaluates key points
Interpreting information from a range of

stances and developing arguments,
appreciating the perspective of other parties
Discusses output
Pros / cons
Demonstrates professional scepticism
Demonstrates objectivity / balance
Demonstrates an appreciation of more than

one side / bias
Seeking opportunities to add value
Evaluates options
Prioritising key issues
Prioritises key points
Applying the concept of materiality to

interrelated situations
Uses knowledge of ethical codes and

professional experience
Appreciating the ethical dimensions of

situations, exercising ethical judgement and
explaining the consequence of unethical
behaviour
Appreciating when more expert help is

required identifying linkages, inconsistencies,
ambiguities
Conducting critiques: considering alternative

views in testing the validity of ideas in practice
Considering and evaluating the effects of a

range of alternative future scenarios
Drawing conclusions and making

recommendations
xiv
Generating solutions for complex problems

using information from multiple sources
Draws conclusions linked to analysis and

judgement
Using technical knowledge, professional

experience, evidence and analysis to support
conclusions
Makes practical commercial

recommendations
Using valid and different technical skills to

formulate opinions, advice, plans, solutions,
options and reservations
Making decisions and recommendations in

unstructured situations in which risks and
uncertainty may exist
Specifying the criteria for the most

appropriate proposal
Assessing the costs and benefits that may flow

from a decision
Approaching decision making using an ethical

framework
Case Study
Assessed skills
Integrative and multidisciplinary skills
Time awareness: recognising time constraints

and prioritising given tasks
Provides appropriate terms of reference

(purpose, scope, disclaimer)
Preparing, describing, outlining the advice,

report, notes required in a clear and concise
style
Provides an executive summary that is

consistent with the main report
Relating parts and wholes: discerning

interrelated issues as part of complex
scenarios, employing a sense of perspective in
over-viewing situations
Demonstrates appropriate balance between

requirements
Uses sufficient but not excessive sub-divisions
Uses appropriate but not excessive use of

notes and bullets
Uses correct style and language for audience

with appropriate tact
Contains appropriate appendices
Providing a report to specialist or nonspecialist audience
calculations easy to follow

assumptions clearly set out
no excessive text
figures appropriately carried forward to
main report
Provides a coherent answer to the requirement

covers the major elements
suitable use of figures
figures clearly derived
flows logically
presents a structured discussion, not just a
list of facts
3 Key Resources
STUDENT SUPPORT TEAM
T +44 (0)1908 248 250
E studentsupport@icaew.com
STUDENT WEBSITE
icaew.com/students student homepage
icaew.com/exams exam applications, deadlines, regulations and more
icaew.com/cpl credit for prior learning/exemptions
icaew.com/examresources examiners comments, syllabus, past papers, study guides and more
icaew.com/examresults exam results
TUITION
If you are receiving structured tuition, make sure you know how and when you can contact your tutors
for extra help.
If you arent receiving structured tuition and are interested in classroom, online or distance learning
tuition, take a look at our tuition providers in your area on icaew.com/exams
ONLINE STUDENT COMMUNITY
The online student community allows you to ask questions, gain study and exam advice from fellow
ACA and CFAB students and access our free webinars. There are also regular Ask an Expert and Ask a
Introduction
xv
Tutor sessions to help you with key technical topics and exam papers. Access the community at
icaew.com/studentcommunity
THE LIBRARY & INFORMATION SERVICE (LIS)

The Library & Information service (LIS) is ICAEWs world-leading accountancy and business library. You
have access to a range of resources free of charge via the library website, including the catalogue,
LibCat. icaew.com/library
4 Faculties and Special Interest Groups

The faculties and special interest groups are specialist bodies within the ICAEW which offer members
networking opportunities, influence and recognition within clearly defined areas of technical expertise.
As well as providing accurate and timely technical analysis, they lead the way in many professional and
wider business issues through stimulating debate, shaping policy and encouraging good practice. Their
value is endorsed by over 40,000 members of ICAEW who currently belong to one or more of the seven
faculties:
Audit and Assurance

Corporate Finance
Finance and Management
Financial Reporting
Financial Services
Information Technology
Tax
The special interest groups provide practical support, information and representation for chartered
accountants working within a range of industry sectors, including:
Charity and Voluntary sector

Entertainment and Media
Farming and Rural Business
Forensic
Healthcare
Interim Management
Non-Executive Directors
Public Sector
Solicitors
Tourism and Hospitality
Valuation
Students can register free of charge for provisional membership of one special interest group and
receive a monthly complimentary e-newsletter from one faculty of your choice. To find out more and to
access a range of free resources, visit icaew.com/facultiesandsigs
5 ICAEW publications for further reading

ICAEW produces publications and guidance for its students and members on a variety of technical and
business topics. This list of publications has been prepared for students who wish to undertake further
reading in a particular subject area and is by no means exhaustive. You are not required to study these
publications for your exams. For a full list of publications, or to access any of the publications listed
below, visit the Technical Resources section of the ICAEW website at icaew.com
ICAEW no longer prints a Members Handbook. ICAEW regulations, standards and guidance are
available at icaew.com/regulations This area includes regulations and guidance relevant to the regulated
areas of audit, investment business and insolvency as well as materials that was previously in the
handbook.
The TECH and AUDIT series of technical releases are another source of guidance available to members
and students. Visit icaew.com/technicalreleases for the most up-to-date releases.
xvi
Case Study
Audit and Assurance Faculty icaew.com/aaf
Right First Time with the Clarified ISAs, ICAEW 2010, ISBN 978-0-85760-063-9
Clarified ISAs provide many opportunities for practitioners in terms of potential efficiencies, better
documentation, better reporting to clients, and enhanced audit quality overall.
This modular guide has been developed by ICAEWs ISA implementation sub-group to help
medium-sized and smaller firms implement the clarified ISAs and take advantage of these
opportunities. This modular guide is designed to give users the choice of either downloading the
publication in its entirety, or downloading specific modules on which they want to focus.
An international edition is also available.
Quality Control in the Audit Environment, ICAEW 2010, ISBN 0-497-80857-605-5

The publication identifies seven key areas for firms to consider. Illustrative policies and procedures
are provided for selected aspects of each key area, including some examples for sole practitioners.
The guide also includes an appendix with answers to a number of frequently asked questions on
the standard.
The Audit of Related Parties in Practice, ICAEW 2010, ISBN 978-1-84125-565-6

This practical guide to the audit of related party relationships and transactions is set in the context
of the significant change in approach that is required under the revised ISA and highlights the
importance of planning, the need to involve the entire audit team in this, to assign staff with the
appropriate level of experience to audit this area and upfront discussions with the client to identify
related parties.
Alternatives to Audit ICAEW, 2009, ISBN 978-1-84152-819-9

In August 2006, the ICAEW Audit and Assurance Faculty began a two-year consultation on a new
assurance services (the ICAEW Assurance Service), an alternative to audit based on the idea of
limited assurance introduced by the International Auditing and Assurance Standards Board (IAASB).
This report presents findings from the practical experience of providing the ICAEW Assurance
Service over the subsequent two years and views of users of financial information that help in
assessing the relevance of the service to their needs.
Companies Act 2006 Auditor related requirements and regulations third edition March
2012 ICAEW, 2012, ISBN 978-0-85760-442-2
This third edition of the guide provides a brief summary of the key sections in the Companies Act
2006 (the Act) which relate directly to the rights and duties of auditors. It covers the various types
of reports issued by auditors in accordance with the Act. It is designed to be a signposting tool for
practitioners and identifies the other pieces of guidance issued by ICAEW, APB, FRC, POB and
others to support implementation of the Act.
Auditing in a group context: practical considerations for auditors ICAEW, 2008, ISBN 978-184152-628-7
The guide describes special considerations for auditors at each stage of the group audit's cycle.
While no decisions have been taken on UK adoption of the IAASB's clarity ISAs, the publication also
covers matters in the IAASB's revised and redrafted 'ISA 600 Special Considerations - Audits of
Group Financial Statements (Including the Work of Component Auditors)'. The revised publication
contains suggestions for both group auditors and component auditors.
Corporate Finance Faculty icaew.com/corpfinfac
Private equity demystified an explanatory guide Second Edition, Financing Change Initiative,
ICAEW, March 2010, John Gilligan and Mike Wright
This guide summarises the findings of academic work on private equity transactions from around
the world. Hard copies of the abstract and full report are free and are also available by download
from icaew.com/thoughtleadership
Introduction
xvii
Best Practice Guidelines

The Corporate Finance Faculty publishes a series of guidelines on best-practice, regulatory trends
and technical issues. Authored by leading practitioners in corporate finance, they are succinct and
clear overviews of emerging issues in UK corporate finance. icaew.com/corpfinfac
Corporate Financier magazine, ISSN 1367-4544

The award-winning Corporate Financier magazine is published ten times a year for members,
stakeholders and key associates of ICAEWs Corporate Finance Faculty.
Aimed at professionals, investors and company directors involved in corporate finance, it covers a
wide range of emerging regulatory, commercial and professional development issues.
The magazine includes features, news, analysis and research, written by experts, experienced
editors and professional journalists.
In 2011, three major themes were introduced: Innovation & Corporate Finance; Financing
Entrepreneurship; and Deal Leadership.
Corporate governance icaew.com/corporategovernance
The UK Corporate Governance Code 2010

The UK Corporate Governance Code (formerly the Combined Code) sets out standards of good
practice in relation to board leadership and effectiveness, remuneration, accountability and
relations with shareholders. All companies with a Premium Listing of equity shares in the UK are
required under the Listing Rules to report on how they have applied the UK Corporate
Governance Code in their annual report and accounts.
The first version of the UK Corporate Governance Code was produced in 1992 by the Cadbury
Committee. In May 2010 the Financial Reporting Council issued a new edition of the Code
which applies to financial years beginning on or after 29 June 2010.
The UK Corporate Governance Code contains broad principles and more specific provisions.
Listed companies are required to report on how they have applied the main principles of the
Code, and either to confirm that they have complied with the Code's provisions or where they
have not to provide an explanation.
Internal Control: Revised Guidance on Internal Control for Directors on the Combined Code
(now the UK Corporate Governance Code)
Originally published in 1999, the Turnbull guidance was revised and updated in October 2005,
following a review by the Financial Reporting Council. The updated guidance applies to listed
companies for financial years beginning on or after 1 January 2006.
The FRC Guidance on Audit Committees (formerly known as The Smith Guidance)
First published by the Financial Reporting Council in January 2003, and most recently updated in
2010. It is intended to assist company boards when implementing the sections of the UK
Corporate Governance Code dealing with audit committees and to assist directors serving on audit
committees in carrying out their role. Companies are encouraged to use the 2010 edition of the
guidance with effect from 30 April 2011.
The UK Stewardship Code

The UK Stewardship Code was published in July 2010. It aims to enhance the quality of
engagement between institutional investors and companies to help improve long-term returns
to shareholders and the efficient exercise of governance responsibilities by setting out good
practice on engagement with investee companies to which the Financial Reporting Council
believes institutional investors should aspire.
A report summarising the actions being taken by the Financial Reporting Council and
explaining how the UK Stewardship Code is intended to operate was also published in July
2010.
xviii
Case Study
Corporate responsibility icaew.com/corporateresponsibility
Sustainable Business January 2009

The new thought leadership prospectus acts as a framework for the work that ICAEW do in
sustainability/corporate responsibility. It argues that any system that is sustainable needs accurate
and reliable information to help it learn and adapt, which is where the accounting profession plays
an important role. A downloadable pdf is available at icaew.com/sustainablebusiness
Environmental issues in annual financial statements ICAEW, May 2009, ISBN 978-1-84152-610-2
This report is a joint initiative with the Environment Agency. It is aimed at business accountants
who prepare, use or audit the financial statements in statutory annual reports and accounts, or
who advise or sit on the boards of the UK companies and public sector organisations. It offers
practical advice on measuring and disclosing environmental performance. A downloadable pdf is
available at icaew.com/sustainablebusiness
ESRC seminar series When worlds collide: contested paradigms of corporate responsibility
ICAEW, in conjunction with the British Academy of Management, won an Economic and Social
Research Council grant to run a seminar series which aims to bring academics and the business
community together to tackle some of the big challenges in corporate responsibility.
icaew.com/corporateresponsibility
The Business Sustainability Programme (BSP)

The Business Sustainability Programme is an e-learning package for accountants and business
professionals who want to learn about the business case for sustainability. The course is spread
across five modules taking users from definitions of sustainability and corporate responsibility,
through case studies and finally towards developing an individually tailored sustainability strategy
for their business. The first two modules are free to everyone. For more information and to
download a brochure visit icaew.com/bsp
Ethics icaew.com/ethics
Code of Ethics
The Code of Ethics helps ICAEW members meet these obligations by providing them with ethical
guidance. The Code applies to all members, students, affiliates, employees of member firms and,
where applicable, member firms, in all of their professional and business activities, whether
remunerated or voluntary.
Instilling integrity in organisations ICAEW June 2009

Practical guidance aimed at directors and management to assist them in instilling integrity in their
organisations. This document may also be helpful to audit firms discussing this topic with clients
and individuals seeking to address issues in this area with their employers.
Reporting with Integrity ICAEW May 2007, ISBN 978-1-84152-455-9

This publication brings ideas from a variety of disciplines, in order to obtain a more comprehensive
understanding of what is meant by integrity, both as a concept and in practice. Moreover, because
this report sees reporting with integrity as a joint endeavour of individuals, organisations and
professions, including the accounting profession, the concept of integrity is considered in all these
contexts.
Finance and Management Faculty icaew.com/fmfac
Finance's role in the organisation November 2009, ISBN 978-1-84152-855-7

This considers the challenges of designing successful organisations, written by Rick Payne, who
leads the faculty's finance direction programme.
Investment appraisal SR27: December 2009, ISBN 978-1-84152-854-4

This special report looks at the key issues and advises managers on how they can contribute
effectively to decision making and control during the process of investment appraisal.
Introduction
xix
Starting a business SR28: March 2010, ISBN 978-1-84152-984-2

This report provides accountants with a realistic and motivational overview of what to consider
when starting a business.
Developing a vision for your business SR30: September 2010, ISBN 978-0-85760-054-7
This special report looks at what makes a good vision, the benefits of having one, the role of the FD
in the process, leadership, storytelling and the use of visions in medium-sized businesses.
Finance transformation the outsourcing perspective SR31: December 2010, ISBN 978-085760-079-0
The authors of this outsourcing special report share their expertise on topics including service level
agreements, people management, and innovation and technology.
The Finance Function: A Framework for Analysis September 2011, ISBN 978-0-85760-285-5
This report is a source of reference for those analyzing or researching the role of the finance
function and provides a foundation for considering the key challenges involved, written by Rick
Payne, who leads the facultys finance direction programme.
Financial Reporting Faculty icaew.com/frfac
EU Implementation of IFRS and the Fair Value Directive ICAEW, October 2007, ISBN 978-184152-519-8
The most comprehensive assessment to date of compliance with the requirements of IFRS and the
overall quality if IFRS financial reporting.
The Financial Reporting Faculty makes available to students copies of its highly-regarded factsheets
on UK GAAP and IFRS issues, as well as its journal, By All Accounts, at icaew.com/frfac
Financial Services Faculty icaew.com/fsf
Audit of banks: lessons from the crisis, (Inspiring Confidence in Financial Services initiative)
ICAEW, June 2010 ISBN 978-0-85760-051-6
This research has looked into the role played by bank auditors and examined improvements that
can be made in light of lessons learned from the financial crisis. The project has included the
publication of stakeholder feedback and development of a final report
Measurement in financial services, (Inspiring Confidence in Financial Services initiative) ICAEW,

March 2008, ISBN 978-1-84152-546-4
This report suggests that more work is required on matching measurement practices in the
financial services industry to the needs of different users of financial information, despite the fact
that the financial services industry has the greatest concentration of measurement and modelling
skills of any industry. A downloadable pdf is available at icaew.com/thoughtleadership
Skilled Persons Guidance Reporting Under s166 Financial Services and Markets Act 2000
(Interim Technical Release FSF 01/08)
This interim guidance was issued by ICAEW in April 2008 as a revision to TECH 20/30 to assist
chartered accountants and other professionals who are requested to report under s166 Financial
Services and Markets Act 2000. A downloadable pdf is available at icaew.com/technicalreleases
xx
Case Study
Information Technology Faculty icaew.com/itfac

The IT Faculty provides ongoing advice and guidance that will help students in their studies and their
work. The online community (ion.icaew.com/itcountshome) provides regular free updates as well as a
link to the facultys Twitter feed which provides helpful updates and links to relevant articles. The
following publications should also be of interest to students:
Make the move to cloud computing ICAEW, 2012, ISBN 978-0-85760-617-4

Cloud computing in its purest form is pay-as-you-go IT, online and on demand. The IT capabilities
provided as a service to businesses include: single software applications or software suites; online
software development platforms; and virtual computing infrastructure, ranging from data storage
to computer grids.
Bringing employee personal devices into the business - a guide to IT consumerisation ICAEW,
2012, ISBN 978-0-85760-443-9
The gap between business and consumer technology has been growing over the last few years,
with the consumer market now leading in terms of ease of use and portability.
Making the most of social media - a practical guide for your business ICAEW, 2011, ISBN 9780-85760-286-2
This guide will enable the business manager to develop a philosophy that allies social medias
potential with the businesss objectives and capabilities, to set objectives and protect against
pitfalls, and then to take the first practical steps in a mass communications medium very different
from any that British business has encountered before.
Tax Faculty icaew.com/taxfac

The Tax Faculty runs a Younger Members Tax Club which provides informal presentations, discussions
and socialising. All young professionals interested in tax are welcome to attend. See the website for
more details icaew.com/taxfac
Tax news service

You can keep up with the tax news as it develops on the Tax Facultys news site
icaew.com/taxnews. And you can subscribe to the free newswire which gives you a weekly round
up. For more details visit icaew.com/taxfac
Demystifying XBRL
This booklet, produced jointly by KPMG, the Tax Faculty and the Information Technology Faculty,
explains exactly what iXBRL is all about and what must be done in order to e-file corporation tax
returns using the new standard.
Implementing XBRL
This booklet, produced jointly by Thompson Reuters, the Tax Faculty and the Information
Technology Faculty, is a practical guide for accountants in business and practice, and follows on
from Demystifying XBRL.
TAXline Tax Practice series of detailed briefings on current topics:

TAXline Tax Practice 27
Let property - a brief guide by Rebecca Cave (published November 2011)
The new pension rules by Anne Redston (published July 2011)
Tax Credits by Robin Williamson (published April 2011)
TAXline Tax Practice No 23
HMRC Powers - an overview of the new powers and penalties regime by Paula Clemett (published
October 2010)
Introduction
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xxii
Case Study
CHAPTER 1
Introduction to the Case

Study
Introduction
Topic List
1 Introduction to the Case Study Learning Materials
2 About the Case Study
3 The Case Study structure
4 Case Study assessment and the marking key
5 Preparing for the Case Study
Introduction
1 Introduction to the Case Study Learning Materials

The Case Study Learning Materials comprise:
The Case Study Manual
Two practice exams:
CROP (the November 2008 exam)

MMM (the July 2009 exam)
This Study Manual contains an introduction to the Case Study, an exploration of the skills including
particularly financial analysis skills required to pass this exam. In addition, there is a section on ethics
and a detailed analysis of the Elite Cars exam.
The two practice exams (CROP and MMM) then provide opportunities to practice and refine your skills.
Each comes with a detailed analysis of how each paper should have been tackled, in the form of debrief
pack.
Elite Cars and the two other cases have been selected for inclusion because they represent as wide a
range as possible of case studies, covering:
Small and large businesses, both national and international

Key areas of the Advanced Stage syllabus
Variations in the style of exam requirements
A broad mix of numerical content
A cross-section of technical issues
While each case is unique and presents its own issues and challenges, you will be able to identify the
areas of commonality between Case Study exams as well as areas of difference. In respect of
commonality, these three cases in particular emphasise the importance of financial analysis in the Case
Study. They have not been updated for changes in GAAP or accounting terminology: what matters in
the Case Study is not the technical content but the skills required in tackling the requirements. If, when
attempting one of the three cases, you identify a current business issue which does not apply at the time
when the case was originally set, this is perfectly acceptable.
Differences in the structure of the Case Study in comparison with TI and Professional Stage are
reviewed, together with the differences expected in student preparation prior to the exam. There is an
emphasis on the change in mindset that is required for the Case Study, the importance of starting your
preparation as early as possible, and linking your academic studies as closely as you can to your
experience in the workplace.
The major differentiators in candidate performance and key success factors for the Case Study are
identified together with the differences between better and weaker scripts on specific sections of cases.
In discussing the communication skills that are essential for success in the Case Study, the Learning
Materials emphasise the pre-eminence of quality over quantity.
The assessment process is explained, so that you can understand what the examiners are looking for and
how to satisfy them. The five professional skill areas on which the Case Study assessment process is
founded are examined and broken down into their individual components. The five skill areas are:

Structuring problems and solutions
Applying judgement
Drawing conclusions and making recommendations
Integrative and multidisciplinary skills
Advice is offered on how to demonstrate these skills as effectively as possible in the exam setting, and
how they interact with each other. Exercises (with tutor notes) are provided to enable you to
Case Study
understand how to use the Case Study Advance Information in preparation for your exam, as well as to
help build your professional skills.
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By providing real contemporaneous examples, the Learning Materials show how to make effective use of
current business issues, SWOT, PESTEL and Porters 5 Forces analysis. The workbook is interspersed with
skills tips for easy reference.
A key focus of these Learning Materials is executive summaries and using financial analysis two areas in
which weaker candidates frequently struggle. In addition, there is also a programme of detailed
exercises on financial data and financial statement analysis provided in the Financial Analysis skills
chapter.
By working through these Learning Materials, you should come away with extensive ideas on many
techniques to help maximise your chances of success in the Case Study:
How to form a 'big picture'

How to use your financial analysis effectively
How to use SWOT, PESTEL and Porter's 5 Forces analysis
How to make effective use of external material
How to deal with financial information presented in a non-standard way
How to use the four hours effectively in the exam itself
How to demonstrate professional scepticism
How to demonstrate ethics
How to exercise judgement
How to form (and communicate) recommendations and conclusions
How to produce a high-quality executive summary
How to achieve 'user focus' (i.e. remember the audience)
How to add value
How to organise your answer
How to produce effective appendices and refer to them in main report
With tips, hints and extracts from the examiners commentaries, these Learning Materials will give you a
comprehensive toolkit that, if used properly as part of your preparation, will provide a pathway to
passing the Case Study. The Learning Materials have been written and structured in such a way as to be
suitable for both self-study and tutor-assisted learning.
2 About the Case Study

2.1
Introduction
Chartered Accountants today are business and financial advisors. As an ACA, your unique selling point
when compared with other advisors to business be they lawyers, bankers, marketing or public
relations specialists is that you will have the knowledge and skills to interpret financial and other
business data and communicate the underlying issues to your clients. This role may be encapsulated in
the phrase 'making the numbers talk'.
During the first two years of your training, you will have received a thorough grounding in the concepts
and principles that underlie the preparation, interpretation and use of financial and business
information. In preparing for the Technical Integration (TI) exams, you will enhance your technical
knowledge and develop the skills to tackle business scenarios that generate technical problems.
The objective of the Case Study is to assess your understanding of more complex interactions of
business issues and your ability to analyse financial and non-financial data, exercise judgement and
develop conclusions and recommendations. Marks are only awarded for professional skills.
The Case Study is always based on real-life situations and generally centres on a request for advice or
assistance, from either your client or your boss. In developing your advice, you will have the opportunity
to carry out some preparatory work, on your own or with your peers and your tutors, in advance of the
exam. The exam requirements will ask you to assess and discuss practical, current commercial issues.
Introduction to the case study
To be successful at the Case Study, you will need to:
Understand the businesss situation, i.e. where it is located in its lifecycle (start-up, transition,
maturity, decline) and the generic issues it will be facing
Identify the key issues relevant to the case
Use relevant data, identify interrelationships and generate new ideas and information
Apply appropriately your knowledge of technical and ethical matters in the context of the case
Develop relevant quality analysis using the financial and non-financial data given
Apply your professional judgement and consider the consequences of your ideas
Develop clear conclusions and recommendations based on your analysis
Produce a well-structured document, using appropriate language to communicate your ideas to

your audience.
These Learning Materials are designed to assist you in preparing to meet these requirements.
2.2
2.2.1
Comparison between the Case Study and the TI and Professional Stage
exams
Differences in structure
The Case Study is unlike any of the other ACA exams. Although you have had opportunities to use open
books, you will not have had an opportunity to see part of the exam paper in advance.
In more ways than one, the Case Study is probably also the longest exam you will have sat. Not only is
it a four-hour paper, but you will also have spent at least two days working directly towards it.
Furthermore, in the four hours, you will ordinarily be expected to produce only one piece of output
(such as a report), although it may have a number of sections. If you have prepared properly, you
should find that the four hours are not enough for you to say all that you would like to say in the report,
and the challenge will be to discipline yourself to answer the requirements you have been set.
Your two days of direct preparation will have been spent familiarising yourself with, and analysing, the
Advance Information about the organisation on which your Case Study exam paper is to be based. At
the end, you will know the entity as though it were your client or employer, and you will have settled
yourself into the role that you are going to be asked to take on in the exam. You will also have an
understanding of the industry sector in which the organisation is based. A suggested approach is set out
in the Elite Cars case, and further general guidance is given below.
2.2.2
Differences expected in student preparation prior to the exam

What is the recommended preparation time for the Case Study? You begin your preparation as soon as
you start your training contract, because the main distinguishing feature of the Case Study is that it is a
real-life situation requiring you to bring to bear all the expertise and experience that you have
accumulated since your first day at work.
Developing your skills cannot be done in the final weeks before the exam. You will need to have
planned your skills development programme as soon as you have completed your Professional Stage
exams.
2.2.3
Difference in the assessment method for the Case Study

The Case Study is marked by reference to a Competency Based Assessment (CBA) key. All the marks are
awarded for the demonstration of professional skills. Where you are required to demonstrate your
technical knowledge, marks will be awarded in the context of how you analyse the problem and
structure your solutions. Because of this focus on skills, there will not be a right or wrong answer
(there may be for individual calculations, but these will form only a small part of the total).
Case Study
3 The Case Study structure

3.1
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The Advance Information

Four weeks prior to your exam, you will receive the Advance Information. This is a pack of (typically) 5060 pages covering:
You, your firm/employer, your role and your client or business

The commercial sector in which your client or business operates
Financial and commercial information about your client or business
Other information relevant to the case (e.g. customers, suppliers, potential acquirers or targets etc)
The Advance Information typically consists of 10-15 exhibits under one or more of these headings.
Some of them will be mainly in narrative form (e.g. an industry overview), others will be largely
numerical (e.g. extracts from a set of financial statements), and the remainder will be a mixture of the
two (e.g. a business plan).
The documents will also be in a variety of formats and styles: there may be an internal memorandum, a
survey commissioned from an external industry consultant, a letter from a public body, and so on. One
of your tasks will be to unravel all the stakeholders and understand their perspectives on the business.
But, regardless of these differences in content and style, the exhibits will all operate together so as to
form a whole picture, and there will be connections or perhaps contradictions between them that
you may be able to spot only on a very careful reading.
The numerical material could be in a form that you are familiar with and use in daily practice, such as
current IFRS, or the material may be presented in an alternative format such as national GAAP,
regulated, or other format with which you are not familiar. If the information is not in a standard
conventional format, this would suggest that the examiner is likely to make some use of that format in
the exam. You would therefore be well advised to familiarise yourself with the key aspects of it so that
you feel comfortable in the exam itself.
The Advance Information will always include some background information on the industry in which the
business operates. It might also provide details on a technical area that is relevant to the industry or to
businesses of the same type and which is outside the syllabus for the Professional Stage and the TI (in
the November 2005 Case Study, Rutwater, the regulations of the UK water industry featured
prominently). The purpose of this is twofold: (i) to ensure that those candidates without practical
experience of this technical area are not at a disadvantage; and (ii) to indicate that all applicable
information on the area is included and candidates do not have to undertake any significant further
research on it.
The purpose of issuing the Advance Information early is to allow you time to familiarise yourself with its
contents, and to undertake any research and analysis you think fit. The intention is that, by the time you
have finished working on the Advance Information, you will know the material as though it related to an
organisation with which you have had dealings in your work (and the Case Study is always based on real
entities). The examiners expectations are set out clearly in the standard rubric, reproduced below with
the bold text as it appears.
This material is issued prior to the examination so as to allow you to familiarise yourself with the
information provided and undertake any research and analysis you think fit. This information is also
published on the website: www.icaew.com/students.
You MUST bring this material with you to the Examination Hall, annotated if you wish, together with
your preparatory work. Once you have read the material, you are not expected to spend more than two
days working on it: this would include familiarisation with the information provided, additional research
and analysis, developing an awareness of the industry, discussion and assembling your preparatory work
for use in the examination.
The use of pre-prepared study material will not significantly help you in your preparation for this
examination. It is essential that you carry out sufficient analysis work of your own in order to have a
good understanding of the Advance Information. You will not benefit from taking large quantities of
additional material with you into the Examination Hall.
At the start of the examination you will receive some additional material which will complete the
description of the case scenario and state the Case Study requirements. Your answer must be submitted
on the paper provided by the ICAEW in the Examination Hall. Any pre-prepared papers or papers
comprising annotated exhibits from the case material included in your answer WILL NOT be marked.
Assessment of the Case Study

All of the marks in the Case Study are awarded for professional skills allocated broadly as follows:

Applying judgement
Demonstrating integrative and multidisciplinary skills
Presenting appropriate appendices
20%
25%
25%
20%
5%
5%
Of the total marks available, 15% are awarded for the executive summary and approximately 10% for
the relevant discussion of ethical issues within your answer to the requirements. Ethical issues do not
form a specific requirement but, within a requirement, may cover such topics as:
Lack of professional independence

Conflicts of interest among stakeholders
Doubtful accounting or commercial practice
Inappropriate pressure to achieve a reported result.
You should be clear that marks are awarded for demonstrating your professional skills, not for
reproducing facts from the case. In order to be successful, you will need to:
Demonstrate your knowledge of the case material and make use of your research
Carry out relevant analysis of the problems and your proposed solutions
Apply your judgement on the basis of the analysis that you have carried out
Draw conclusions from your analysis and judgement and develop them into practical commercial
recommendations.
Omitting any one of these elements will have a significantly detrimental effect on your chances of
success.
3.2
How to use the Advance Information

Thorough preparation is one of the keys to success in the Case Study, given its breadth of subject matter
and its assessment of Professional Skills. The required preparation can be broadly listed under five main
headings:
Familiarisation with the information provided

Strategic analysis
Financial analysis
Developing industry and business awareness including ethical considerations
Integrating and assembling your preparatory work
Examples of questions that could be asked or matters that could be considered under each of the above
headings are as follows:
Strategic analysis
What information has been provided?

What is your role?
What sort of organisation is the subject business?
What ethical issues may be discerned?
What information might you need which has not been provided?
Case Study
Where is the business in its life cycle?

What generic issues face businesses at this point?
Financial analysis
Developing industry, business and ethical awareness
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Is the business making good profits, marginal profits or making a loss?

How does it make its profits? Why is it making losses?
Is its balance sheet strong or weak?
Is it appropriately financed?
Is it generating or absorbing cash?
What are the current industry issues?

What are the top companies doing at the moment?
How can you use your personal experience?
Integrating and assembling your preparatory work
What opportunities are there to brainstorm with colleagues?
What opportunities are there to talk with managers and partners or other senior colleagues?
What opportunities are there to make presentations on issues to the class or the learning
group?
How can you create a clear structure and cross-referencing system?
How will you use your information?
In summary, the recommended strategy is to familiarise yourself with the Advance Information to the
point where you feel at ease with all sections of it and how they connect with each other. You may well
want to identify some general headings under which the requirements are likely to occur e.g. takeover
by one of the named large players in the market, appraisal of a new development project but the key
is to be flexible so that you can adapt your approach in the exam itself according to the new
information presented to you.
3.3
Additional analysis and research

The rubric quoted above refers to additional analysis and research although this may vary from case to
case. Generally you are expected to do a small amount of research yourself so as to enhance your
familiarity with the industry. This should not be extensive; and, if you are working in a group, you will
find that you can do it efficiently by allocating specific research tasks to each member and then sharing
the output. Your technical knowledge from Professional Stage and TI is the framework in which to
develop your wider business knowledge.
Having a good understanding of the areas that are covered will give you the background knowledge
with which to assess the particular industry in which the subject company operates.
You can buy a good quality business newspaper (e.g. in the UK the Saturday edition of the Financial
Times, which gives an excellent round-up of the weeks news), read the Economist or subscribe to a news
articles service that can send messages direct to your desktop, palmtop or mobile phone.
There is about a month between the publication of the Advance Information and the exam, and so you
will want to ensure that you are alert to developments in the industry during this period.
3.4
The Exam Paper (EP)

In the exam itself, you will be issued with some more information (the Exam Paper), comprising 10-15
pages and usually spread across another 4-5 exhibits. This completes the scenario and sets out the exam
requirements.
The Exam Paper will like the Advance Information consist of documents in a variety of formats and
with a combination of words and numbers. The numbers will be in a format that is familiar, whether
IFRS, national GAAP or some other convention that you will have been given a chance to assimilate in
the Advance Information. Like the Advance Information, the Exam Paper comes with a standard rubric
(reproduced below) and you should ensure you are familiar with it before you go into the exam.
DO NOT TURN OVER UNTIL YOU ARE TOLD TO DO SO

1
When instructed:
(a)
check that your question paper contains all the required pages. The Institutes consecutive
page numbering may be found under the base line at the foot of each page;
(b)
enter your candidate number in the box provided above.
Number each page of your answer consecutively using the space provided at the top right of each
sheet. Ensure that your candidate number is written on each page of your answer.
After the instruction to stop writing at the end of the paper, you will be given five minutes to
assemble your answer in this folder. Fasten your complete script inside this folder using the hole in
the back page and the tag provided. Do not include your question paper in the folder.
Answer folders and examination stationery, used or unused, must not be removed from the
Examination Hall. Question papers may, however, be retained by candidates.
Your answer must be submitted on the paper provided by the ICAEW in the Examination Hall. Any
pre-prepared papers, or papers comprising annotated exhibits from the case material, included in
your answer WILL NOT be marked by the examiners.
The Exam Paper will comprise one or more requirements, with or without separate components, and
these could interact in a number of ways, so it is essential that you read them very carefully and
understand at the outset of the exam exactly what it is that you are being asked to do. For example, you
could be asked to:
Draft a report to the client dealing with two or three interrelated aspects of the clients business
Produce a set of 'notes' for your boss about a possible transaction, with a separate covering
summary drawing attention to key matters
Write a letter to a third party answering questions it has raised about your clients activities
Prepare information for a partner who is to lead a meeting with a prospective new client
The specific requirement for each exam is set out in the following form (the example provided relates to a
report for a client).
Requirement
You are required to prepare a draft report as set out in the email from the partner in your firm to you.
Your report should comprise the following four elements:
An executive summary
Your responses to the three detailed requirements as set out in Exhibit **, including financial
appendices (as required).
State clearly any assumptions that you make.

Your report should be balanced across the three detailed requirements and the following time allocation
is suggested:
Reading and planning
Performing calculations and financial analysis
Drafting report
1 hour
1 hour
2 hours
You will not be able to identify the actual exam requirements from the Advance Information, but good
preparation will mean that you will be able to identify the relevant background issues quickly in the
exam. You will also be able to decide which parts of the syllabus can be applied to answering the
requirements.
With your preparation in place, in the exam you will be able to apply your analysis to the requirements
that link back to the Advance Information, leaving yourself more time to consider how to use the Exam
Paper that you are seeing for the first time.
Case Study
4 Case Study assessment and the marking key

4.1
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Marks allocation
The rubric in the exam paper continues as follows:
All of the marks in the Case Study are awarded for the demonstration of professional skills, allocated
broadly as follows:
Applied to the four elements of your report (as described above)

Applying judgement
20%
25%
25%
20%
90%
Applied to your report as a whole

5%
5%
100%
the relevant discussion of ethical issues within your answer to the requirements.
In planning your report, you should be aware that not attempting one of the requirements will have a
significantly detrimental effect on your chances of success, as will not submitting an executive summary.
In addition, as indicated above, all four skills areas will be assessed under each of the four elements of
your report. Accordingly, not demonstrating your judgement and/or failing to include appropriate
conclusions and recommendations in each element of your report will affect your chances of success.
Details of the particular skills and attributes that the examiners are looking for under each of the
professional skills are set out in the tables below.
It is important for candidates to focus on the fact that it is the evidence of their professional skills that is
being assessed. Unsuccessful candidates are likely to produce facts with no analysis or judgement.
For each exam paper, a marking key is developed using the following criteria:
4.2
There will be five areas in which marks are given: the executive summary; the three requirements in
the exam; and integrative and multidisciplinary skills (including relevant financial appendices).
There will be 10 Skills Assessment Boxes (SABs) (see below for definition) for each of the three
requirements, 6 for the executive summary and 4 for integrative and multidisciplinary skills that
apply to the document as a whole (2 of which are for the financial appendices).
Across the whole paper, there will thus be 40 SABs, the majority for structuring problems and
solutions, and applying judgement.
Constructing the marking key

The Case Study marking keys are constructed specifically for each exam and use a process called
Competency Based Assessment (CBA). The starting-point is the generic competencies that are set out
below and are linked to the assessed skills in the Assessment Grid in section 2 of the Introduction. These
are lists of all the areas in which professional skills might be assessed in a Case Study exam. However,
not all will be relevant to any given Case Study; the examiners select those that are relevant to ensure
that the marking of successive cases is comparable.
Having selected the required competencies for the exam, the examiners will then set out the specific
basis on which each competency for each of the five areas is to be assessed. This will comprise a set of
possible facts, technical and ethical knowledge, outputs from analysis, implications from the analysis,
conclusions and recommendations.
Assimilating and
using information
Structuring problems /
solutions
Uses the Advance

Information (AI),
Exam paper (EP),
knowledge of ethical
codes and
professional
experience to define
the specific issue /
situation
Identifies and uses

key information
Demonstrates
technical knowledge
Uses professional
experience
Uses own
understanding of
context and findings
Uses relevant
strategic analytical
tools (SWOT,
PESTEL, Porters 5
Forces)
Describes wider
context
Performs relevant
analysis
Identifies business
issues
Produces quality
analysis
Understanding of
business entity
Depth
Position in
industry sector
Logic
Appreciation of
wider economy
Recognises where
business is in its life
cycle
Breadth
Reasonableness
Uses knowledge of
ethical codes and
professional
experience to
perform relevant
analysis
Financial data
analysis:
Uses appropriate
analytical tools
(valuation
methodologies,
sensitivity
analysis)
Performs relevant
analysis on
Numerical
data
Other
information
Integrates
numbers and
words
10
Case Study
Applying judgement
Conclusions and
recommendations
Builds on
implications of
analysis
Draws conclusions
linked to analysis
and judgement
Identifies and uses

key financial
information
Makes practical
commercial
recommendations
Recognises linkages
Prioritises key points
Evaluates options
Discusses output
Pros / cons
Demonstrates
professional
scepticism
Demonstrates
objectivity/ balance
Demonstrates an
appreciation of
more than one side
/ bias
Evaluates options
Uses knowledge of
ethical codes and
professional
experience
Assimilating and
using information
Structuring problems /
solutions
Applying judgement
Conclusions and
recommendations
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Financial statement
analysis:
Uses appropriate
analytical tools to
measure financial
performance,
identify trends
and make
comparisons
Performs relevant
analysis on
Financial
statements
Other
information
Integrates
numbers and
words
Provides terms of
reference
Provides executive
summary consistent
with report
Provides a coherent
answer to the
question
Demonstrates
appropriate balance
between topics
Uses sufficient but
not excessive subdivisions
Uses appropriate
notes and bullets
Uses style /
language for
audience;
appropriate tact
Avoids repetition
Appropriate
appendices
Titled and crossreferenced
Clear calculations
No excessive text
As there are 10 SABs for each of the three requirements, you should ensure that you allow yourself
enough time to answer each part of all the requirements in as much detail as you can.
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A typical allocation of grades might be as follows:

Requirements
A&UI
SP&S
AJ
C&R
Total
Executive summary
Requirement 1
10
Requirement 2
10
Requirement 3
10
11
10
36
Overall paper:
Report
Overall paper:
Appendices
TOTAL
40
(Key to professional skills: A&UI = Assimilating and using information; SP&S = Structuring problems and
solutions; AJ = Applying judgement; C&R = Drawing conclusions and making recommendations)
As can be seen from the table above, not attempting one of the requirements has a significantly
detrimental effect on your chances of success, as does not submitting an executive summary. In
addition to the importance of good preparation, the table clearly demonstrates the cascade effect of
weak analysis (structuring problems and solutions) and poor judgement, with almost 60% of the SABs
available being awarded for these skills. AJ in particular is a skill with which many candidates struggle: it
manifests itself in a number of ways but in the Case Study it usually entails the need to challenge
assumptions or to apply professional scepticism to facts and figures supplied by people or entities that
may have vested interests.
It is likely that the exam requirements will comprise a series of components that interact in a number of
ways. For example, you might be required to prepare a report that comprises:
The assessment of the financial impact of a number of events
An evaluation of an adjusted set of financial forecasts, taking into account these events
A discussion of the options that management could consider in the light of the impact of these
events on their strategy for the business.
The marking key would comprise five sections being:
Executive summary
Financial assessment
Financial forecasts
Strategic options
Overall paper
Although there would be SABs available for each requirement individually, there would also be marks for
how you linked the three requirements to produce a comprehensive report.
4.3
How are grades awarded?

Each competency is assessed by reference to four levels:
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Clearly competent (CC) candidates have to show that they have understood the requirement and
have provided relevant evidence relating to most of the assessment criteria in the SAB.
Sufficiently competent (SC) candidates have to show that they have understood the requirement
and have provided sufficient (some or enough) relevant evidence relating to the assessment criteria
in the SAB.
Insufficiently competent (IC) candidates have shown only a partial understanding of the
requirement and/or provided insufficient evidence relating to the assessment criteria in the SAB.
Case Study
Insufficiently demonstrated (ID) candidates have made an attempt to demonstrate the skill
required but there is little or sparse evidence of their understanding of what is required.
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If there is no evidence of you having addressed the competency, it will be marked as 'Not attempted'.
Not attempted (NA) candidates have not provided any evidence to show that they have
understood the requirement or demonstrated the skill required. NA means that under that SAB
nothing relevant has been provided.
Finally your competency for each of the four skills areas is reviewed overall by reference to the guidelines
set out overleaf and an overall mark is awarded.
The professional skills that are assessed in the Case Study are themselves interrelated. In general:
Without sufficient familiarity of the Case Study information and wider business issues, by definition
your analysis will be weak
Inadequate analysis of the problems and structuring of your solutions will leave you without a
proper basis for exercising your judgement
If you are unable to demonstrate your application of judgement, it is unlikely that you will provide
sufficient support for your conclusions
Without properly developing conclusions, you will have no basis for making your
recommendations.
In the grades for the overall paper, your integrative and communication skills will be assessed.
Make sure that you know to whom you are writing. Having identified your audience, keep it in mind
throughout. Each audience will have different requirements and expectations. Regardless of the
audience, you will need to:
Avoid technical jargon and colloquialisms use simple language

Be professional
Be succinct
Be relevant
Be tactful
Finally, your report as a whole must answer the requirements that have been set, not those that you
would like to have answered.
Clearly competent (CC)
Assimilating and using
information
Good definition of situation

Extensive use of AI & EP/ethical framework/own understanding
Good description of wider context
Structuring problems and

solutions
Mostly correct/relevant analysis

Good depth and breadth of analysis
Good integration of numbers and words
Applying judgement
Good links with output/analysis

Good prioritisation of issues
Good evaluation of options/balance/bias
Good demonstration of professional scepticism
Conclusions and
recommendations
Draws conclusions on all issues

Good linkage to analysis and judgement
Makes good range of recommendations
Good practicality and commerciality
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Sufficiently competent (SC)

information
Reasonable definition of situation

Adequate use of AI&EP/ethical framework/own understanding
Reasonable description of wider context

solutions
Mainly correct/relevant analysis

Reasonable depth and breadth of analysis
Reasonable integration of numbers and words
Applying judgement
Reasonable links with output/analysis

Reasonable prioritisation of issues
Reasonable evaluation of options/balance/bias
Reasonable demonstration of professional scepticism
Conclusions and
recommendations
Draws conclusions on most issues

Reasonable linkage to analysis and judgement
Makes some recommendations
Reasonable practicality and commerciality
Insufficiently competent (IC)

information
Weak definition of situation

Some use of AI & EP/ethical framework/own understanding
Weak description of wider context

solutions
Mainly incorrect/irrelevant analysis

Weak depth and breadth of analysis
Weak integration of numbers and words
Applying judgement
Weak links with output/analysis

Weak prioritisation of issues
Weak evaluation of options/balance/bias
Weak demonstration of professional scepticism
Conclusions and
recommendations
Draws some conclusions

Weak linkage to analysis and judgement
Makes few recommendations
Weak practicality and commerciality
Insufficiently demonstrated (ID)
4.4

information
Poor definition of situation

Minimal use of AI & EP/ethical framework/own understanding
Poor description of wider context

solutions
Mostly incorrect/irrelevant analysis

Poor depth and breadth of analysis
Weak integration of numbers and words
Applying judgement
Poor links with output/analysis

Poor prioritisation of issues
Poor evaluation of options/balance/bias
Poor demonstration of professional scepticism
Conclusions and
recommendations
Draws few conclusions

Poor linkage to analysis and judgement
Makes minimal recommendations
Impractical or uncommercial recommendations
How is numerical work rewarded?

The Case Study will always require you to perform some calculations, though the extent of these will
vary from case to case. What will not change, however, is their purpose. With this in mind, the marks
awarded for calculations are spread across the professional skills.
14
Case Study
You could potentially be awarded marks across all four skills areas. For example, if you are asked to
calculate an offer price for a business your client is seeking to acquire, you could gain credit (i) in
'Assimilating and using information', for applying a P/E ratio from the Advance Information to an
earnings figure; (ii) in 'Structuring problems and solutions', for commenting on your choice of P/E ratio
and earnings figure; (iii) in 'Applying judgement', for adjusting this earnings figure for seasonal
distortions; (iv) in 'Drawing conclusions and making recommendations', for suggesting a price that is
logically derived from the foregoing work. You will also score marks for making due reference to this
outcome in your executive summary and under 'Overall paper: Appendices for presenting your
calculations clearly and stating appropriate workings and assumptions.
4.4.1
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What does a marking key look like?

An extract from a sample marking key is provided overleaf. It relates to the analysis of an offer to acquire
a business from the perspective of the target business, its owners and management.
You will see that within the columns of the marking key there are different numbers of SABs indicating
the different weightings within this topic of the professional skills being assessed. There are two SABs for
Assimilating and Using Information (A&UI); three SABs for Structuring Problems and Solutions (SP&S);
three SABs for Applying Judgement (AJ); and two SABs for Conclusions and Recommendations (C&R).
This is a typical weighting of skills assessment for most topics.
4.4.2
Translation of initial grades to final marks

The overall marks are built up from the individual competencies, with marks awarded as follows:
Clearly competent
Sufficiently competent
Insufficiently competent
Insufficiently demonstrated
Not attempted
In order to ensure that the marking of each Case Study is comparable, weighting factors are applied to
the grades, based on the actual cohort of candidates sitting the exam and calculated individually for
each Case Study exam following a reflective process. The result is a final mark out of 100; the pass mark
is 50.
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REQUIREMENT 1 - FUNDING REQUIREMENTS

STRUCTURING PROBLEMS & SOLUTIONS
ASSIMILATING & USING INFORMATION

Uses relevant AI & EP info to adjust cashflow forecast
AR slowdown (eg 20k Sept, 30k Oct, reverse 50k in year)
Comments on impact of adjusting cashflow

IS: employment costs
IS: overheads / depreciation
Share capital injection delay (500k Nov->Jan)

IS: interest / dividends
Bank loan finance delay (980k Nov->Jan)
BS: NCA
Increase in NCA expenditure (20k Aug, 25k Sept)
BS: inventory
Additional tax payment (40k Dec)

Suggested exit payment to J & G (300k Apr)
NA
ID
IC
SC
CC
Comments on cashflow forecast
NA
ID
IC
SC
CC
Identifies months when o/d breached

Identifies issue of finance delay v bank o/d limit terms
Identifies peak funding requirement

Partnership changed to limited company
Identifies change from bank o/d to bank loan
Partners v directors roles / directors' responsibilities
Explains adjustments / assumptions
Business currently near overdraft limit
Elite position very weak in the short term / variable historically
Own research
NA
ID
IC
SC
CC
Comments on proposed finance
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ID
IC
SC
CC
Deteriorating cashflow position

Problems caused by errors and delays
Taking up new funding from NWF will ease cashflow
Loss of control if new funding accepted
Bank o/d will need to be renegotiated
NA
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ID
IC
SC
CC
APPLYING JUDGEMENT
CONCLUSIONS AND RECOMMENDATIONS
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Draws conclusions (under a heading)
Considers / explains implications for J & G
Elite is running out of cash / profit & BS overstated
Considers implications for future shareholders
Cash flow problem exacerbated by exit plans
Considers implications of breaching o/d terms
Short time frame for action / renegotiation with bank
Cashflow is a critical issue for Elite
Elite should not be operating at max o/d level all the time
Considers critical nature of profit calculation
Further breaches may trigger personal guarantees
Considers need for sensitivity analysis
NA
ID
IC
SC
CC
NA
ID
IC
SC
CC
Makes recommendations
Recognises linkages between areas

AR delay v staff cover and ability
Ensure forecast figures correct / need for staff training
Errors on NCA forecast v staff competence

Need to prepare longer term forecasts
Effect of NWF timing v bank terms
Try to renegotiate continuation / new o/d terms
Profit overstatement v loan and VC criteria

Bank loan conditional on getting NWF funding
Implement profit & cash monitoring to avoid breaches
J & G exit terms will breach new o/d limit
Consider slowing payments to creditors
NA
ID
IC
SC
CC
NA
ID
IC
SC
CC
Appreciates possible bias / scepticism

Forecasts prepared by Elite management
Possible over-optimism on sales and receipts
CC
SC
IC
ID
NA
Total
Pressure not to breach o/d terms

Adjs from a letter / not confirmed by JED
Known 'errors' already / poor staff supervision?
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May be further (as yet unknown) adjustments
NA
4.5
ID
IC
SC
CC
What is an appropriate grade profile?

The range of grades awarded to each requirement varies from paper to paper depending on the subject
matters. To ensure a pass, a candidate should aim to achieve more than 50% passing grades (SC or
CC) in each of the requirements.
4.5.1
Applying your knowledge of the Learning Materials

Grades available in the Case Study relate to the application of your use of your professional skills and
business knowledge. Nevertheless, a good technical grounding is an essential foundation. The
Advanced Stage syllabus comprises the following:
Audit and assurance

Business strategy
Corporate reporting
Ethics
Taxation
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Accordingly, you need to consider the major issues for any business entity in each of these areas, given
the entitys stage in its life cycle.
4.5.2
Understanding the stage of the business in its life cycle

Your use of the Advance Information needs to take place at several different levels. Some exhibits
such as any industry overviews are contextual and provide the background for your required output.
Others, such as the subject entitys financial statements, will need to be used in much greater detail.
Others still, such as a list of the entitys key clients, may come somewhere in the middle.
However, there is one vital question that you will have to get clear at the outset, as this will have a
pervasive impact on your preparation: at what stage in its life cycle is the business? This will determine
the appropriate framework for any required discussion of its business strategy, financial strategy or
business transformation issues.
4.5.3
Understanding the role of the candidate in the case

Your role in the case will be as a student in the final year of his/her training contract, which might be in
a:
Professional accountancy practice

Company outside the accountancy profession
Central or local government department
Statutory agency or regulator
Not-for-profit organisation.
You may also be on secondment to a client or another department in your organisation. It is important
that you appreciate your required role, as this will provide the appropriate perspective for your exam
output.
4.5.4
Demonstration of communication skills executive summary

The 'executive summary' in the exam can be in one of a number of possible formats, so you need to be
aware in broad terms of the main characteristics of each of these when you go into the exam. You may
want to have a checklist with you.
This summary and the financial analysis contained in the numerical appendices (which are rewarded
separately) are two items that will almost always be required. These are key features of the Case Study
and are covered later in this Case Study Manual.
4.5.5
Quality v quantity
'How much do I have to write in order to pass the Case Study?'
Passing the Case Study is nothing to do with how much you write and everything to do with what you
write. The aim of the exercise is to keep your script relevant. The longer scripts tend to be those that
are padded out with irrelevant material, an inevitable consequence of which is that their authors run out
of time to spend on the bits that really matter.
4.5.6
Differentiators
From previous Case Study exams, the examiners have identified features that regularly distinguish
successful candidates from failing ones. Here (in no particular order) are the top ten most common
differentiators, or critical success factors:
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Good-quality financial analysis that makes the numbers talk

A succinct executive summary that covers all of the major issues
An absence of irrelevant material
Use of material from both the Advance Information and the Exam Paper
Development of analysis through judgement into reasoned recommendations and conclusions
Inclusion of innovative (but realistic) ideas
Comprehensive coverage of all parts of the requirements
References to economic and industry factors including ethical issues
Demonstration of professional scepticism and the ability to challenge assumptions
Application of common sense to ensure proposals are reasonable
Case Study
5 Preparing for the Case Study
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The skills you develop through your IPD form an integral part of the skills being assessed in the Case
Study exam. In taking responsibility for your skills development programme, you should identify those
in your work environment who can to help you: peers, tutors, managers and partners. Identify the areas
on which to concentrate your skills revision programme. Make use of the IPD material on the ICAEW
website to give you ideas on how to continue to develop these skills.
5.1
Preparing yourself
Planning is an essential prerequisite to passing any exam, but especially the Case Study. Planning for the
Case Study begins straight after you complete the Professional Stage. Although it is easy to
compartmentalise professional life into the separate areas of work and study, viewing the two areas as
complementary is critical for the Case Study. Your workplace experience should help you to put your
preparation for the Case Study into a meaningful practical context.
5.2
Technical and business knowledge

Good technical and business knowledge is also the foundation to demonstrating your skills in business
and financial analysis. The following are recommended:
Reading VITAL magazine
Referring regularly to the ICAEW website www.icaew.co.uk, especially any links to Financial Times
and other current articles
Seeking opportunities to practise technical skills and accounting techniques in the workplace,
questioning colleagues whenever necessary.
Specific exercises which can be done either alone or in small groups might comprise:
5.3
Studying financial statements prepared or audited by your office
Reading correspondence between your office and the taxation authorities
Reading due diligence reports prepared by your office in connection with a proposed business
acquisition or disposal.
Analytical skills
Sound analysis is the basis for exercising judgement and developing your conclusions and
recommendations. It can be broadly divided into two main aspects:
An overview or big picture

The relevant key components of the issues being covered.
You will need to be able demonstrate your understanding of where the business is placed in its life cycle
and appreciation of the macro issues facing the business in its context. To do this, you should be
comfortable applying tools for corporate and strategic analysis, such as PESTEL, SWOT or Porters 5
Forces.
Having assessed the big picture, you will then need to analyse the key components of the specific tasks
that you have been set. For this part of analysis, you need to be able to:
Select and use the relevant parts of SWOT, PESTEL or Porters 5 Forces (see below)
Incorporate relevant numerical analysis
Integrate your numerical analysis with your written work for a cohesive product.
To develop your analytical skills, you should make use of work programmes in the chapter Financial
analysis skills. These skills will be assessed in the Case Study and are critical to your success. You will also
need to obtain fair and open feedback. Ask for your work to be critiqued and, from the feedback,
develop your own analytical process.
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5.4
Communication skills
It is important to practise producing as many different types of output as you can, and to read those
prepared by professional colleagues. Each type of document involves a different set of skills: for
example, if you are asked to write bullet points, you may find initially that this is not an easy way to
express complex ideas in an unambiguous way. There will be many examples in your office of all these
different types of output. Ask colleagues about how they devised the format and contents and their
style.
The executive summary is the area where candidates written communication skills are specifically
tested, and here you should seek opportunities to read summaries of reports produced in your office.
Further guidance about executive summaries is given in later in this Case Study Manual.
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Case Study
CHAPTER 2
Introduction
Topic List
1 Financial analysis
2 Case Study A P Bath and Ceramics Ltd
3 Financial statement analysis
4 Financial data analysis
Answers to Interactive questions
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Introduction
This Financial Analysis Skills chapter has been developed using the experience of all previous sittings of
the Case Study (CS). There are a series of exercises, each designed to take about one hour (to cover
reading, individual and group work, and discursive feedback), that can be selected as required either to
form part of a formal tuition programme or to be used in self-study.
The exercises all use a short case study, AP Bath and Ceramics Ltd (APBC). There are 25 pages of case
material that provides a small amount of background information and a set of financial statements and
forecasts for APBC and for one of its suppliers, ZWS Lesznow Sp. z o.o. (ZWS L), a company based in
Poland. Each exercise focuses on a particular aspect of the case study material, but there are
opportunities to develop your skills further by integrating other aspects of the material into your
answers.
Why is financial analysis relevant to you in the Case Study?

The ability of a Chartered Accountant to perform financial analysis on any business is a primary skill and
one that clients will expect. Developing this skill is essential, both in practice and for examination
purposes; it is extremely difficult to succeed in the Case Study exam, and become a Chartered
Accountant, without it.
Although the Case Study examination is 4 hours long, you are always provided with guidance from the
examiners on how you should use your time. Reading, planning and calculations (including any
financial appendices to your report) are usually allocated 1 to 2 hours. It follows from this that your
financial analysis is expected to form a significant part of your answer and you will have to perform any
financial analysis at speed and with confidence.
1 Financial analysis
Section overview
1.1
Financial analysis is the review and explanation of the financial state of a business by way of an
examination of the published financial statements, the accompanying notes and additional
information (such as both financial and non-financial performance indicators), and any other
relevant financial data, as is available or can be obtained.
What is financial analysis?

Financial analysis can range from a high-level overview considering a number of key aspects of the
whole business through to a detailed analytical review of a particular business activity. In reality and
almost certainly in the Case Study exam the financial analysis that is usually required lies somewhere in
between. There are two main components to financial analysis; financial data analysis and financial
statement analysis.
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Financial analysis
Financial analsis
Financial data analysis
Financial statement analysis
Choice of analytical tools
Choice of relevant performance
Calculation and explanation
Indicators (including ratio analysis)
Flexing numbers
Calculation and explanation
Interpretation of results
Interaction of elements of financial

statements
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Financial data analysis involves using analytical techniques to assess the results of individual transactions,
measure a particular performance indicator or quantify the impact of changes in underlying
assumptions. It can include flexing the numbers or performing financial calculations such as breakeven analysis.
Financial statement analysis involves analysing the financial statements of an organisation, being both
the individual elements and the statements in their entirety, and using a variety of techniques in order
to understand the story behind them. Often this will involve using the output from your financial data
analysis.
1.2
What the examiners expect when they refer to financial analysis

When the examiners refer to financial data analysis, they expect you to:
Know what analytical tools they are referring to

Know the types of calculations that you might be asked to perform
Be comfortable using your judgement to amend your figures
Know how to carry out high quality sensitivity analysis
Know how to carry out meaningful reconciliations
Interpret your results meaningfully
When they refer to financial statement analysis, they expect you to:
1.3
Know how to apply your ratio analysis
Be able to make sense of the meanings behind changes in the numbers
Know how to demonstrate your professional scepticism
Have a process to carry out your initial analysis on the financial headlines of a business
Be able to discuss the principal financial aspects of any business its results, its financial position
and whether it is generating or using cash
Know what to look for in the income statement, the balance sheet and the cash flow statement
Be able to demonstrate financial fluency
The financial analysis exercises

The material included in this workbook sets out what the examiners expect of you in relation to these
issues and give guidance on how you can improve your answer in a Case Study exam.
Using the case study material for AP Bath and Ceramics Ltd (APBC), there are a variety of exercises
covering:
23
Balance sheet
Income statement and statement of changes in equity (SOCIE)
Cash flow statement
Improving your financial statement analysis under Competency Based Assessment
Break-even analysis
Valuation and investment appraisal
Flexing the numbers and sensitivity analysis
Reconciliations and interpretation of results
There are generally two exercises for each topic, with the second exercise building on the output from
the first and dealing with more complex issues.
At the end of each topic there is a comparison of answers under Competency Based Assessment (the
assessment methodology for the Case Study) that demonstrate what the examiners would expect if the
topic was part of a Case Study exam requirement. Although each exercise focuses on a particular aspect
of the case study material, you can see how you can develop your answers by integrating other aspects
of the material.
At the end of the financial statement analysis section, there is a comparison of answers for financial
statements as a whole so that you can see how the examiners expect you to integrate the three
individual elements.
2 Case study A P Bath and Ceramics Ltd

Section overview
The case of AP Bath and Ceramics was originally set as the Case Study exam in November 2002.
The information provided here is an updated summary of that information, but concentrating on
the main financial statements and other financial information relating to the two companies.
Any one, or any number, of the analysis questions set and discussed in the following material
could have formed part of a real Case Study exam. No candidate would be asked to perform all
the analysis shown in these materials in any single Case Study exam, but all candidates should be
aware of all the techniques demonstrated and discussed in these materials, which could form the
basis of exam requirements.
2.1
Case study material
A P Bath and Ceramics Ltd

Financial analysis case study
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Case Study
AP Bath and Ceramics Ltd

List of Exhibits
Exhibit Description
1
Memorandum from Lynne Lyons, partner in Lyons Maynard and Roscolla Chartered Accountants to
you, Britt Westlake
Letter from your client AP Bath and Ceramics Limited (APBC) to Lynne Lyons
Letter from ZWS Lesznow Sp. z o.o. (ZWS L), a supplier to APBC of ceramic mosaics
ZWS L: Business Plan (extracts)
ZWS L: Actual and Forecast Financial Statements and Notes
APBC: Extracts from the Audit Permanent File
APBC: Actual and Forecast Financial Statements and Notes
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EXHIBIT 1
Lyons Maynard and Roscolla

Memorandum
From:
Lynne Lyons
To:
Britt Westlake
Re:
AP Bath and Ceramics Limited
Date:
29 June 20X7
We have received some important correspondence from Jan Aakermans, the Managing Director of our
client AP Bath and Ceramics Limited (APBC), which I have attached to this memo (Exhibit 2). It appears
that a request for investment of funds and expertise has come from one of their major suppliers based in
Poland (Exhibit 3) and Jan Aakermans, on behalf of APBC, would like our views on this suppliers
Business Plan and Financial Information (Exhibits 4 and 5).
I am also attaching some extracts from our permanent file concerning APBC (Exhibit 6), together with
APBCs Actual and Forecast Financial Statements and Notes (Exhibit 7). This information was presented
at the recent planning and budget meeting of their Board.
Your previous client engagements and studies should help you to work through all of these documents
and give you the background against which to analyse and comment on the information provided and
the proposal outlined in the letter from Piotr Novak. I am confident that if you use your professional
experience to date, background knowledge and common sense you will come up with important and
useful comments.
In summary we are required to analyse the key figures in the accounts and business plan of the Polish
supplier ZWS Lesznow Sp. z o.o. (ZWS L) and to comment on any areas of concern which we can
identify from their proposal, on behalf of APBC.
Best regards
Lynne Lyons
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Case Study
EXHIBIT 2
AP BATH AND CERAMICS LIMITED

The Old Stone Mill, Church Street, Shipston-on-Stour, Warwickshire, CV3 4AR
Lynne Lyons
Lyons Maynard and Roscolla
15 Wells Street
Banbury
Oxon OX3 2PZ
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23 June 20X7
Dear Lynne,
Further to our previous discussions on future developments for AP Bath and Ceramics Limited we have
just received an interesting proposal from one of our major suppliers which I am forwarding to you.
Please find enclosed a letter, a business plan and a set of actual and forecast financial statements from
Piotr Novak, the Managing Director of ZWS Lesznow Sp. z o.o., on which I would like your views.
As you know we have worked with Piotrs company for the past ten years or more. Primarily they supply
us with our requirements of special order ceramic wares and mosaics, which we use to create featured
entrances and wall mosaics for our clients. However, they are more than just suppliers; they have been
a very real help to us in adapting our clients concepts for unique mosaics and turning them into
workable finished products of a very high standard. They are an essential part of our supply chain.
I know that during previous conversations I have discussed with you our concerns over the sustainability
of aspects of the UK market for our work. The recent high value of sterling against the dollar is causing,
and will continue to cause, a negative impact on the UK tourist trade. This impacts on us because it
means that our future order book for work on hotel conversions is looking lower than it has for many
years.
Similarly we are concerned that the recent increases in interest rates will have a negative impact on the
UK housing market and that will have an effect on the general commercial building market and a
subsequent effect on our UK office conversion and installation work. Some diversification abroad may
help to offset these downturns.
This opportunity to become more involved with ZWS L is something that I would want to consider very
seriously indeed. At the very least we would want to try to maintain our supply chain, but further we
would want to consider whether this is a good strategic investment for our company both financially
and in terms of future operations.
Could we meet in a couple of days to discuss this after you have had time to review it all? Please call me
to set up a meeting when you have reviewed this information.
Yours sincerely,
Jan Aakermans
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EXHIBIT 3
ZWS Lesznow Sp. z o.o.

ul Wandy, Lesznow,
POLAND
Jan Aakermans
The Old Stone Mill
Church Street
Shipston-on-Stour
Warwickshire CV3 4AR
19 May 20X7
Dear Jan,
Following our discussions at the trade fair in Frankfurt in March 20X7 and our subsequent numerous
telephone conversations concerning developing closer co-operation, I am sending you, as requested,
our Business Plan, the audited financial statements for the year to 31 December 20X6 and forecast
financial statements for the three years to 31 December 20X9 that we have developed (Exhibit 5). I am
also attaching some background information on the Polish economy to provide a broader context (see
Exhibit 4).
You know that we are looking for a partner organisation or financier to help us to re-equip our factory
and for an injection of expertise and know-how to help us to open up new markets. I believe that as an
important customer of ours, your closer involvement, which we have spoken about, would be to our
mutual benefit.
Our immediate concern is that we need to upgrade our production process in order to be able to take
advantage of new market opportunities in Poland and Central Europe and to avoid any potential
bottlenecks, inefficiencies and delivery delays which could occur without that upgrading. To this end
the proposed expenditure on non-current assets (NCAs) should take place as soon as possible. It has
been shown in our plan as starting in the year 20X7 with the bulk occurring in 20X8 and being
completed in 20X9.
You will see from our Financial Statements that we are a profitable company. The figures shown for the
year ended 31 December 20X6 are exactly as appear in our audited and registered Financial Statements
for that year. Our projections for 20X7X9 continue from that starting point and show our expected
trend in terms of sales, costs and profits. The projected revenues are based on a 15% increase in 20X7
over 20X6 which we are currently achieving followed by a smaller 10% increase in 20X8 as we
upgrade our NCAs. In 20X9 we expect to continue our 15% rate of increase in revenues. There are
some more detailed some notes with these financial statements to show our thinking on the figures. I
hope that this will explain matters for you.
As far as the Balance Sheet is concerned most of the information is straightforward. The changes in the
NCAs are derived from detailed schedules (not supplied to you at this time but which can be sent if
required) prepared in consultation with our architects and engineers concerning our proposed changes.
These additions to NCAs support our Required Investment shown in the Business Plan. The
depreciation calculated on NCAs is being charged on a per annum reducing balance basis as follows:
4 on land and buildings

5% on all equipment
0% on motor vehicles.
These rates are in line with taxation regulations in Poland.
As a result of this expenditure we are looking for an injection of capital in the near future (see
Exhibit 4). This could be either equity or loan finance, or a mix depending on the provider
concerned. I have presented this new investment in the Projected Balance Sheet under New
Equity and New Loans. We need around 2,200,000 Polish Zloty over the next few years. Currently
it is shown in the forecast as 200,000 Polish Zloty in New Equity and 2,000,000 Polish Zloty in
New Long-Term Loans drawn down in two instalments. The eventual make-up and repayment
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of this investment would be subject to agreement. I am sure that you understand we are looking
for participation from the finance provider, not a takeover.
Although primarily we are trying to raise the finance for our business I know that your organisation has
been successful using our products and we would be interested in your help to develop our markets.
As you are aware, there are significant changes happening to the Polish economy particularly since our
entry into the EU on 1 May 2004 not least the massive movement in population since that time.
However, an important side-effect of the recent emigration from Poland has been the remittances being
sent back to Poland by those working abroad, particularly in the past twelve months. This money is
being invested in property in Poland mainly houses and apartments and with that investment there
is the necessary rebuilding, refurbishing and general improvements and upgrading of those properties.
As a result there has been an increase in demand for all building products and we believe that we are
particularly well placed because our products are in line with current demands for quality goods. This
additional increase in demand is not specifically reflected in the forecasts but as I have said we are
currently achieving our forecast increase in this year.
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Overall the situation is definitely looking good for our business and we feel that the proposed
investment in NCAs will enable ZWS L to capitalise on the increasing domestic demand in our sector as
well as taking advantage of the burgeoning export market.
If you were to be interested in participating in our next stage of development it would be great to have
some of your expertise alongside. Please let me know what you think.
I look forward to hearing from you.

Yours sincerely
Piotr Novak
Managing Director
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EXHIBIT 4
Business Plan (Extracts)

Company history
The company ZWS Lesznow Sp. z o.o. (ZWS L) existed as part of the state-owned ceramics sanitary ware
group, ZWS Polska, for some fifty years from 1945 until 1995. ZWS L manufactures and supplies
ceramic sanitary ware mainly: baths, washbasins, complete toilet systems, shower trays and bidets. It
also supplies tiles and mosaics.
On 1 January 1995 ZWS L was privatised as one part of the overall privatisation of the ZWS Polska
Group. The ZWS L privatisation was achieved by a management buy-out from state ownership led by
the then Managing Director, Piotr Novak, who remains in overall charge of the company. In the case of
ZWS L the previous state owners had been deemed to be the local authority of Upper Silesia. Lesznow
was an area of high unemployment and was classed as a special development zone in Poland.
Many of the agreements and restrictions on operations concerning this buy-out, such as fixed rent
charges and no redundancy agreements, were effective for the first five years of the new operation. This
period of agreement ended on 31 December 1999, since which time the company has operated in a
fully competitive environment.
Ceramic sanitary ware
A significant strength of ZWS L has been the manufacture to order of specially sized or specially
coloured ceramic sanitary ware, although the vast majority of goods are pure white. These specially
sized, top quality, ceramic sanitary goods were used extensively in contracts with PKP, the state owned
railway company, for installation on the first class and sleeper compartments of trains. PKP had
traditionally expected top quality products for these luxury carriages, which ZWS L achieved. Demand
from PKP has diminished steadily in the past decade but has been replaced by demand from the
buoyant commercial and domestic building sector in Poland.
There has also been an increasing demand from customers outside Poland in Western Europe for ZWS
Ls special ceramic ware and mosaic tiles for installation in homes, offices and hotels. The fact of lower
labour and other costs has enabled ZWS L to compete on price, despite higher transport costs. ZWS L
has gained excellent experience and a strong reputation for meeting the requirements of the customers
in this market. The entry of Poland into the EU has removed barriers to trade within the EU
particularly in non-agricultural products.
According to Polish government economic statistics, from 20X0 to 20X5 there was a steady year-onyear increase in the value of the sale of ceramic sanitary goods. This averaged between 10 15 % in
value after inflation with an average increase of approximately 7% in volume. This steady increase is the
result of more than five decades of neglect within the property market, giving rise to a large demand for
the upgrading of property throughout Poland with the resulting growth in the demand for sanitary
goods.
In the year to December 20X5 it was estimated that the market demand for ceramic sanitary goods in
Poland was approximately 3.5 million pieces annually (sales of tiles are classified separately). Of this
total, Poland produces around 2.3 million pieces and imports around 1.2 million pieces. The demand
for these goods is a function of new housing and commercial construction activity in Poland, but
importantly, a large percentage (more than 70%) comes from the replacement of bathrooms within
existing apartments, houses and commercial buildings. ZWS L currently produces and sells around
50,000 pieces annually.
The market for ceramic sanitary ware in Poland is expected to remain strong for at least the next five
years as the housing improvements continue. In addition there is strong inward investment in Poland
from foreign companies whose expatriate workers require high-quality housing and accommodation.
According to an independent survey carried out in January 20X6, sponsored by Tourist Europe, the
tourist industry in Poland is expected to grow by some 8% a year for the next five years. One of the
greatest constraints to this growth in tourism that has been identified is the availability of good-quality
hotel accommodation.
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Case Study
The market for ceramic sanitary ware in Poland is divided into three main segments:
Segment 1 This comprises the large volume traditional items which are cheap and often of simpler
design.
Segment 2 This comprises high-quality goods, new styles, bought for use by those on middle and
higher incomes who are influenced by foreign styles and who demand more sophisticated
designs.
Segment 3 This comprises exclusive goods, the majority of which are imported items bought for use
by those on the highest incomes.
ZWS L operates in all three segments. Its main competitors are: Cersanit, based in Brzeg, approximately
120 kilometres southeast of Wroclaw; and Sanitec, which has operations all over Poland but whose
nearest site is Okrag some 140 kilometres northeast of Lesznow. Cersanit operates mainly in Segment 1
of the market. It has a high-volume mass-production operation offering good products at a good price.
Sanitec dominates Segment 2 of the market.
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Mosaic tiles
Since 20X1 ZWS L has supplied small, ornate, mosaic tiles used to create either floor or wall decorative
mosaics. Although originally these mosaics tiles were imported ZWS L developed its own process for
creating many of these products itself.
The region just north of the Tatra Mountains in Poland is famous for the quality and variety of clays that
exist in the hills and valleys. The rich colours in those local clays means that tiles can be manufactured
which range in colour from deep purple, created by blue lias deposits, through bright reds and light
yellows, caused by a variety of red marl and sand. Local limestone and chalk deposits also permit pure
white tiles to be produced. This region is only 200 kilometres from the ZWS L factory and, with a good
road and rail connection, transportation of clay is easy, economic and efficient.
The designs now offered by ZWS L are based on historic designs and ancient motifs taken from temples
and palaces and feature everything from European historical characters, ancient battle scenes religious
images and wildlife. As ZWS L has developed and expanded its skill base it has started to produce tile
scenes and patterns based on specific customer requests. At the present time the ZWS L output ranges
from modern abstract scenes to imitations of traditional ancient Eastern and Western style mosaics.
These intricate mosaic pictures are drawn, created and these tiles are glazed and fired within ZWS L
before being sent out to customers throughout Europe.
Sales of these mosaics have grown slowly but steadily. The demand for these tiles is potentially very
large in Poland as the number of luxury apartments and houses, up-market hotels and new offices is
increasing and these tiles provide a unique way of customising any setting. With its low cost base and
expertise ZWS L has a competitive advantage in the production of replica mosaics.
Production issues
Current situation
As a result of steadily increasing demand for its products ZWS L needs to upgrade and expand its
manufacturing capacity and operations in order to allow it to meet that increased demand and to
maintain and improve quality.
The current output and efficiency of the machinery is well below what could be achieved by investing in
new plant and equipment and re-designing part of the factory. New investment will also be made in the
latest computer assisted design and control production processes. This investment should permit an
increase in production of between 50% and 70% on current levels.
Required Investment
The required investment required in new buildings and machinery and equipment over the next three
years is shown in the following schedule:
31
Buildings
Zl000s
Year
20X7
Subtotal
Year
20X8
Subtotal
Year
20X9
Subtotal
Stage 1 of building and reconstruction

work. Upgrade of storage facilities for raw
material mix including new automated
transport system.
High pressure mixer to increase capacity for
non-standard items.
Gas quality control unit for main kiln.
1,000
Machinery &
Equipment
Zl000s
Motor
Vehicles
Zl000s
500
1,200
1,000
Reconstruction and reorganisation of

production process including storage
facilities plus one new short fire kiln.
Upgrade of vehicles and transport system
within factory for raw materials and finished
goods.
1,700
1,500
1,000
500
2,500
500
1,000
50
1,200
1,200
5,400
270
400
400
900
45
New office system plus new production

computerised equipment and software.
TOTAL
Contingencies overall (approximately 5%) not
included in non-current asset schedule
Polish Economic Statistics (source: Quarterly report Poland)
20X2
GDP (US $bn)
Inflation (% increase year on year)
Employment (% unemployed)
Population (millions)
Export of goods and services (US $bn)
Import of goods and services (US $bn)
Average exchange rate (Zloty : )
Interest rate
199
5.5
15.9
38.7
96
98
6.28
5.25%
20X4
212
3.2
12.0
38.8
97
98
5.82
4.5%
20X6
241
2.1
16.0
38.2
101
103
5.60
4.0%
Current exchange rates are approximately 1 = 5.5 Polish Zloty (Zl) and 1 = 1.5 Euros
Poland basic data
In terms of population, physical size and economy, Poland was the largest of the former Eastern bloc
countries to gain entry to the EU on 1 May 2004. Poland has not adopted the Euro its currency
remains the Polish Zloty (Zl), a relatively stable currency which has strengthened over time against the
UK sterling.
Poland has a Parliamentary democracy with an elected President and Houses of Representatives.
Religions are Roman Catholic (95%); Eastern Orthodox, Protestant and other (5%). It has an important
geographical location between Germany to its west and Belarus and Ukraine to the east. It also shares
borders with the Czech Republic and Slovakia in the south and Lithuania in the north. This location
makes Poland one of the important border countries of the EU.
The population of Poland is well educated. More than 50% of all 18 year olds attend universities,
academies or other educational institutions. The majority of the population speak at least two
languages: older people speak Polish and Russian; whilst younger people speak Polish with either English
or German as second languages.
The infrastructure in Poland is well developed with a good road and rail system. There are good road
links from western Poland with the rest of the EU through Germany. The rail system is extensive and
well maintained. There is a strong national airline (Lot) which has its hub in the capital, Warsaw.
Since joining the EU the Polish economy has strengthened with an increase in GDP; a decline in inflation
and the Polish Zloty exchange rate strengthening steadily against other major currencies such as the
Euro, the US dollar and the sterling.
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Case Study
EXHIBIT 5
Page 1
Actual and Forecast Income Statements

Year ending 31 December
All figures are in Polish Zloty (000)
Actual
Forecast
Forecast
Forecast
20X6
20X7
20X8
20X9
Notes
Revenue
Cost of sales
1
1
13,229
(8,236)
15,213
(9,241)
16,734
(9,863)
19,244
(11,161)
Gross profit
Administration,
marketing
& selling expenses
Transport &
distribution
EBITDA
Depreciation
Loss on disposal
4,993
5,972
6,871
8,083
(2,568)
(2,953)
(3,010)
(3,270)
(1,058)
(1,166)
(1,170)
(1,350)
4
4
1,367
(359)
-
1,853
(478)
-
2,691
(931)
(101)
3,463
(1,072)
-
1,008
(72)
936
(178)
1,375
(130)
1,245
(237)
1,659
(260)
1,399
(266)
2,391
(280)
2,111
(401)
758
1,008
1,133
1,710
Operating profit
Finance costs
Profit before tax
Taxation
Profit for the
period
5
6
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Statement of changes in equity
Year ended 31 December
Ordinary
share capital
Retained
earnings
Share holders'
equity
Balance as at 1 January 20X6

Profit for the period ended 31 December 20X6
Balance as at 31 December 20X6
New equity
548
548
200
748
748
-
1,772
758
2,530
1,008
3,538
1,133
4,671
1,710
2,320
758
3,078
1,008
200
4,286
1,133
5,419
1,710
748
6,381
7,129
33
EXHIBIT 5
Page 2
Actual and Forecast Balance Sheets

As at 31 December
Actual
Forecast
Forecast
Forecast
20X6
20X7
20X8
20X9
2,536
4,758
6,526
7,054
7
8
947
1,133
453
1,060
1,360
1,370
1,640
1,820
1,920
2,533
140
2,560
10
3,020
250
3,990
5,069
7,318
9,546
11,044
548
2,530
548
200
3,538
548
200
4,671
548
200
6,381
3,078
4,286
5,419
7,129
709
709
605
1,000
1,605
501
2,000
2,501
389
1,800
2,189
813
426
43
1,282
973
390
64
1,427
1,030
420
100
76
1,626
1,040
600
86
1,726
5,069
7,318
9,546
11,044
Notes
Non-current assets
Tangible fixed assets
Current assets
Inventory
Accounts receivable
Bank & cash
Total assets
Shareholders' equity
Old equity
New equity
Retained earnings
9
9
Total shareholders' equity

Non-current liabilities
Long-term bank loans
New loans
Current liabilities and provisions

Trade accounts payable
10
Taxes & duties payable
11
Bank overdraft
Other provisions
12
Total
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Case Study
EXHIBIT 5
Page 3
Actual and Forecast Cash Flow Statements

For the year ended 31 December
Cash flows from operating activities

Profit before tax
Adjustments for:
Finance costs
Depreciation
Loss on disposal
Change in accounts receivables
Change in inventories
Change in accounts payable (trade)
Cash generated from operations
Finance costs
Income taxes and duties
Other
Net cash from operating activities
Investing activities
Purchase of non-current assets
Proceeds from disposal of plant and
equipment
Net cash used in investing activities
Financing activities
Issue of new shares
Original loan
New loan
Net cash (used in)/from financing
activities
Actual
Forecast
Forecast
Forecast
20X6
20X7
20X8
20X9
936
1,245
1,399
2,111
72
359
-
130
478
260
931
280
1,072
1,853
(227)
(113)
160
1,673
101
2,691
(280)
(310)
57
2,158
3,463
(280)
(450)
10
2,743
(130)
(273)
(260)
(236)
(280)
(221)
1,367
(212)
(298)
62
919
(72)
(404)
8
451
21
1,291
12
1,674
10
2,252
(30)
(2,700)
(3,000)
(1,600)
(30)
(2,700)
200
(2,800)
(1,600)
(112)
-
200
(104)
(104)
(112)
1,000
1,000
(200)
(112)
1,096
896
(312)
Net change in cash & cash equivalents
309
(313)
(230)
340
Cash & cash equivalents at start of year
144
453
140
(90)
Cash & cash equivalents at end of year
453
140
(90)
250
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35

Notes to the actual and forecast financial statements
EXHIBIT 5
Page 4
Note 1 Revenue, cost of sales and gross profit

Over the past ten years the company has enjoyed a time of steady growth in sales revenue, both in
terms of volume (average 9%) and in monetary terms (average 19%). Although there is competition
from other local ceramic sanitary ware and tile manufacturers, ZWS L has increased its level of sales by
offering and delivering good-quality products, developing and selling its mosaics and meeting the
increasingly stringent and specific needs of its export clients.
There has been a steady change in sales mix over the past five years, which is expected to continue. The
actual sales and gross profit mix for 20X6 and the forecast for 20X7-X9 are shown below:
Wholesale
Retail
PKP
OSO&E *
Total
Actual 20X6
Revenue
GP
Zl 000
Zl 000
2,645
652
3,204
949
4,236
1,839
3,144
1,553
13,229
4,993
Forecast 20X7
Revenue
GP
Zl 000
Zl 000
3,042
760
4,071
1,221
3,300
1,419
4,800
2,572
15,213
5,972
Forecast 20X8
Revenue
GP
Zl 000
Zl 000
3,347
837
4,877
1,463
2,510
1,080
6,000
3,491
16,734
6,871
Forecast 20X9
Revenue
GP
Zl 000
Zl 000
3,848
962
5,796
1,739
2,100
882
7,500
4,500
19,244
8,083
(* OSO&E: Other special orders and exports)

The projected changes in sales mix are caused by a number of factors:
The volume of sales to merchants and installers will remain at about 20% of total sales. Although
there is competition, ZWS L matches all competitors on price and offers better-quality products.
Retail sales will continue to grow despite competition. ZWS L has an established customer base, its
products are well-known locally and it is expected that demand in this sector will grow over the
next three years. ZWS L expects to maintain its share of this sector of the market.
The demand from PKP for the special sanitary ware for trains will decline over the next three years
because PKP is shifting to stainless steel.
ZWS L expects significant growth in OSO&E particularly in sales of mosaics. By meeting client
requirements to standard and to time ZWS L has been building its activity and profitability in this
sector over the past five years it is expected that this trend will continue. ZWS L will be
intensifying its targeting of this market with its range of products and expects to be able to
increase its volume of sales and its sales prices as a result of that effort. Sales to APBC are
included within this category.
Note 2 Administration, marketing & selling expenses

Although there will be an increase in marketing expenses, there are expected to be efficiency savings in
administration and selling costs over the next three years.
Note 3 Transport & distribution expenses
By investing in a new, better-quality fleet of vehicles ZWS L expect its transport costs to diminish as a
proportion of sales over the next three years.
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Case Study
EXHIBIT 5
Page 5
Notes to the Actual and Forecast Financial Statements

Note 4 Non-current assets
Total
Land &
Machinery &
Assets /
Motor
Buildings
Equipment
Construct'n
Vehicles
1,183
2,982
604
4,769
30
30
1,183
3,012
604
4,799
Cost
At 1 January 20X6
Additions
At 31 December 20X6
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Depreciation
At 1 January 20X6
246
1,440
218
1,904
Charge for the year
47
235
77
359
At 31 December 20X6
293
1,675
295
2,263
Carrying amount at 31 Dec 20X6
890
1,337
309
2,536
2
Cost
At 1 January 20X7
Additions
At 31 December 20X7
1,183
3,012
604
4,799
1,200
1,500
2,700
1,183
4,212
1,500
604
7,499
293
1,675
295
2,263
Depreciation
At 1 January 20X7
Charge for the year
36
380
62
478
At 31 December 20X7
329
2,055
357
2,741
854
2,157
1,500
247
4,758
1,183
4,212
1,500
604
7,499
2,500
(800)
500
(1,000)
500
-
3,000
(800)
-
Cost
At 1 January 20X8
Additions
Disposals
Transfers
At 31 December 20X8
500
1,683
6,412
500
1,104
9,699
Depreciation
At 1 January 20X8
On disposals
329
-
2,055
(499)
357
-
2,741
(499)
Charge for the year
54
728
149
931
383
2,284
506
3,173
1,300
4,128
500
598
6,526
At 31 December 20X8
37
EXHIBIT 5
Page 6
Note 4 Non-current assets (continued)
Total
Land &
Machinery &
Assets /
Motor
Buildings
Equipment
Construct'n
Vehicles
1,104
9,699
400
-
1,600
-
1,504
11,299
Cost
At 1 January 20X9
1,683
6,412
500
500
1,200
-
(500)
2,183
7,612
At 1 January 20X9
383
2,284
506
3,173
Charge for the year
72
800
200
1,072
455
3,084
706
4,245
Carrying amount at
31 Dec 20X9
1,728
4,528
798
7,054
Rates of depreciation:
4% WDV
Additions
Transfers
At 31 December 20X9
Depreciation
At 31 December 20X9
15% WDV
Nil
20% WDV
Depreciation is a tax allowable expense in Poland within certain parameters. The percentages used above fall
within the tax allowable range.
Note 5 Finance costs
Finance costs represent the interest to be paid on both the old and the new loan.
Note 6 Taxation
Taxation is calculated at the current rate of 19% on assessable net profit.
Note 7 Inventory
Inventories are shown at the lower of cost and net realisable value.
Note 8 Accounts receivable
Accounts receivable are shown before any provisions for doubtful debts (see Note 12).
Note 9 Issued equity
Old equity represents the amount of capital already issued. It is all held by members of the board, who
are all employed within the company, and who also receive salaries for their work. New equity
represents the additional capital which would be introduced as part of any new financing deal. The Zl
200,000 is a suggested figure and would rank pari passu with the old equity in all respects.
Note 10 Trade accounts payable
Trade accounts payable are the amount owed to creditors for purchases of inventory and supply of
services.
Note 11 Taxes and duties payable
This figure includes company tax, VAT and other taxes and duties unpaid at the year end.
Note 12 Other provisions
This comprises the provision for bad and doubtful debts shown here for Polish national reporting
purposes.
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Case Study
EXHIBIT 6

Permanent File Extracts (as at May 20X7)
Background
AP Bath and Ceramics Limited (APBC) was established 10 years ago by Austin Page. Created to take
advantage of the increasing activity in the property market and the major building developments taking
place in the UK, APBC currently specialises in upmarket bathroom, sanitary ware and ceramic tile
installations in prestigious buildings throughout the UK. APBC has been an audit client of Lyons
Maynard and Roscolla since the company was created.
In the first five years of its existence the business grew significantly. Clients were the major developers of
new hotels and office buildings and apartment blocks throughout the UK. APBCs work included the
design and supply, as well as the installation, of all aspects of bathroom and decorative ceramics in
these new luxurious buildings. It proved to be a successful business venture.
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An increasingly significant factor in APBCs success since 20X0 has been the supply and installation of
unique ceramic floor and wall mosaics imported from Poland. Dramatic entrance hallways and foyers
were created by the use of these stunning mosaics which were based on client designs, or which
recreated ancient cultural scenes.
The use of these mosaics had resulted from a meeting between Jan Aakermans, Managing Director of
APBC, and Piotr Novak at a trade fair in Poznan in March 20X0. Jan, who is from the Netherlands,
speaks fluent German as well as English and Dutch. The discovery of the Polish manufacturer ZWS
Lesznow Sp. z o.o. (ZWS L) was opportune in every sense. ZWSLs sanitary ware and mosaic products
were unique in Poland, its prices were very good value and competitive, and the quality was excellent.
Its ability to manufacture bathroom mosaics to specific requirements and within a very tight timescale
was ideal for APBC and their clients.
Three months after the trade fair meeting, the first commissioned mosaic floor was physically on its way
to the UK to be laid in the entrance of Denobe and Spiers, a law firm in Oxford. With the firms motifs of
justice scales and law scrolls on an apparently faded Latin script background it achieved the exact
stunning effect that APBC and their client had envisaged. This success provided good publicity and this
new line of the business developed.
Since that time similar wall and floor mosaics have been installed in the entrances of many new
buildings: office developments; apartment blocks and shopping malls including prestigious new sites
in Canary Wharf (London) in the UK. The effect has been universally acclaimed and APBC have received
awards for their work.
APBCs share capital of 1,000,000 ordinary shares is fully paid up and is held entirely by the members
of the board. These shareholders and directors are all members of the same family.
The financial systems are under the control of Claire Brensen (nee Page), Finance Director and daughter
of Austin Page. The financial statements and budgets are prepared by Claire and the notes and
commentaries are prepared by Claire in consultation with Jan Aakermans.
39
AP Bath & Ceramics Limited

Actual and Forecast Financial Statements
Years ending 31 March 2006-20X9
EXHIBIT 7
Page 1
Overall commentary
The reduction in level of gross revenue for the year to 31 March 20X7 by comparison with the year to
31 March 20X6 was caused by a number of large contracts being completed in the year to 31 March
20X6. Despite that, the financial figures for the year ended 31 March 20X7 show another strong year:
the profit held firm and the cash position, including short term deposits, remained very good. This
success stems from excellent design ideas, realistic pricing and successful tendering, all coupled with
quality delivery on time and on budget.
The forecasts for the next two years (to 31 March 20X8 and 20X9) have been prepared at a time of
uncertainty. At the present time a number of major factors are affecting the UK building and property
market and the general economy. Although our forecasts show good profits and good cash flows from a
projection of our current core business, we are aware that the economic uncertainties in the housing
and building market, together with the recent increases in bank base rates, make the figures very
sensitive and susceptible to economic changes.
On the positive side, the effect of winning the bid to stage the next Olympics in four years time will
mean that an extensive regenerative building programme will have to be undertaken in London. It is
planned that this building programme will include a large number of luxury developments and as a
result should be the eventual source of work for APBC.
EXHIBIT 7
Page 2
Actual and Forecast Income Statements

Year ending 31 March
Actual
Actual
Forecast
Forecast
20X6
20X7
20X8
20X9
Notes
'000
'000
'000
'000
Revenue
Cost of sales
1
2
16,652
(10,824)
13,978
14,250
14,500
(9,085)
(9,100)
(9,150)
Gross profit
Transport & distribution
Administration
1
3
4
5,828
(1,240)
(2,821)
4,893
(978)
(2,238)
5,150
(1,000)
(1,849)
5,350
(1,020)
(1,780)
EBITDA
Depreciation
Loss on disposal
1,767
(547)
(30)
1,677
(418)
-
2,301
(551)
-
2,550
(420)
-
1,190
61
(65)
1,186
(335)
1,259
69
(56)
1,272
(368)
1,750
80
(51)
1,779
(550)
2,130
90
(44)
2,176
(660)
851
904
1,229
1,516
Operating profit
Interest receivable
Interest payable
Profit before tax
Taxation
Profit for the period
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6
7
8

Statement of changes in equity
Year ended 31 March
Ordinary
share capital
Retained
earnings
Share holders'
equity
Balance as at 1 April 20X5

Profit for the period ended 31 March 20X6
Dividend
Balance as at 31 March 20X6
Dividend
Dividend
'000
1,000
1,000
1,000
-
'000
3,166
851
(500)
3,517
904
(500)
3,921
1,229
(500)
'000
4,166
851
(500)
4,517
904
(500)
4,921
1,229
(500)

Dividend
1,000
-
4,650
1,516
(500)
5,650
1,516
(500)
1,000
5,666
6,666
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EXHIBIT 7
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Actual and Forecast Balance Sheets

As at 31 March
Actual
Actual
Forecast
Forecast
20X6
20X7
20X8
20X9
'000
'000
'000
'000
3,766
3,348
3,797
3,377
9
10
903
1,706
1,008
103
897
1,586
1,501
950
1,650
1,850
1,000
1,750
3,000
3,720
219
4,203
181
4,631
359
6,109
Total assets
7,486
7,551
8,428
9,486
Shareholders' equity
Ordinary share capital
Retained earnings
1,000
3,517
1,000
3,921
1,000
4,650
1,000
5,666
4,517
4,921
5,650
6,666
Actual
Actual
Forecast
Forecast
20X6
20X7
20X8
20X9
'000
'000
'000
'000
705
629
548
460
942
335
500
487
2,264
739
368
500
394
2,001
780
550
500
400
2,230
795
660
500
405
2,360
7,486
7,551
8,428
9,486
Notes
Non-current assets
Current assets
Inventory
Accounts receivable
Investments - deposits
Bank & cash
Total shareholders' equity
Notes
8% loan
Current liabilities
Taxes payable
Dividends
Other accounts payable
Total
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11
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EXHIBIT 7
Page 4
Actual and Forecast Cash Flow Statements

For the year ended 31 March
Cash flows from operating activities

Profit before tax
Adjustments for:
Finance costs
Finance income
Depreciation
Loss on disposal
Change in accounts receivables
Change in inventories
Change in accounts payable (trade)
Finance costs
Finance income
Income taxes paid
Other
Investing activities
Purchase of non-current assets (machinery)
Proceeds from disposal of plant and
equipment
Financing activities
Dividends
Long-term loans
Net cash (used in)/from financing
activities
Actual
Actual
Forecast
Forecast
20X6
20X7
20X8
20X9
'000
'000
'000
'000
1,186
1,272
1,779
2,176
65
(61)
547
30
1,767
(36)
(21)
29
1,739
(65)
61
(345)
(7)
1,383
56
(69)
418
51
(80)
551
44
(90)
420
1,677
120
6
(203)
1,600
2,301
(64)
(53)
41
2,225
2,550
(100)
(50)
15
2,415
(56)
69
(335)
(93)
1,185
(51)
80
(368)
6
1,892
(44)
90
(550)
5
1,916
(723)
(1,000)
3
(720)
(1,349)
(500)
(71)
(500)
(76)
(500)
(81)
(500)
(88)
(571)
(576)
(581)
(588)
92
609
311
1,328
Cash and cash equivalents at start of

year
1,019
1,111
1,720
2,031
Cash and cash equivalents at end of year
1,111
1,720
2,031
3,359
Net change in cash and cash equivalents
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Page 5
Note 1 Revenue and gross profit

Overall 20X7 has seen a reduction in revenue compared with the previous year. The analysis by segment
is as follows:
Hotel
Office
Other
Total
Conversion
Conversions
Private
'000
'000
'000
'000
Year ended 31 March 20X7

Revenue
Cost of sales
Gross profit
Gross profit %
6,053
4,930
2,995
13,978
(4,183)
(3,204)
(1,698)
(9,085)
1,870
30.9
1,726
35.0
1,297
43.3
7,159
5,821
3,672
16,652
(5,029)
(3,672)
(2,123)
(10,824)
4,893
35.0
Year ended 31 March 20X6

Revenues
Cost of sales
Gross profit
Gross profit %
2,130
29.8
2,149
36.9
1,549
42.2
5,828
35.0
Although there was a decline in revenue, 20X7 was a relatively trouble-free year for APBC in terms of
both winning work and delivering to schedule and contract. The company has stuck to its policy of not
bidding for the very big contracts and has used its expertise and that of its established suppliers to
deliver a good-quality service and product to its clients.
The estimated revenue for the next two years (to 31 March 20X8 and 20X9) is based on the 20X7
results and shows only a small level of growth. APBC has been cautious in its revenue forecast, which it
believes to be realistic in a sector which is most difficult to predict. However, the company believes that
its sales mix will change with a larger proportion of revenue being derived from the higher profit margin
private sector.
Note 2 Cost of sales
APBC expects its cost of sales to remain roughly in line with the cost breakdown in the financial
statements to 31 March 20X7, which was:
'000
'000
'000
'000
415
478
275
1,168
Purchases: sanitary ware etc
1,712
1,829
831
4,372
Purchases: tiles and mosaics
181
273
83
537
Installation costs
1,147
1,352
509
3,008
Total
3,455
3,932
1,698
9,085
Design and related costs
Note 3 Transport & distribution costs

Transport & distribution costs show the cost of running APBC commercial vehicles. These costs have
moved, and are predicted to move, in line with sales.
Note 4 Administration costs
Administration costs have been streamlined in 20X7 are expected to continue to be subject to general
efficiency savings over the next two years.
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EXHIBIT 7
Page 6

Land &
Plant &
Office &
Motor
Buildings
Machinery
IT
Vehicles
'000
'000
'000
'000
496
672
5,050
153
(81)
194
-
568
3
866
5,478
Cost
'000
At 1 April 20X5
2,100
Additions
Disposals
At 31 March 20X6
2,100
Proceeds
1,782
376
(214)
1,944
Nil
Total
723
(295)
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Depreciation
At 1 April 20X5
On disposals
8
-
912
(205)
215
(57)
292
-
1,427
(262)
Charge for the year
296
103
144
547
At 31 March 20X6
12
1,003
261
436
1,712
2,088
941
307
430
3,766
At 1 April 20X6
2,100
1,944
568
866
5,478
At 31 March 20X7
2,100
1,944
568
866
5,478
12
1,003
261
436
1,712
Charge for the year
229
77
108
418
At 31 March 20X7
16
1,232
338
544
2,130
2,084
712
230
322
3,348
2,100
1,944
568
866
5,478
250
500
250
1,000
2,100
2,194
1,068
1,116
6,478
Carrying amount at 31 March 20X6
Cost
Depreciation
At 1 April 20X6

Cost
At 1 April 20X7
Additions
At 31 March 20X8
Depreciation
16
1,232
338
544
2,130
Charge for the year
At 1 April 20X7
221
183
143
551
At 31 March 20X8
20
1,453
521
687
2,681
2,080
741
547
429
3,797
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Page 7

Land &
Plant &
Office &
Motor
Buildings
Machinery
IT
Vehicles
'000
'000
'000
'000
Total
'000
Cost
At 1 April 20X8
2,100
2,194
1,068
1,116
6,478
At 31 March 20X9
2,100
2,194
1,068
1,116
6,478
20
1,453
521
687
2,681
Depreciation
At 1 April 20X8
Charge for the year
173
136
107
420
At 31 March 20X9
24
1,626
657
794
3,101
2,076
568
411
322
3,377

Annual rates of depreciation *
2% (SL)
25% (RB)
25% (RB)
25% (RB)
(* SL = straight line; RB = reducing balance)

Note 6 Interest receivable
The interest receivable in 20X7 has been earned through short-term and overnight investments made
during the year. The forecast has assumed similar returns in the future on any funds available for
investment.
Note 7 Interest payable
Interest payable represents the amounts due on the UK 900,000 8% 10-year loan.
Note 8 Taxation
Corporation tax is calculated at 30% of the assessable profit.
Note 9 Inventory
Inventory includes work in progress and is valued at lower of cost and net realisable value.
Note 10 Accounts receivable
The accounts receivable figure represents the amounts owed across all contract work at the year end. As
in the past no provision is made for doubtful debts.
Note 11 Trade accounts payable
Trade accounts payable represent balances outstanding to UK and European suppliers.
Note 12 Other accounts payable
Other accounts payable include customs charges; wages and salary accruals; and all utility accruals.
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Case Study
3 Financial statement analysis

3.1
Introduction
Financial statement analysis is an evaluation and explanation of the information contained in the
financial statements, including summary statements, management accounts, budgets and forecasts, of a
business. This analysis covers the financial performance (income statement including SOCIE), financial
position (balance sheet), and cash flow (cash flow statement).
Initial analysis
Your initial analysis should consider the financial headlines of the business by way of a rapid review.
From that review, you should be able to assess the business by reference to the following criteria.
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Context/nature of business
Expanding or contracting business sector?

Impact of recent global events?
Impact of technology on this business?
Growth
Growing, shrinking or static: where in the business life cycle?

How is it growing: organically or by acquisition?
Making good profits, marginal profits or making a loss: how much, when?
Stable or erratic performance: spurts of growth and plateaux?
Size
Small, medium or large: using what criteria?

A single company or group: national or international?
Quoted or unquoted: What are the volumes of shares issued?
Stability
Financially well-structured; mix of debt (long-/short-term) and equity?
Solvent: able to meet its current liabilities?
One with a good life-expectancy: Is it starting up, expanding financially or declining?
With achievable budgets and forecasts in line with strategic direction?

The aim of this initial analysis is to understand and assess the business as a whole and not ignore
obvious features.
Detailed analysis
The next step is to make a more detailed analysis of the financial statements. This involves
examining and explaining the information provided in each of the three key documents - income
statement (including SOCIE); balance sheet and cash flow statement - together with the detailed
notes. The questions that you need to ask yourself are:
What are the key elements to the businesss results (ie profits, losses, surpluses or deficits)?
What is the businesss financial position (ie net assets, net current assets, gearing, capital
structure, quality of assets, nature of liabilities)?
Is the business generating or using cash? Why? What is the relationship between the results
and the cash generation/usage?
Using ratio analysis

Ratio analysis provides a logical pathway to be followed in the examination and review of figures in
financial statements but then it must be developed. You must be able to calculate the basic
groups, or families, of ratios for profitability, liquidity, ROCE, financial structure and asset
efficiency and to calculate them at speed and with accuracy.
The basic numerical ratio analysis should be considered in the same category as a PESTEL or SWOT
review: very useful as a starting-point for further analysis. The important thing about ratio analysis
is that it permits comparisons to be made between:
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The current results with past results or with budgets

The results of one subsidiary with those of another
Comparative performance of business segments
The company under review with a rival or takeover target
The appendices of the weaker Case Study exam candidates are full of pages of mathematically
correct ratios demonstrating that candidates can cope with this basic skill. This skill has already
been tested at the Professional Stage, so there are minimal marks given for calculation of figures.
The emphasis in the Case Study exam is on your ability to demonstrate how the main families of
ratios interrelate, and how you make sense of the meaning behind changes in the numbers. In
addition, for forecasts, you will need to develop possible alternative scenarios by flexing the
underlying assumptions and discussing your results using sensitivity analysis a concept that was
explained earlier.
Using financial statement analysis in a Case Study environment

This section includes seven exercises, two for each of the three elements of financial statements
and one for the financial statements overall.
The process you should use is the same as at Professional Stage and is a variation on the table
above:
Focus on:
Results The financial performance (income statement including SOCIE)

Debt Financial position (balance sheet)
Cash Cash flow (cash flow statement)
Consider:
Business How do the business issues relate to the financial statements?

Adjust Remove one-off items, including acquisitions/disposals
Segment Slice and dice; break the numbers down into components
Sceptic What judgements have been exercised; appropriately/ethically?
Ask:
Why? The elements in your financial statement analysis require an explanation

So what? What does this mean to the business or the analysis?
Like for like? Adjust for any non-recurring items or changes in the business
In the Professional Stage exams, you were generally provided with a small amount of information in a
straightforward scenario. The purpose of these exercises is to show how to carry out financial statement
analysis in a Case Study environment, where you are provided with a lot more information that is
sometimes incomplete.
3.2
Income statement including the SOCIE

The key issues in income statement analysis concern results and financial performance:
Trend in revenue: how achieved if rising, or caused if falling?
Trend in gross profit: rising or falling: in absolute gross profit % terms? Are the margins the same
for different products? What is the effect of changes in the mix of sales?
Pattern of costs against revenue: rising or falling? What is causing any inconsistency? Are they fixed
or variable?
Are there any material anomalies in any single key cost figures?
Is the level of operating profit and profit before tax being achieved satisfactory and stable? Are they
increasing or decreasing?
Is there consistency one year with another of the bridging items between income statement and
balance sheet? How material are the following items:
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Closing inventory?
Depreciation and profits or losses on disposals?
Provisions for bad and doubtful debts?

Accruals and prepayments?
Is the tax charge reasonable?
Is the dividend policy understandable and consistent?
Given the time constraints in a four-hour Case Study exam, you would not be able to consider any more
aspects if you were asked to provide an appropriate detailed commentary on the income statement. In
fact, if there is a number of products with different patterns of revenue and gross profit, or you are
required to carry out a comparative exercise against another company or against expected results, you
would have to identify which of the above are the key performance indicators.
Interactive question 1 and 2: Income statement analysis
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The two exercises in this section relate to the income statements for APBC (Exhibit 7) and ZWS L
(Exhibit 5).
Exercise 1 requires you to review APBCs actual results for the year ended 31 March 20X7 against
the comparatives for 20X6.
Exercise 2 requires you to review ZWS Ls forecast profit for the year ending 31 December 20X7
using the results for 20X6 as a basis and carry out some sensitivity analysis.
Exercises
1
2
Review the results for APBC for 20X7 against 20X6.

Review the forecast profit for 20X7 for ZWS L against the actual results for 20X6.
See Answer at the end of this chapter.
3.3
Statement of financial position (or balance sheet) analysis

The objectives of balance sheet analysis are to assess a businesss financial position, consider the quality
of its assets and liabilities, and conclude on whether the balance sheet is strong or weak. If the balance
sheet is prepared under the historical cost convention, it also requires a consideration of likely market
values, particularly of non-current assets.
The key issues in balance sheet analysis concern financial position, content, structure and stability. The
main questions to be asked are:
Do the quadrants of non-current assets and long-term funding appear balanced?
What is the quality of the non-current assets: largely tangibles such as equipment or mostly
intangibles such as goodwill? What might be an independent market value of these items?
Does the majority of the long-term funding comprise share capital and retained earnings or is it
mainly long-term debt? Is that debt soft directors loans; or hard external funding with a
high rate of interest and a short redemption date?
Do the quadrants of current assets and current liabilities appear in balance? If not, would you
consider this to be appropriate given the nature of the business?
What is the quality of the current assets and how liquid are they? Do they comprise mainly
inventory and slow paying accounts receivable, or is a sufficient quantity of cash available?
Are the current liabilities softer trade payables and accruals; or harder bank overdrafts and
liabilities such as VAT, PAYE and corporation tax?
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Interactive question 3 and 4: Balance sheet analysis

The two exercises in this section relate to the balance sheet for APBC (Exhibit 7) and ZWS L (Exhibit 5).
The first requires you to review APBCs balance sheet at 31 March 20X7 against the comparatives
for 20X6.
The second requires you to review ZWS Ls forecast balance sheet at 31 December 20X7 using
20X6 as a basis and carry out some sensitivity analysis.
Exercises
3
4
Review the balance sheet for APBC for 20X7 against 20X6.
Review the forecast balance sheet for 20X7 for ZWS L against the actual for 20X6.
3.4
Cash flow analysis

An analysis of the cash flow statement provides an opportunity to assess the businesss cash flows (as
opposed to profits or losses) and review all aspects of its financial operations.
It is not simply the third financial statement which may be superficially assessed each line is
significant. Questions and commentary may include:
How successful is the business in generating cash from its operations? This includes revenues, gross
profit, overheads and working capital management.
Is the working capital being managed in line with the increase/decrease in business activity?
Is the business earning an appropriate return on its investment? Is it paying out significant sums on
the servicing of finance?
What has been the cash flow impact of payments for taxation? Are the payments consistent with
the liability?
What is the company policy on capital and financial investment? Is there an appropriate noncurrent asset replacement policy?
What are the strategic implications of the activities concerning subsidiaries and associate
companies?
Is the policy on equity dividends appropriate? Can the business afford the payments?
What is the companys long-term financing strategy and is it appropriate for the business?
Is the company making best use of its liquid resources?
What is happening to the cash balances in the business? How much is being held?
Overall what the cash flow statement tells you is how the business is being managed in financial terms
at all levels. All financial analysis therefore must include a succinct analysis of the cash position and/or
the information in the cash flow statement.
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Case Study
Interactive question 5 and 6: Cash flow analysis

The two exercises in this section relate to the cash flow statements for APBC (Exhibit 7) and ZWS L
(Exhibit 5).
The first requires you to review APBCs actual cash flows for the year ended 31 March 20X7 against
the comparatives for 20X6.
The second requires you to review ZWS Ls forecast cash flows for the year ending 31 December
20X7 and carry out some sensitivity analysis.
Exercises
5
6
Review the cash flow statement for APBC for 20X7.

Review the forecast cash flow statement for ZWS L for 20X7.
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3.5

When required to interpret results, weaker candidates tend to describe what should be done, rather
than actually doing the work and discussing the outcomes. It is also important to consider how best to
present the results in order to enhance your interpretation.
One method of presentation that may be appropriate is a reconciliation. This is a powerful analytical
tool that can explain clearly, in financial terms, what has happened over period of time. It could be
between:
Information about an entity from different perspectives, eg financial and management accounts
Financial performance presented under different GAAP
Forecast and actual results
Results before and after an event, eg acquisition, disposal, market change etc.
To be successful in the Case Study exam, it is essential that you understand, and can explain, the
differences between the two positions that you are reconciling and the factors that link them. You need
to know what the constituent components of each element are and then explain the movements in
each.
Interactive question 7: Reconciliations and interpretation of results
The exercise below relates to the forecast profit before tax gross profit for ZWS L for 20X9 that is
provided in Exhibit 5. It illustrates how a reconciliation can be used to analyse and interpret the
forecast results.
Exercise 7
Reconcile the 20X9 forecast profit before tax for ZWS L to the 20X6 actual results and comment on the
key factors underlying the projected growth.
3.6
Improving your financial statement analysis under Competency Based

Assessment
What is the purpose of your financial statement analysis?
In the Case Study exam, you will rarely be asked to consider only one element of the financial
statements in isolation. The requirement is more likely to be:
Your report should include a review of the 20X7 financial forecasts for ZWS L.
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Therefore, having considered each of the three individual financial statements, flexed the numbers and
done your sensitivity analysis as required, you need to link all the pieces together and conclude on the
financial statements as a whole.
To be successful in the Case Study exam, you will need to:
Carry out a meaningful initial analysis of the financial statements in order to identify the key drivers
Use the key drivers to determine the detailed work you will carry out in your analysis of the three
individual financial statements
If you are reviewing a forecast, carry out some relevant sensitivity analysis on your key drivers
In doing this, you will need to exercise judgements in a number of ways:
Identifying the key drivers

Assessing the level of detailed work necessary to tell the story
Selecting appropriate parameters against which to measure your sensitivity analysis
Selecting appropriate movements in the key drivers on which to measure the change in output
As with all judgements, these must flow logically from the analysis you have done. It may be that you
need to put some reservations, provisos or parameters around the judgements, based on professional
assessment of the criteria, but it is expected that any judgement you give would be unambiguous,
indicate confidence in your own work, and ultimately support your conclusions and recommendations.
Interactive question 8: Summary review
The exercise below relates to the forecasts for ZWS L for 20X7. It illustrates how you should link
the various elements of your financial statement analysis to be successful under Competency Based
Assessment.
Exercise 8
Using your output from Exercises 9, 11 and 13, prepare a summary review of the 20X7 forecast for ZWS
L.
4 Financial data analysis

Section overview
Just as strategic analysis of a business across all its domains can be refined and focused by means
of techniques such as SWOT, PESTEL and Porters 5 Forces Analysis, so can financial analysis make
use of similar logical techniques which fall under the heading of financial data analysis. This
covers:
4.1
Choosing appropriate analytical tools

Calculations and explanations
Using appropriate analytical tools

The tools that you will be required to use in the Case Study exam have all been covered in the
Professional Stage. They are:
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Sensitivity analysis
Breakeven analysis
Short-term and long-term decision-making
Working capital management
Investment valuation and appraisal
Case Study
Appraisal of sources of long-term finance

Cost of capital and capital structure
Equity sources and dividend policy
Risk and decision-making
Financial strategies for developing the business
In the Case Study exam, you are not always told which analytical tool(s) to use to develop the required
output. You will need to use your judgement when making this decision. Accordingly, in preparation
for the Case Study exam, you need to be able to know how to use each of the analytical tools provided
in the Professional Stage and Technical Integration Learning Materials and know which tool is relevant
to a given situation.
The use of some of these tools is covered in this chapter: sensitivity analysis, breakeven analysis; and
investment valuation and appraisal.
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In the Professional Stage exams, you were generally provided with a small amount of information in a
straightforward scenario. The purpose of the following exercises is to show how to use these tools in a
Case Study environment, where you are provided with a lot more information that is sometimes
incomplete.
4.2
Using financial data analysis in a Case Study environment

2
In the Professional Stage exams, the questions were often closed, ie there was a defined answer. In
the Case Study exam, the requirements are always open, ie the examiners are assessing the approach
you adopt in your answer and your ability to use the data in a constructive way, and there will generally
not be a right or wrong answer.
4.3

A critical element of financial analysis is the ability to flex the numbers given or calculated and then
comment on the impact. In the Case Study exam, this may be correcting a series of erroneous
transactions, or flexing a forecast to reflect changes in the underlying assumptions. Sometimes, the
issue is spelt out because errors have occurred in the information previously provided and these need to
be corrected. Often it is left to your discretion to decide whether flexing the numbers might be
appropriate.
One of the tools available is sensitivity analysis. This involves identifying the critical factors to any
numerical calculation and considering the effect on the result of changing one or more of them. In the
Case Study exam, you are not expected to perform endless similar speculative calculations. Accordingly,
it is important to identify your critical factors with care.
The two exercises in this section relate to the forecast gross profit for ZWS L for 20X9. Exhibit 3
provides some economic background to the forecasts, exchange rate data is in Exhibit 4 and you will
need to use the income statements for ZWS L in Exhibit 5.
Interactive question 9 and 10: Flexing the numbers and sensitivity analysis
Exercise 9 requires you to identify some critical factors behind the 20X9 forecast for ZWS L, justify
your choices, calculate their effect on gross profit and discuss your results.
Exercise 10 covers the basics of flexing numbers and requires you to make and justify your
assumptions about sales mix and exchange rate movements.
Exercises
9
Identify and comment on the key sensitivities in the forecast profit before tax for ZWS L in 20X9.
10
Assuming that exports are priced in and , how vulnerable is the 20X9 forecast for ZWS L to
movements in the exchange rates for the Polish Zloty?
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4.4
Breakeven analysis
In many Case Studies, the exam requirements ask for an analysis of a businesss operating results, often
using its financial statements or forecasts.
Assuming that one of the businesss objectives is to make a profit, a starting-point for this type of
analysis is its revenue and gross profit. You could assess revenue growth or gross profit percentages; or
consider marginal / total absorption costing, or apply breakeven analysis. You should be familiar with
these concepts and tools from Professional Stage.
However, in the Case Study exam, the problem of being asked to do analysis is often compounded by
the need to make assumptions or use figures you have prepared yourself. It is this development of your
own work that will add value to your answer; it is a key differentiator under Competency Based
Assessment.
Interactive question 11 and 12: Breakeven analysis

Here are two exercises using breakeven analysis. You will need to use the income statements for ZWS L
in Exhibit 5.
Exercise 11 covers the basics of breakeven analysis, and requires you to make and justify
assumptions about your cost allocations, and discuss your results.
Exercise 12 requires you to plan how to present your analysis and consider the key drivers to the
forecast improved performance in 20X9.
Exercises
11
Calculate the breakeven point for ZWS L in 20X6 and 20X9. What is the excess of contribution
over breakeven?
12
Compare the gross profit margin and breakeven point for ZWS L in 20X9 with those for 20X6.
4.5
Investment valuation and appraisal

In many Case Studies, the exam requirements ask for a valuation or an appraisal of a proposed
investment. This could utilise a price earnings (P/E) valuation, a net present value (NPV) calculation, a
calculation of new shares to be issued, or some other similar calculation.
In the Case Study exam performing the required calculations meets only part of the requirement.
Remember, all of the marks are for demonstrating your professional skills. You will also need to:
Provide a context for the appraisal you have conducted what is the reason for applying the
technique, and choosing the bases, you have used?
Exercise your judgement are there any reservations about the results of your valuation?
Develop your conclusions and/or recommendations what do your results mean or what should
the client do now?
The next two exercises relate to the possible investment by APBC in ZWS L. Exhibit 3 provides some
background to the investment proposition and you will need to use the income statements and balance
sheets for ZWS L in Exhibit 5.
54
Case Study
Interactive question 13 and 14: Investment valuation and appraisal
Exercise 13 covers the basics of a share valuation, requires you to make and justify your
assumptions about your valuation method and bases, and discuss your results.
Exercise 14 requires you to consider a range of possible debt/equity mixes and the pros and cons
of your options.
Exercises
13
What is the likely range of shareholdings that APBC might receive if it agreed with ZWS Ls
proposal to invest Zl 200,000 in new equity?
14
Assuming a total investment of Zl 2.2 million, what is the likely mix of debt and equity that APBC
might consider for a strategic investment in ZWS L?
C
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4.6
Using financial analysis in your Case Study exam

It is extremely difficult to succeed in the Case Study exam without good financial analysis. If your results
from the exercises in this workbook are sufficiently competent and you understand what is required to
improve them to clearly competent, then you will have made good progress in developing your
financial analysis skills.
However, these exercises will only provide you with the necessary analytical tools. You will need to
demonstrate that you can apply them appropriately in the context of the Case Study exam.
Consequently, in order to demonstrate your skills effectively, you will have to:
Choose the appropriate tools to analyse any new financial data you may be given in the exam.
Provide a context for the data analysis that you carry out.
Use your initial analysis to identify the headlines of any new financial statement information you
may be given.
Exercise your judgement in selecting the relevant headlines to analyse further.
Consider the consistency of the information provided in the three elements of the financial
statements.
Apply your professional scepticism.
Link your work on the AI to that done on any new financial data and financial statements in order
to provide depth and breadth to your analysis and demonstrate your financial fluency.
You will be under pressure in the exam and have only limited time in which to do your analysis.
Therefore, you will have to develop your skills so that you can perform any financial analysis selectively,
at speed and with confidence to give yourself time to use the output in a constructive way.
55
Answer to Interactive question 1

Review the results for APBC for 20X7 against 20X6.
Suggested process
Calculate the changes in the income statements between 20X7 and 20X6
Reconcile 20X7 profit before tax to 20X6
Identify the principal components for each element (gross profit, overheads, other costs)
Establish a big picture theme
Discuss the changes
Calculations and comparisons

Exhibit 7 Income statement
20X6
000
16,652
(10,824)
5,828
(1,240)
(2,821)
1,767
(577)
(4)
1,186
Revenue
Cost of sales
Gross profit
Administration
EBITDA
Depreciation & loss on disposal
Net interest
Profit before tax
As % of revenue
Gross profit
Administration
35.0
7.4
17.0
Hotels
Offices
Other
56
Change
0.0
-0.4
-1.0
200
62
262
583
159
17
1,272
Decrease in administration
Reduction in depreciation charge and loss on disposal
Increase in net interest
20X7 profit before tax
20X6
000
7,159
5,821
3,672
16,652
%
35.0
7.0
16.0
Change
000
(2,674)
1,739
(935)
262
583
(90)
159
17
86
000
1,186
(935)
Reconciliation of profit before tax

Decrease in revenue (2,674 35.0%)
Transport & distribution:
Decrease in sales activity (2,674 7.4%)
Efficiency savings (13,978 0.4%)
Revenue & gross profit

(Note 1)
20X7
000
13,978
(9,085)
4,893
(978)
(2,238)
1,677
(418)
13
1,272
20X7
000
6,053
4,930
2,995
13,978
Change
%
-16%
-15%
-18%
-16%
Gross profit %
20X6
20X7
29.8
31.0
36.9
35.0
42.2
43.3
35.0
35.0
Discussion points
What are the key elements in the 86k (7.2%) increase in profit before tax? 16% revenue
decline offset by reduced costs
What is underlying the revenue decline? Broadly similar across all three segments (Hotels,
Offices and Other)
Are there any compensating movements underlying the static GP% at 35.0%? Small
improvement in GP% on Hotels (1.2%) and Other (1.1%) offset by decline in Offices (1.9%)
Case Study
What is the reason for the reduction in transport costs (0.4%) greater than reduction in
revenues? Additional saving 62k
What is the reason for the decrease in administration costs of 583k? Reduction of 21% over
20X6. Expected to continue to be subject to general efficiency savings over the next two
years (Note 4). How much more can be saved?
What is the reason for the decrease in depreciation charge of 159k? The policy is to charge a
% of written down value and there has been no capital expenditure in 20X7. The
depreciation charge will increase in future with proposed capital expenditure of 1 million in
20X8
Include any significant changes in equity and the dividend policy.

C
H
A
P
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Review the forecast profit for 20X7 for ZWS L against the actual results for 20X6.
Suggested process
Identify how the increase in gross profit is forecast to be achieved
Calculate the changes in the cost structure between 20X6 and 20X7
Identify the principal components for each element
Identify the key sensitivities and discuss the changes

Exhibit 5 Note 1
Revenue
20X7
Zl000
3,042
4,071
3,300
4,800
15,213
Change
%
+15
+27
-22
+53
+15
Mix
%
20.0
26.8
21.6
31.6
100.0
Change
in mix
0.0
+2.6
-10.4
+7.8
Change
in GP%
0.0
0.0
-0.4
+4.2
+1.6
20X6
GP mix
13%
19%
37%
31%
100%
20X7
GP mix
13%
20%
24%
43%
100%
Change
Administration, marketing & selling expenses

Depreciation
Interest payable
Interest cover
20X6
Zl000
(2,568)
(1,058)
(359)
(72)
14 times
20X7
Zl000
(2,953)
(1,166)
(478)
(130)
11 times
Costs as % of revenue
19.4
8.0
19.4
7.7
Wholesale
Retail
PKP
OSO&E
Total
Gross profit
Wholesale
Retail
PKP
OSO&E
Total
20X6
Zl000
2,645
3,204
4,236
3,144
13,229
20X7
GP%
25.0
30.0
43.0
53.6
39.3
Costs
Sensitivity analysis:
Zl000
1,245
20X7 forecast profit before tax
0%
+1%
-13%
+12%
Change
+15%
+10%
+Zl 119k
+Zl 58k
0.0%
-0.3%
%PBT
Illustration 1: Effect of 10% reduction in

revenue
Retail
OSO&E
Zl,000
407
480
GP%
30%
53.6%
122.1
257.8
9.8
20.7
Illustration 2: Effect of increase in GP% not

4.2% for OSO&E
4,800
4.2%
201.6
16.1
15,123
1.6%
242
19.4
1.6% overall
57
Discussion points
What are the key elements to forecast increase in gross profit? 15% revenue growth, 1.6%
increase in GP%
What are the reasons for the revenue growth? 15% growth in Wholesale, 27% growth in
Retail, 53% growth in OSO&E; offsets by 22% decline in PKP
What are the reasons for the increase in GP%? Improvement of GP% on OSO&E from 50% to
60%
How has the mix of products in sales changed? OSO&E now largest contributor to gross
profit (43%) (20X6 PKP at 32%); increases overall GP% by 1.6% but leaves ZWS L more
dependent on one sector
What questions are posed by the forecasts for administration, marketing and selling expenses?
Could be broadly considered to be fixed; increase of 15%; are ZWS L investing in operational
capacity for future growth?
Why has transport and distribution costs reduced by 0.3% to 7.7% of revenue? How are
these efficiencies due to be achieved?
Why is there an additional depreciation charge? Due to investment in new machinery and
equipment
Why is there an increase in interest cost Zl 58,000? Impact of new Zl 1 million loan; implied
interest rate of approx 6% pa; interest cover of 11 (20X6: 14 times) times still acceptable
How would you illustrate the impact of changes in the assumptions underlying the key
components? For example, 10% reduction in forecast Retail and OSO&E revenues; forecast
changes in GP% not being achieved
What is the forecast profit for 20X7 critically dependent on? Revenue forecast and improving
GP% for OSO&E
Comparison of answers for Competency Based Assessment: Analysis of income statement and
SOCIE forecast
58
IC script
SC script
CC script
Top script
Revenue growth
forecast for 20X7
is 15%.
Revenue growth forecast

for 20X7 is 15%, the
principal components
being Retail (27%) and
OSO&E (53%).
Revenue growth
forecast for 20X7 is
15%, the principal
components being
Retail (27%) and
OSO&E (53%). The
anticipated decline in
sales to PKP is broadly
offset by the increase
in Wholesale.
Revenue growth
15%, the principal
components being
Retail (27%) and
OSO&E (53%). The
anticipated decline in
sales to PKP is broadly
offset by the increase in
Wholesale.
Overall gross profit %

is forecast to rise by
1.6%.
Overall gross profit % is

forecast to rise by 1.6%,
due to an increase in
the margin on OSO&E
of 4.2% to 53.5%.

forecast to rise by
1.6%, due to an
increase in the margin
on OSO&E of 4.2% to
53.5%.

forecast to rise by
1.6%, due to an
increase in the margin
on OSO&E of 4.2% to
53.5%. OSO&E are
forecast to become
the largest
contributor to gross
profit (43% compared
with 31% in 20X6).
Case Study
IC script
SC script
Profit before tax

is forecast to be
Zl 1,245k, an
increase of Zl
309k.
Profit before tax is

forecast to be Zl
1,245k, an increase
of Zl 309k.
CC script
forecast to be Zl 1,245k.
A 10% reduction in
forecast OSO&E
revenues would result in
a reduction in profit
before tax of Zl 152,000
(12.2% of PBT).
Forecast profit for 20X7
critically dependent on
OSO&E.
Top script
Profit before tax is forecast to
be Zl 1,245k. A 10%
reduction in forecast OSO&E
revenues would result in a
reduction in profit before tax
of Zl 152,000 (12.2% of
PBT); if the forecast
increase in gross profit % is
not achieved, profit before
tax would be reduced by Zl
374,000 (30% of PBT).
C
H
A
P
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Forecast profit for 20X7

critically dependent on
revenue forecast and
improving GP% for
OSO&E.
Characteristics of each script
IC script makes only limited use of the case information to provide headline analysis of forecast
revenue and gross profit without any breadth or depth; the comment on forecast profit before tax
is meaningless without any context.
SC script uses the case material and own work to provide an explanation for the forecast increase
in revenue and gross profit %. This demonstrates an understanding of the business assumptions
that are underlying the forecast and provides some context for the reader.
CC script develops the analysis of the forecast further by including an analysis of the sensitivity of
profit before tax to a change in the assumption for the increase in revenue. It also concludes on a
critical assumption underlying the forecast.
Top script develops further still the analysis of the gross profit margin by discussing the effect of
forecast changes in product mix; the sensitivity analysis is developed further with another variable
(GP%) and the conclusion identifies more than one critical assumption.
How to improve your answer
Cover each of the principal areas of the income statement revenue, gross profit, overheads, profit
before tax, tax. Only focus on the material elements.
Make sure that the forecast and the prior period are consistent; adjust for any non-recurring events
(acquisitions, disposals, one-off charges etc) before you carry out your comparisons.
Consider what product or segmental information is provided (or can be assumed). Select a few
major elements; keep your analysis simple.
Differentiate between fixed and variable costs. If the change in revenue is an indication of the
forecast activity level, consider whether the cost structure in the forecast the same as the prior
period.
Select a meaningful performance indicator for other costs (interest cover, effective tax rate) and
look for a specific reason for any change.

Review the balance sheet for APBC for 20X7 against 20X6.
Suggested process
Calculate the changes in the components of net assets between 20X7 and 20X6
Identify the major elements in the movement in net assets; non-current assets (intangible and
tangible), net current assets (receivables, inventories, cash, payables and bank overdraft), noncurrent liabilities (loans and provisions)
59
Discuss the changes
Identify the key sensitivities

Current assets
Inventory
Accounts receivable
Deposits, bank & cash
Total assets
Equity
Retained earnings
Current liabilities
Other accounts payable
Increase in net assets in 20X7
Depreciation charge
Increase in deposits, bank & cash
Increase in working capital
20X6
000
3,766
20X7
000
3,348
Change
000
(418)
903
1,706
1,111
3,720
7,486
897
1,586
1,720
4,203
7,551
(6)
(120)
609
483
65
1,000
3,517
4,517
705
1,000
3,921
4,921
629
0
404
404
(76)
942
1,322
7,486
739
1,262
7,551
(203)
(60)
65
000
000
(418)
609
137
746
Loans repaid
Change in shareholders equity
Gearing
Days sales in accounts receivable (excluding VAT)
Purchases (Note 2)
Days purchases in inventory
Inventory turnover per annum
Days purchases in trade payables (excluding VAT)
76
404
15.6%
31.8
5,848
56.3
6.5
58.8
12.8%
35.2
4,909
66.7
5.5
54.9
Days
+3.4
+10.4
Discussion points
What are the principal changes in the increase in net assets of 404k? The increase in liquid
funds (deposits, bank & cash) (609k) offset by the depreciation charge for the year (418k)
Why is there an increase of 77k in working capital, although there is a 16% reduction in
revenue? This is due to an increase of 3.4 days sales in receivables, 10.4 days purchases in
inventory and a reduction of 3.9 days purchases in trade payables.
Notes:
60
-3.9
Case Study
Working capital is accounts receivable, inventory and trade accounts payable
VAT needs to be deducted from the balances for accounts receivable and payable to
ensure like-with-like comparison with revenue and purchases
Purchases for 20X7 are calculated from Note 2 (4,372k + 537k = 4,909k) and
estimated for 20X6 using the same % of revenue
By how much does the annual repayment of the 8% loan reduce gearing? From 15.6% to
12.8%

Review the forecast balance sheet for 20X7 for ZWS L against the actual for 20X6.
Suggested process
Calculate the changes in the components of net assets between 20X7 and 20X6
Identify the major elements in the movement in net assets; non-current assets (intangible and
tangible), net current assets (receivables, inventories, cash, payables and bank overdraft), noncurrent liabilities (loans and provisions)
Discuss the changes
C
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Exhibit 5 Balance sheet
Non-current assets
Current assets
Inventory
Accounts receivable
Bank & cash
Total assets
Equity
Retained earnings
Current liabilities
Increase in net assets in 20X7

Additions to tangible fixed assets
Depreciation charge
Decrease in net current assets
Loans repaid
New loan
20X6
Zl000
2,536
20X7
Zl000
4,758
Change
Zl000
2,222
947
1,133
453
2,533
5,069
1,060
1,360
140
2,560
7,318
113
227
(313)
2,249
548
2,530
3,078
709
1,282
5,069
748
3,538
4,286
1,605
1,427
7,318
200
1,008
1,208
896
145
2,249
Zl000
2,700
(478)
Zl000
2,222
(118)
104
(1,000)
(896)
1,208
Change in shareholders equity

Gearing
Days sales in accounts receivable
Inventory turnover per annum
Days purchases in trade accounts payables
Sensitivities:
20X7 sales per day (receivables)
20X7 purchases per day (inventories & payables)
Increase of 1 day in working capital cycle
Discussion points
23%
31.3
42.0
8.7
36.0
37%
32.6
41.9
8.7
38.4
Zl000
42
25
92
What are the principal changes in net assets? Additions to tangible fixed assets (Zl 2.7
million) and the new long-term loan (Zl 1.0 million)
What are the additions to tangible fixed assets? The new high-pressure mixer (Zl 1.2 million)
and Stage 1 of the building and reconstruction work (Zl 1.5 million)
What are the terms of the new loan? They have yet to be agreed with the finance provider
61
How does the new loan impact on gearing? Is the increase acceptable? Increases gearing
from 23% to 37%; anything up to 50% is generally considered acceptable
How does the new loan affect ZWS Ls balance of funding? Financing of new fixed assets with
long-term loan maintains the strategic balance of funding
Are there compensating movements underlying the small movements in forecast net current
assets? An increase in 2.4 days credit taken from suppliers is offset by an increase of 1.3 days
credit begin given to customers
How important is the management of working capital in the forecast? Why? Management of
working capital is critical as the cash balance of Zl 140,000 represents just over 1.5 days
increase in the working capital cycle (increase in days sales in receivables and days purchases
in inventories plus decrease in days purchases in payables)
Comparison of answers for Competency Based Assessment: Balance sheet analysis forecast
IC script
SC script
CC script
Top script
Total assets and

liabilities are
forecast to increase
by Zl 2.2m.
Net assets are

by Zl 1.2m. The
principal changes are
additions to tangible
fixed assets (Zl 2.7m)
and the new longterm loan (Zl 1.0m).
Net assets are forecast

to increase by Zl 1.2m.
The principal changes
are additions to tangible
fixed assets (Zl 2.7m)
and the new long-term
loan (Zl 1.0m).
Net assets are forecast to

increase by Zl 1.2m. The
principal changes are
additions to tangible fixed
assets (Zl 2.7m) and the new
long-term loan (Zl 1.0m).
The principal
change in assets is
the additions to
tangible fixed
assets (Zl 2.7m).
The principal
changes in
liabilities are the
new long-term
loan (Zl 1.0m) and
retained earnings
(Zl 1.2m).
Additions to tangible
fixed assets are the
new high-pressure
mixer (Zl 1.2m) and
Stage 1 of the
building and
reconstruction work
(Zl 1.5m).
Gearing will increase
from 23% to 37%.
Additions to tangible
fixed assets are the new
high-pressure mixer (Zl
1.2m) and Stage 1 of
the building and
reconstruction work (Zl
1.5m).
The terms of the new
loan, which will
increase gearing from
23% to 37%, have yet
to be agreed with the
finance provider.
Financing the new
fixed with long-term
loan maintains the
strategic balance of
funding.
Additions to tangible fixed

assets are the new highpressure mixer (Zl 1.2m) and
Stage 1 of the building and
reconstruction work (Zl 1.5m).
The terms of the new loan,
which will increase gearing
from 23% to 37%, have yet to
be agreed with the finance
provider.
Financing the new fixed with
long-term loan maintains the
strategic balance of funding.
Management of working
capital is critical as the cash
balance of Zl 140k is only
sufficient to finance
approximately 1.5 days
increase in the working
capital cycle.
62
IC script only identifies additions to fixed assets and the new long-term loan as principal changes.
However, by referring to total assets and liabilities, it includes the increase in retained earnings,
which would be covered in the review of the income statement and SOCIE.
SC script refers to changes in net assets thus focusing on items not covered in the review of the
income statement and SOCIE. There is an analysis of the additions to tangible fixed assets and the
effect of the new long-term loan on gearing.
CC script provides a caveat that the terms of the new long-term loan have not been agreed and
includes an opinion (judgement) about the funding of new tangible fixed assets with long-term loans.
Top script develops further still the analysis by carrying out some sensitivity analysis on working
capital and considering the impact on the forecast cash balance.
Case Study
Cover each of the principal areas of the balance sheet non-current assets (intangible and
tangible), net current assets (receivables, inventories, cash, payables and bank overdraft), noncurrent liabilities (loans and provisions). Focus on the major changes.
Use net assets as your starting point; this eliminates the need to refer to changes in equity.
Make sure that the forecast and the prior period are consistent; consider the impact of acquisitions
and disposals.
Consider the long term and short-term quadrants. Is there a change in financing structure?
Carry out relevant sensitivity analysis on the key elements.

C
H
A
P
T
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R

Review the cash flow statement for APBC for 20X7.
Suggested process
Summarise the cash flow statement into its principal components
Is cash being generated or absorbed by operations?
Consider the impact of change in working capital; is this consistent with the increase/decrease
in trading activities?
What are the principal investing activities?
Is the cash from financing activities (long-term) sufficient to finance the investing activities?
What is the net change in cash and cash equivalents?
Calculations
Summary of cash flow statement
Profit before tax
Adjustments
Change in working capital
Finance costs and tax
Net cash used in financing activities
Working capital
Days sales in accounts receivable (excluding VAT)
Days purchases in trade payables (excluding VAT)
20X6
31.8
56.3
58.8
20X6
000
1,186
581
1,767
(28)
1,739
(356)
1,383
(720)
(571)
92
20X7
000
1,272
405
1,677
(77)
1,600
(415)
1,185
(576)
609
20X7
35.2
66.7
54.9
Change
+3.4
+10.4
-3.9
Discussion points
What is the increase in cash & cash equivalents for 20X7 compared with 20X6? 609k in
20X7, 92k in 20X6?
What are the reasons for the difference between 20X7 and 20X6? There is no investment in
non-current assets in 20X7
Is the change in working capital in 20X7 consistent with the change in revenue? No; increase
of 77k in working capital, although there is a 16% reduction in revenue
What is the cause of this inconsistency? This is due to an increase of 3.4 days sales in
receivables, 10.4 days purchases in inventory and a reduction of 3.9 days purchases in trade
payables (see Exercise 10)
63
Why does the net change in cash and cash equivalents in 20X7 differ from the net cash from
operating activities? Net cash from operating activities of 1,185k is reduced by repayment of
loan (76k) and dividends paid (500k)
Is APBCs dividend policy sustainable at 500k per annum? Yes; in fact from the projections it
would appear that future dividends could be increased, notwithstanding the proposed
investment of 1.0 million in new machinery in 20X8. Over the next 2 years, net cash and
cash equivalents are forecast to increase by 1,639k

Review the forecast cash flow statement for ZWS L for 20X7.
Suggested process
Summarise the cash flow statement into its principal components
Is cash being generated or absorbed by operations?
Is the cash from financing activities (long term) sufficient to finance the investing activities?
What is the net change in cash and cash equivalents?
Identify the sensitivities of the principal components to changes in the assumptions

underlying the income statement and balance sheet
Discuss the changes
Calculations
Zl000
1,245
608
1,853
(180)
1,673
(382)
1,291
(2,700)
1,096
(313)
Profit before tax

Adjustments
Change in working capital
Finance costs and tax
Net cash from financing activities
Days sales in accounts receivable
Days purchases in trade accounts payables
31.3
42.0
36.0
Sensitivity analysis
20X7 cash balance
1% reduction in revenues (Exercise 9) (Zl 156k 39.3%)
1.6% increase in GP% not achieved (Exercise 9)
No savings in transport & distribution (Exercise 9) (0.3% revenues)
No increase in days sales in receivables (Exercise 11) (Zl 42k 1.3)
No increase in days purchases in payables (Exercise 11) (Zl 25k 2.4)
64
32.6
41.9
38.4
Zl000
140
(61)
(243)
(46)
55
(60)
+1.3
-0.1
+2.4
% cash
44
174
33
39
43
Discussion points
Cash required for investment in tangible fixed assets in 20X7 (Zl 2.7 million) to be provided
by new investment (Zl 1.2 million) and cash generated from operations (Zl 1.3 million)
The capital investment cannot be funded without the new external finance
Cash generated from operations critically dependent on revenue forecast and improving GP%
for Special orders and exports (see Exercise 9)
Case Study
Modest forecast reduction in transport and distribution costs has significant impact on
forecast closing cash balance
Closing cash balance critically dependent on management of working capital; if the average
level of credit given to customers is kept at 31.3 days, the cash balance would be increased by
Zl 55,000 (39%); if the average level of credit taken from suppliers is kept at 36.0 days, the
cash balance would reduce by Zl 60,000 (43%)
Comparison of answers for Competency Based Assessment: Cash flow statement analysis
forecast
IC script
SC script
CC script
Top script
The forecast cash

flow for 20X7
includes Zl 2.7m
for new tangible
fixed assets.
The cash required for

the investment in
tangible fixed assets in
20X7 (Zl 2.7m) is to
be provided by the
proposed new
investment (Zl 1.2m)
and cash generated
from operations (Zl
1.3m).
The cash required for

the investment in
tangible fixed assets in
20X7 (Zl 2.7m) is to be
provided by the
proposed new
investment (Zl 1.2m)
and cash generated
from operations (Zl
1.3m).
The cash required for the

investment in tangible fixed
assets in 20X7 (Zl 2.7m) is to be
provided by the proposed new
investment (Zl 1.2m) and cash
generated from operations (Zl
1.3m). The capital investment
cannot be funded without the
new external finance.
The forecast cash

generated from
operations is
critically dependent
on the revenue
forecast and the
forecast
improvement in
GP% for OSO&E.
The forecast cash

generated from
operations is critically
dependent on the
revenue forecast and
the forecast
improvement in GP%
for OSO&E.
The total
proposed new
investment in
ZWS L is Zl 1.2m
and net cash
from operating
activities is
forecast to be Zl
1.3m.
The forecast closing

cash balance of Zl
140k is not large in
comparison with the
forecast cash flows.
The forecast closing

cash balance of Zl 140k
is also critically
dependent on the
management of
working capital. The
average level of credit
given to customers is
forecast to increase by
1.3 days to 32.6 days.
The average level of
credit taken from
suppliers is forecast to
increase by 2.4 days to
38.4 days.
C
H
A
P
T
E
R
The forecast cash generated

from operations is critically
dependent on the revenue
forecast and the forecast
improvement in GP% for
OSO&E.
The forecast closing cash
balance of Zl 140k is also
critically dependent on the
management of working capital
(forecast to increase in 20X7
by Zl 180k). The average level
of credit given to customers is
forecast to increase by 1.3 days
to 32.6 days. If ZWS L can
keep it at 20X6 levels, the
cash balance would be
increased by Zl 55k (39%).
The average level of credit taken
from suppliers is forecast to
increase by 2.4 days to 38.4
days. If ZWS L is unable to
achieve this, the cash balance
would reduce by Zl 60,000
(43%).
IC script makes only limited use of the case information to provide headline analysis of the
forecast cash flows (new tangible fixed assets, new investment and net cash from operating
activities) that are meaningless without any context.
SC script uses the case material and own analysis to explain how the forecast investment in
tangible fixed assets is to be financed. There is also evidence of some sensitivity analysis to identify
the critical components, although they are not quantified.
CC script concludes on the dependence of the forecast closing cash balance on working capital
management. It develops the analysis further by providing data underlying the assumptions for
working capital.
65
Top script concludes about the absolute need for new external finance. It also develops further still
the analysis of the forecast by quantifying and discussing the effect on the closing cash balance of
changes in the assumptions for working capital.
Cover each of the principal areas of the cash flow statement operations, investing, financing,
closing cash.
Link your work on the cash flow statement to your review of the income statement, the SOCIE and
the balance sheet.
Linking to the income statement
Linking to the SOCIE
Is the cash being generated or absorbed by operations consistent with the profit or loss?
What the critical factors involved in making the profit, or generating the loss?
What are the changes in equity?

What is the dividend policy?
Linking to the balance sheet
What is the change in working capital and how does it relate to the change in the level
of activities?
What are the changes in loan capital?
Discuss your sensitivity analysis in the context of the cash flows and the closing cash
balance.

Reconcile the 20X9 forecast profit before tax for ZWS L to the 20X6 actual results and comment
on the key factors underlying the projected growth.
Suggested process
Calculate the change between 20X6 and 20X9 for each element of profit before tax
Identify the key elements
Select an appropriate driver for change in profit before tax between 20X6 and 20X9
Present the changes in the key elements between 20X6 and 20X9 in terms of the selected
driver
Discuss the impact of the changes in the key elements on the projected growth
Calculations and reconciliation

From Exhibit 5 Income statement
Revenue
Cost of sales
Gross profit
EBITDA
Depreciation
Interest payable
Profit before tax
66
Case Study
20X6
Zl000
13,229
(8,236)
4,993
(2,568)
(1,058)
1,367
(359)
(72)
936
20X9
Zl000
19,244
(11,161)
8,083
(3,270)
(1,350)
3,463
(1,072)
(280)
2,111
Change
Zl000
6,015
(2,925)
3,090
(702)
(292)
2,096
(713)
(208)
1,175
As % of revenue
Gross profit
20X6
Zl000
%
37.7
19.4
8.0
Reconciliation of profit before tax

Increase in revenue (6,015 37.7%)
Increase in GP% (19,244 4.3%)
20X9
Zl000
%
42.0
17.0
7.0
Change
Zl000
Change
+4.3
-2.4
-1.0
936
2,270
820
3,090

Increase in sales activity (6,015 19.4%)
(1,168)
466
C
H
A
P
T
E
R
(702)
Increase in sales activity (6,015 8.0%)
(482)
190
(292)
(713)
(208)
2,111
Increase in depreciation charge

Increase in interest payable
20X9 forecast profit before tax
Discussion points
What are the key elements underlying the change in profit before tax? In monetary terms
these are gross profit; administration, marketing & selling expenses; and depreciation charge
What is an appropriate driver for measuring the change in profit before tax between 20X6
and 20X9? For this reconciliation the 45.5% growth in revenue has been selected
How do you present the changes in the key elements in terms of the selected driver? In this
case, the changes are calculated in monetary amounts and in terms of % of revenue, to
indicate whether they are greater or smaller than a constant 20X6 level
What is the impact of the change each of these elements on the projected growth?
Gross profit due to revenue growth Zl 2,270k (see Exercise 6 for analysis of sales
volumes, sales prices, and sales mix)
Gross profit due to margin change Zl 820k (see Exercise 6 for analysis of sales mix)
Administration, marketing and selling expenses due to increase in sales activity (Zl
1,168k) offset by efficiency savings (Zl 466k); is increase due to sales activity a variable
cost? Are efficiency savings genuine or just non-variable?
Transport and distribution expenses due to increase in sales activity (Zl 482k) and
efficiency savings (Zl 190k)
Overall impact of revenue growth could be considered to be Zl 620k (aggregate of all

volume effects: 2,270 1,168 482 = 620)
Depreciation (Zl 713k) due to capital spend of Zl 7.3 million on upgrading and
expanding manufacturing capacity
Interest payable (Zl 208k) due to the new Zl 2 million loan.
67
Comparison of answers for Competency Based Assessment: Reconciliations

IC script
SC script
CC script
Top script
Profit before tax

is forecast to
increase from
Zl 936k in 20X6
to Zl 2,111k in
20X9, an
increase of
Zl 1,175k.

forecast to more
than double from
Zl 936k in 20X6 to
Zl 2,111k in 20X9,
an increase of Zl
1,175k.

forecast to more than
double from Zl 936k in
20X6 to Zl 2,111k in
20X9, an increase of
Zl 1,175k.
Profit before tax (PBT) is

forecast to more than double
from Zl 936k in 20X6 to
Zl 2,111k in 20X9, an increase of
Zl 1,175k.
The increase is
principally due to
a forecast
increase in
revenue and
GP%.
Revenue is forecast
to increase by 45%
and GP% by 4.3%.
The increase in
gross profit is
offset by higher
administration
(Zl 702k) and
transport (Zl 292k)
costs, together
with additional
depreciation
(Zl 713k) and
interest (Zl 208k)
charges.
Revenue is forecast to
increase by 45% due to
81% growth in Retail
and 138% growth in
Other special orders
and exports
(OSO&E), offset by a
decline in sales to PKP.
The forecast increase in
GP% is 4.3% (Zl 820k).
This is due to the
change in product mix
and a 10% increase in
GP% for OSO&E to
60%.
The increase in gross
profit is offset by higher
administration (Zl 702k)
and transport (Zl 292k)
costs, together with
additional depreciation
(Zl 713k) and interest
(Zl 208k) charges.
Revenue is forecast to increase by

45% due to 81% growth in Retail
and 138% growth in Other
special orders and exports
(OSO&E), offset by a decline in
sales to PKP. The forecast
increased profit from revenue
growth is Zl 620k.
The forecast increase in GP% is
4.3% (Zl 820k). This is due to
the change in product mix and a
10% increase in GP% for OSO&E
to 60%.
Further increase in PBT is
forecast from savings in
administration expenses (2.4%,
ZL 466k) and transport costs
(1.0%, Zl 190k).
These savings are offset by an
increase in depreciation charge
(Zl 713k) due to capital
expenditure of Zl 7.3m, and an
increase in interest payable
(Zl 208k) due to the new Zl 2m
loan.
IC script calculates the increase between the 20X6 and 20X9 PBT. Other than stating that the
increase is due to increases in revenue and GP%, there is no analysis of how the forecast is to be
achieved.
SC script provides a context for the increase in PBT (more than double) and an analysis of the
principal elements underlying this increase (revenue, GP%, administration, transport, depreciation
and interest).
CC script develops the analysis further by providing details of how the forecast increase in revenue
is to be achieved and analysing the increase in GP% between product GP% and mix.
Top script introduces the concept of profit from revenue growth in order to differentiate this
from the effects of changes in GP% and cost savings from efficiencies. The changes in depreciation
and interest payable are linked to the capital expenditure and the new loan.
68
Calculate the change between 20X6 and 20X9 for GP and costs.
Analyse the change in GP between changes in revenue and GP%.
When analysing the effect of changes in product mix, keep your analysis simple.
Analyse the change in costs between changes in revenue and % of revenue to give you an
indication of any efficiency savings.
Case Study
Consider whether cost savings are genuine or just non-variable elements.
Link depreciation and interest to forecasts of capital expenditure/disposals and changes in

investments/loan finance.

Comparison of answers for Competency Based Assessment
IC script
SC script
CC script
Top script
Revenue
growth forecast
for 20X7 is
15%. Gross
profit is forecast
to rise by 20%.
Revenue growth
15%, the principal
components being
Retail (27%) and
Special orders and
exports (53%).
Revenue growth
15%, the principal
components being
Retail (27%) and
OSO&E (53%).
Revenue growth forecast for 20X7

is 15%, the principal components
being Retail (27%) and OSO&E
(53%).
Total assets and

liabilities are
forecast to
increase by
Zl 2.2m.
Gearing is
forecast to
increase from
23% to 37%.
Overall gross profit

% is forecast to rise
by 1.6%.
Net assets are
by Zl 1.2m. The
principal changes
are additions to
tangible fixed
assets (Zl 2.7m),
and the new longterm loan (Zl 1.0m)
that will increase
gearing from 23%
to 37%.

forecast to rise by 1.6%.
Net assets are forecast
to increase by Zl 1.2m.
The principal changes
are additions to tangible
fixed assets (Zl 2.7m),
and the new long-term
loan (Zl 1.0m) that will
increase gearing from
23% to 37%.
Forecast profit before
tax and cash
generated from
operations for 20X7 is
critically dependent
on revenue forecast
and improving GP%
for OSO&E. A 10%
reduction in forecast
revenues for OSO&E
would result in a
reduction in profit
before tax of
Zl 152,000 (12.2% of
PBT).
C
H
A
P
T
E
R
Overall gross profit % is forecast to

rise by 1.6%, due to an increase
in the margin on OSO&E of 4.2%
to 53.5%.
Net assets are forecast to increase
by Zl 1.2m. The principal changes
are additions to tangible fixed
assets) (Zl 2.7m), and the new
long-term loan (Zl 1.0m) that will
increase gearing from 23% to 37%.
Forecast profit before tax and cash

generated from operations for
20X7 is critically dependent on
revenue forecast and improving
GP% for OSO&E. A 10% reduction
in forecast revenues for OSO&E
would result in a reduction in profit
before tax of Zl 152,000 (12.2% of
PBT).
Management of working capital
is very important, as the cash
balance of Zl 140k is only
sufficient to finance
approximately 1.5 days increase
in the working capital cycle.
IC script makes only limited use of the case information to provide headline analysis of the
forecast change in revenue, gross profit and total assets and liabilities. The analysis of the change
in gearing lacks meaning without any context.
SC script uses the case material and own analysis to provide some relevant analysis of the forecast
changes in revenue, GP% and net assets. There is some context for the change in gearing.
CC script uses the analysis to conclude on the dependence of the profit and cash flow forecasts on
achieving the increases in revenue and GP%. There is also some sensitivity analysis on the impact
of changes in revenue on PBT.
Top script provides more depth of analysis on the increase in GP% and links the analysis of the
balance sheet and cash flow statement forecasts by quantifying and discussing the effect on the
closing cash balance of changes in the assumptions for working capital.
69
Cover all of the financial statements income statement and SOCIE, balance sheet, cash flow
statement.
Make sure that the forecast and the prior period are consistent; adjust for any non-recurring events
(acquisitions, disposals, one-off charges etc) before you carry out your comparisons.
Identify a small number of themes and develop them using all of the financial statements (eg
capital expenditure, depreciation charge, financing, interest charge).
Use your work on the cash flow statement to link your review of the income statement, the SOCIE
and the balance sheet.
Carry out relevant sensitivity analysis on the key elements.

Identify and comment on the key sensitivities regarding the achievability of the forecast gross
profit for ZWS L in 20X9.
Suggested process
Identify how the increase in gross profit is forecast to be achieved

Calculate the changes in the cost structure between 20X6 and 20X9
Discuss the changes
Calculations
Exhibit 5 Note 1
Revenue and gross profit

Wholesale
Retail
PKP
OSO&E
Gross profit
Gross profit %
20X6
Zl000
20X9
Zl000
2,645
3,204
4,236
3,144
13,229
3,848
5,796
2,100
7,500
19,244
4,993
37.7%
8,083
42.0%
Change
%
GP
%
+45.5
+80.9
-49.6
+138.5
+45.5
25.0
30.0
44.0
60.0
42.0
+4.3%
Sensitivity analysis:
Zl000
8,083
20X9 forecast gross profit (as above)

Illustration 1: Effect of 10% reduction in
revenue
Retail
OSO&E
Illustration 2: Effect of increase in GP% not
being achieved
10% for OSO&E
4.2% overall
70
Zl000
580
750
GP%
GP%
30.0
60.0
(174)
(450)
2.2
5.6
(750)
(827)
9.3
10.3
Discussion points
What are the key elements to forecast increase in gross profit? 45.5% revenue growth, 4.3%
increase in GP%
What are the reasons for the revenue growth? 81% growth in Retail, 138% growth in
OSO&E; increase in Wholesale broadly offsets decline in PKP
Case Study
What are the reasons for the increase in GP%? Improvement of GP% on OSO&E from 50% to
60%; this and change in product mix increases overall GP% by 4.3%
How would you illustrate the impact of changes in assumptions the underlying key
components (revenues, GP%)? For example, 10% reduction in forecast Retail and OSO&E
revenues; changes in gross profit % for different products and overall
What is the forecast gross profit for 20X9 critically dependent on? Revenue forecast and
improving GP% for OSO&E
Comparison of answers for Competency Based Assessment: Sensitivity analysis

IC script
SC script
CC script
Top script
Other special
orders and export
(OSO&E) sales
are forecast to be
39% of revenue in
20X9.

and export
(OSO&E) sales are
forecast to be 39%
of revenue in 20X9.

and export
(OSO&E) sales are
forecast to be 39% of
revenue in 20X9. This
includes sales to the
UK and Eurozone
countries.
Other special orders and export

(OSO&E) sales are forecast to
be 39% of revenue in 20X9. This
includes sales to the UK and
Eurozone countries.
If ZWS L prices its

exports to APBC in
, its revenue will
reduce if the Zloty
strengthens
against the .
No data is
provided for the
split between
special orders and
exports for ZWS L.
APBC purchases
537k of tiles in
mosaics in 20X7.
It is assumed that
ZWS L will price its
exports to APBC in
.
No data is provided
for the split between
special orders and
exports. Sales to UK
are assumed to be
300k.
Assuming a 1%
strengthening of
the Zloty would
reduce the gross
profit by Zl 15k
(0.3% OSO&E GP).
It is assumed that
ZWS L will price its
exports in and .
No data is provided
for the split between
special orders and
exports. Sales to UK
are assumed to stay
constant at 300k
(55% of APBC 20X7
tile purchases), as
APBC forecasts little
growth.
Assuming, after APBC,
the balance is 50:50, a
strengthening of 1%
in the Zloty would
reduce gross profit
(GP) by Zl 40k (0.9%
OSO&E GP, 0.5%
total GP).
C
H
A
P
T
E
R
It is assumed that ZWS L will price

its exports in and as the Zloty
is not a hard currency. In
order to be competitive,
customers might expect ZWS L
to take on any foreign exchange
risk.
No data is provided for the split

between special orders and
exports. A range of export sales
mixes have been assumed.
Sales to UK are assumed to stay
constant at 300k (55% of APBC
20X7 tile purchases), as APBC
forecasts little growth.
Assuming, after APBC, the
balance is 50:50, a strengthening
of 1% in the Zloty would reduce
gross profit (GP) by Zl 40k (0.9%
OSO&E GP, 0.5% total GP).
Assuming the balance is all
exports, a 1% strengthening of
the Zloty would reduce GP by
Zl 65k (1.4% OSO&E, 0.8%
total).
IC script reproduces some case information about ZWS L export sales and APBC purchases. It
correctly states the effect of a strengthening Zloty but, in the absence of any data, does not
attempt any analysis.
SC script, in the absence of data, makes an assumption about ZWS Ls sales to APBC and that these
sales will be priced in . It calculates the effect of a 1% strengthening in the Zloty on gross profit.
CC script identifies that exports are to the UK and Eurozone. It states the basis for the assumption
about ZWS Ls sales to APBC and develops the analysis by calculating the effect of a 1%
strengthening in the Zloty on gross profit for SO&E sales and overall.
Top script states why it is assumed that ZWS L would price its exports in and . It provides
further analysis of the effect of a 1% strengthening in the Zloty on gross profit by assuming
different mixes of export sales.
71
Identify the components of the ZWS L profit forecast that are exposed to foreign exchange risk.
Be prepared to make assumptions if data is not provided, in order to answer the requirement.
State the basis for any assumptions that you make.
Consider a range of different input assumptions (in this example, Zloty exchange rates).
Consider the effect on a range of outputs (in this example, gross profit).

Assuming that exports are priced in and , how vulnerable is the 20X9 forecast for gross profit
for ZWS L to movements in the exchange rates for the Polish Zloty?
Suggested process
Identify the components of the profit forecast that are exposed to foreign exchange risk
Select an appropriate exchange rate movement
Calculate the impact of the proposed exchange rate movement
Discuss the changes
Calculations
Exhibit 5 Note 1 (Figures for 20X9)
Wholesale
Retail
PKP
Special orders & exports
Revenue
Zl000
3,848
5,796
2,100
7,500
19,244
Mix
%
20
30
11
39
100
%
39
39
22
100
Currency
Gross profit
%
Zl000
25.0
962
30.0
1,739
42.0
882
60.0
4,500
42.0
8,083
Special orders & exports revenues:

Illustration 1 (at 20X6 rates)
Polish special orders
Eurozone exports (1=1.515)
UK exports
Rate
799,000
300,000
3.66
5.50
39
39
22
100
799,000
300,000
3.63
5.45
78
22
100
1,598,000
300,000
3.63
5.45
Cost of sales
Gross profit
Illustration 2 (Zloty strengthens 1%)
UK exports
Cost of sales
Gross profit
Decrease in product gross profit
Illustration 3 (change in revenue mix)
UK exports
Cost of sales
Gross profit
Decrease in product gross profit
Decrease in total gross profit
72
Case Study
Zl000
2,925
2,925
1,650
7,500
(3,000)
4,500
2,925
2,900
1,635
7,460
(3,000)
4,460
0.9%
5,800
1,635
7,435
(3,000)
4,435
1.4%
0.8%
Discussion points
What are the relevant components of the profit forecast that will be impacted by movements
in exchange rates? Clearly export sales but these are not separately analysed in Note 1 so
they will have to be estimated. and exchange rates are given in Exhibit 3 which would
indicate exports to the UK (including APBC) and the Eurozone
In the absence of sufficient information in the 20X9 forecast, how do you estimate and
sales in 20X9? ZWS L revenues from OSO&E totalled Zl 3,144,000 (571,000 @ Zl 5.5).
APBC purchased 537,000 of tiles and mosaics in 20X7, say 300,000 from ZWS L. With no
growth in sales to APBC in 20X9 (Exhibit 7 shows APBCs revenue forecast to 20X9 to be
broadly static), this is 22% of OSO&E. Split remaining sales equally between Polish special
orders and Eurozone exports
What is an appropriate exchange rate movement to select for your sensitivity analysis? Say
1% strengthening of the Zloty as Exhibit 4 indicates a strengthening Polish economy
What is the impact of your selected exchange rate movement? 1% strengthening of the Zloty
would result in a 0.9% reduction in gross profit on these products
Is it reasonable to assume that ZWS L would price its exports in or ? Yes, as the Zloty is not
a hard currency and therefore would be inconvenient for customers to buy and hedge any
foreign exchange exposure. To be competitive in new markets, ZWSL might need to assume
the foreign exchange risk
C
H
A
P
T
E
R
What if the OSO&E revenue mix is different? Assume the most extreme case and that all
revenue is from exports; decrease is 1.4% in product gross profit, 0.8% of total gross profit

Calculate the breakeven point for ZWS L in 20X6 and 20X9. What is the excess of contribution
over breakeven?
Suggested process
Define what is meant by breakeven

Identify obvious fixed costs
Identify components of contribution
Consider remaining costs and allocate between fixed and variable
Carry out the calculations
Calculations
Exhibit 5 Income statement
Fixed costs
Depreciation
Interest
Contribution
Revenue
Cost of sales
Gross profit
Breakeven (fixed costs as % of revenue)

Contribution (as % of revenue)
Excess of contribution over breakeven point (margin of safety)
Breakeven as % of contribution
20X6
Zl000
20X9
Zl000
2,568
359
72
2,999
Zl000
3,270
1,072
280
4,622
Zl000
13,229
(8,236)
4,993
(1,058)
3,935
19,244
(11,161)
8,083
(1,350)
6,733
22.7%
29.7%
7.0%
76.2%
24.0%
35.0%
11.0%
68.6%
73
Discussion points
What is the breakeven point? The cost structure of ZWS L differentiates between the fixed
costs (that will be incurred whatever business volumes are achieved) and the contribution (ie
profit) achieved from its products.
Should you include interest in fixed costs? It may be appropriate since bank loans are noncurrent liabilities and therefore strategic financing, ie will not vary with activity levels (ie sales
volumes), unlike working capital finance. However, it could also be excluded altogether as it
is a financing cost not an operating cost.
Should transport and distribution be included in variable costs? These are likely to have a fixed
(costs of having a transport system, eg vehicles) and variable element (eg numbers of
journeys). A sensible assumption is required here; what happens if the allocation between
fixed and variable elements is changed?
In this example, what is the excess of contribution over breakeven? Profit before tax because,
in looking at the business as a whole, all items in the income statement have been allocated to
either the fixed or variable elements. The excess of contribution indicates what is known as
the margin of safety.
What does breakeven as percentage of contribution mean? In a forecast, assuming a constant

mix of sales and therefore constant gross profit percentage, this is the proportion of turnover
that needs to be achieved in order to breakeven.

Compare the gross profit margin and breakeven point for ZWS L in 20X9 with those for 20X6.
Suggested process
Define the breakeven point for a business
Identify a meaningful way to present the change in the breakeven point between 20X6 and
20X9
Calculate the changes in the fixed cost elements
Calculate the changes in the contribution elements
Identify the key elements
Discuss the change in breakeven point; what does it mean?
Calculations
From Exhibit 5 Income statement
Fixed costs as % of revenues

Depreciation
Interest
Breakeven (fixed costs as % of revenue)
Variable costs as % of revenues
Cost of sales
Gross profit
Contribution (as % of revenue)
Excess of contribution over breakeven point (PBT)
20X9
%
19.4
2.8
0.5
22.7
17.0
5.5
1.5
24.0
+2.4
-2.7
-1.0
-1.3
62.3
37.7
8.0
29.7
58.0
42.0
7.0
35.0
+4.3
+4.3
+1.0
+5.3
11.0%
+4.0
7.0%
+ Better/
-Worse
Discussion points
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20X6
%
Case Study
What is a meaningful way to present the change in the breakeven point? For a business as a
whole, the breakeven point is the cost structure. We need to find a way to present the
change between the actual cost structure in 20X6 and that used in the 20X9 forecast. Here
we have used costs as a percentage of revenue to illustrate the cost structure.
What are the key elements to improved performance in 20X9? An improvement in

contribution by 5.3% to 35.0% of revenue is offset by a 1.3% increase in fixed costs to 24.0%
of revenues. The principal impact on contribution is the 4.3% overall increase in GP% to
42%, being a combination of changes in sales volumes, sales prices, costs of sales and sales
mix. (Within fixed costs, the 2.4% reduction of administration, marketing and selling
expenses is broadly offset by the increases in depreciation and interest costs.)
What does the change in the breakeven point mean? There is a higher level of fixed
overheads in 20X9 that need to be serviced before the business will achieve a profit.
Is the possibility of making a profit in 20X9 higher or lower than in 20X6? Why?
Higher: higher contribution and margin of safety

Lower: increase in breakeven point means higher fixed costs that need to be serviced
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Comparison of answers for Competency Based Assessment: Breakeven analysis for 20X9
IC script
SC script
CC script
Top script
The breakeven
point is the
contribution
required for a
product to cover
its fixed costs.
The breakeven
point for a
business is the
contribution
required to cover
the fixed costs.
The breakeven point for

a business is the
contribution required to
cover the fixed costs.
Gross profit can

be an estimate of
contribution and
is Zl 8,083 in
20X9.
Contribution is
gross profit less
variable costs and
is forecast to
increase by 5.3%
to 35% of
revenue.
The breakeven point for a business

is the contribution required to
cover the fixed costs. Since all
ZWS L costs have been allocated
between fixed and variable, the
breakeven point is also profit
before tax.
Fixed costs in
20X9 are
Zl 4,622k.
Fixed costs in
20X9 totalling Zl
4,622k include
administration,
depreciation and
interest. Fixed
costs are forecast
to increase by
1.3% to 24.0% of
revenue.
Contribution is gross
profit less variable costs
and is forecast to
increase by 5.3% to
35% of revenue. The
key element of the
forecast improvement
is an increase in gross
profit % by 4.3% to
42.0 % of revenue.
Fixed costs in 20X9
totalling Zl 4,622k
include administration,
depreciation and
interest. Fixed costs are
forecast to increase by
1.3% to 24.0% of
revenue. 68.6% of
forecast revenue will
need to be achieved to
breakeven in 20X9,
down from 76.2% in
20X6.
The breakeven point is
forecast to be higher
in 20X9.
Contribution is gross profit less

variable costs and is forecast to
increase by 5.3% to 35% of revenue.
The key element of the forecast
improvements in performance in
20X9 is an increase in gross profit %
by 4.3% to 42.0% of revenue, being
a combination of changes in sales
volumes, GP% and mix.
Fixed costs in 20X9 totalling Zl
4,622k include administration,
depreciation and interest (bank
loans are non-current liabilities
and therefore strategic financing).
Fixed costs are forecast to increase
by 1.3% to 24.0% of revenue.
68.6% of forecast revenue will need
to be achieved to breakeven in
20X9, down from 76.2% in 20X6.
Although the breakeven point is
forecast to be higher in 20X9, the
possibility of making a profit is
probably higher than in 20X6 due
to the increase in PBT from 7.0%
to 11.0% of revenue.
IC script does not provide a relevant definition of breakeven for a business and makes only limited
use of the case information to provide analysis that is of little value.
SC script provides a clear definition of breakeven and uses the case material and own work to
calculate some relevant measures for 20X9. This demonstrates an understanding of how
breakeven can be used to measure performance.
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CC script develops the analysis of the breakeven point by including analyses of contribution and
fixed costs. It also concludes on the breakeven point in 20X9.
Top script provides further definition of breakeven and provides an explanation of the components
of contribution and fixed costs. The conclusion makes a qualitative assessment about achieving the
20X9 forecast profit.
Provide a clear definition of a breakeven point (in this case for a business as a whole).
Explain the basis for allocating costs between fixed and variable, and state any assumptions used.
Plan how you are going to present any changes in the breakeven point in a clear and meaningful way.
Identify the key elements that underlie any change in performance.
Draw a relevant conclusion about the profitability of the business that is clearly linked to your analysis.

What is the likely range of shareholdings that APBC might receive if it agreed with ZWS Ls
proposal to invest Zl 200,000 in new equity?
Suggested process
Consider appropriate valuation methods from case information

Value of current shares in ZWS L
Calculate new equity shareholding
Consider alternative scenarios
Calculations
Exhibit 5 Income statement and balance sheet
20X6 profit after tax
P/E ratio of, say, 10
Current equity (say Zl 1 shares)
Value per share
20X6
Zl 758,000
Zl 7.6 million
548,000
Zl 13.83
New equity
New shares (also Zl 1)
Total number of issued shares
New shareholding
Zl 200,000
14,460
562,460
2.6%
Zl 200,000
10,873
558,873
1.9%
5.2%
3.8%
P/E ratio of, say 5: new shareholding
Discussion points
What is an appropriate method for valuing ZWS L and why?
76
20X7
Zl 1,008,000
Zl 10.1 million
548,000
Zl 18.39
P/E multiple simple to estimate and apply

Inadequate cash flow projections for discounted cash flow
ZWS L has not paid dividends so cannot use dividend yield
Net assets not appropriate for growing business
What is an appropriate range of P/E multiples? Traditional manufacturing company unlikely

to command particularly high multiples (unlike eg new technologies); not that critical as the
proposed equity investment is small compared to the company value.
What are ZWS Ls maintainable profits? Given projected growth in PAT of 7% per annum,
using 20X6 seems low. Implies P/E higher multiple or using forecast profits.
What is the likely range of new equity shareholding? Say 2-4%. Higher valuation of ZWS L
reduces new equity shareholding.
No mention is made in Exhibit 3 of the terms of sale for the new shares; what if ZWS L had
not considered valuing the existing shares but had merely thought the new shares to be
issued at nominal value? What would this imply? The new shareholding would be 200/748 =
26.7% ie the current shareholders have sold over a quarter of the company for Zl 200k.
Case Study
This might be because they do not consider that there is any market in these shares ie they
are effectively worthless. Even at net asset value, the existing share would be worth Zl 5.62,
which would imply a new shareholding of 35,608 shares (6%).

ZWS L is proposing a total investment of Zl 2.2 million, being Zl 0.2 million in new equity and Zl
2.0 million in debt. Using a share price of Zl 18.39 from Exercise 3, consider whether a higher
level of strategic investment by APBC in ZWS L would be feasible.
Suggested process
Consider how APBC would finance the proposed investment in ZWS L

Consider the returns APBC might be expecting on the debt and the equity
Consider what a strategic participation might mean to APBC
Consider the impact on ZWS L of APBC having a higher proportion of equity
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Calculations
Exhibit 3 Investment proposal from ZWS L
Proposed investment (Zloty 2.2m @ 5.5)
Exhibit 7 balance sheet and cash flow statement
20X7 APBC cash and deposits
20X8 forecast cash generated from operating activities
Less: purchase of non-current assets
Less: financing activities
Forecast 20X8 free cash
% holding by APBC assuming Zl 0.2m equity investment
Assuming Zl 2.2m all equity (@Zl 18.39 per share)
New shares in ZWS L
Enlarged ZWS L share capital
% holding by APBC
000
400
1,720
1,892
(1,000)
(581)
311
1.9%
119,630
667,630
17.9%
Discussion points
How could APBC finance the proposed investment in ZWS L? Zl 2.2 million (400k) either
out of cash and deposits or new Zl loan to match exchange risk
What is a likely Poland bank base rate? Why? Strong economy, low inflation, appreciating
currency. Likely to be in line with European Central Bank rate (20X7 4%)
What would APBC expect as a return on debt? Assuming equivalent interest rate differentials
to UK, 1-2% over Poland base rate, say 5-6% pa, as compared with UK commercial deposit
rates - say 6%
What would APBC expect as a return on equity? Dividend yield in UK construction sector
(20X7 (3-5%); UK private equity investment returns (capital growth 30% pa), compared with
projected growth in ZWS L profits after tax 20X6-20X9 30% pa
How might APBC define a strategic investment in ZWS L? Might mean associated company
but then all proposed investment (and more) would need to be in equity; unlikely to be
acceptable to ZWS L in short term (see Exhibit 3). Lack of dividends and exit route would
probably preclude this
If APBC wanted to have a higher proportion of equity in the debt/equity mix of the proposed
investment in ZWS L, what would be the impact on ZWS L? Would need to agree dividend
policy with APBC. Lack of free cash in ZWS L means any dividends would be small. APBC will
look for capital growth; must consider exit route for APBC if shareholding is more than, say,
2% as projected growth rate of 30% pa will make it expensive to buy them out
Do you consider that it is likely that ZWS L would accept a higher proportion of equity in the
mix of the proposed investment? Unlikely to be significantly different to ZWS L proposal due
to dividend and exit constraints
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Comparison of answers for Competency Based Assessment: Investment appraisal

IC script
SC script
CC script
Top script
The proposed
investment in
ZWS L is Zl
2.2m (400k at
Zl 5.5). This
comprises Zl
200k in equity
and a Zl 2m
loan.
The proposed
investment in ZWS L
is Zl 2.2m (400k at
Zl 5.5). APBC could
finance this by
using cash
currently on
deposit. At Zl
18.39 per share,
the equity element
of Zl 200k would be
a 2% shareholding.
The proposed
investment in ZWS L is
Zl 2.2m (400k at Zl
5.5). APBC could
finance this by using
cash currently on
deposit. At Zl 18.39
per share, the equity
element of Zl 200k
would be a 2%
shareholding.
The proposed investment in ZWS L

is Zl 2.2m (400k at Zl 5.5). APBC
could finance this by using cash
currently on deposit. At Zl 18.39
per share, the equity element of Zl
200k would be a 2% shareholding.
A strategic
investment for
APBC would
mean an equity
stake of over
20%
(associated
company).
The total
investment of Zl
2.2m would only be
an 18%
shareholding. A
strategic investment
for APBC would
mean an equity
stake of over 20%
(associated
company).
It would expect the

interest rate on any
loan to be equivalent
to the UK commercial
deposit rate, which is
currently 6% pa.
The total investment of
Zl 2.2m would only be
an 18% shareholding.
A strategic investment
for APBC would mean
an equity stake of over
20% (associated
company).
The proposed
investment of Zl 2.2m
is not enough for
APBC to obtain a
strategic equity
investment.
UK commercial deposit rates are

currently 6% pa. Interest rates in
Poland are likely to be in line
with the ECB (currently 4% pa)
as it has a strong economy (13%
growth in 20X6) and low
inflation (2.1% pa). The likely
interest rate on the Zl 2m loan is
5.5-6.0% (1.5-2.0% over base
rate).
The total investment of Zl 2.2m
would only be an 18%
shareholding. A strategic
investment for APBC would be an
equity stake of over 20%
(associated company).
The proposed investment of Zl
2.2m is not enough for APBC to
obtain a strategic equity
investment. ZWS L has not paid
any dividends to date. It is
unlikely to accept a new equity
investment of more than 2% due
to the constraints on paying
significant dividends in the
future, as it does not have
sufficient free cash.
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IC script merely reproduces the case information about the proposed investment in ZWS L and
does not answer the question as to whether a higher level of strategic investment by APBC would
be feasible.
SC script has carried out a valuation of ZWS L (in Exercise 3) to determine the 2% shareholding for
an equity investment of Zl 200k. It also calculates the shareholding for an all equity investment
(18%) and links this to the definition of a strategic shareholding.
CC script develops the analysis of the proposed investment by stating the return that APBC would
require on its loan (6% pa). It also concludes on that even an all-equity investment is not enough
to be strategic for APBC (only implied in IC script).
Top script provides further analysis on the return that APBC would require on its loan, by
comparing this with the likely interest rates in Poland. It also extends the conclusion on the equity
investment by considering why ZWS L is unlikely to accept more than 2%.
Case Study
Use the valuation information provided in Exercise 3 (which you are referred to).
Provide a range of possible equity investments by APBC in ZWS L; in this case Zl 200k (2%) and
Zl 2.2m (18%).
Describe clearly what you mean by a strategic investment for APBC in ZWS L.
Develop your analysis by discussing likely returns required for the debt and equity elements.
Conclude on your proposed equity element from both APBCs and ZWS Ls perspectives.
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CHAPTER 3
Ethics
Introduction
Topic List
1 Approaching ethics
2 Ethics in the Case Study
3 Dealing with ethical issues in the Case Study exam
4 Guide to appendices
Appendix 1
Byx Limited
Appendix 2
Comparative answering techniques for ethical issues in Byx
Appendix 3
Sovranti Limited
Appendix 4
Comparative answering techniques for ethical issues in the

Sovranti case
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Introduction
Ethics may be defined as 'written and unwritten codes of principles and values that govern decisions and
actions within an organisation'.
In the business world, an organisations culture sets standards for determining the difference between
good and bad decision-making and behaviour. The expression 'business ethics' can be used to describe
the actions both of individuals within an organisation and of the organisation as a whole though in
effect these are the same thing: the culture of an organisation is necessarily shaped by the individuals
who work for it (especially those at the top, the ones who 'set the tone').
In the most basic terms, business ethics has two parts. The organisation must first know the difference
between right and wrong, and then choose to do what is right in the relevant circumstances.
1 Approaching ethics
Section overview
1.1
The ICAEW has a principles-based approach to ethics.
Is it possible to approach ethical dilemmas in a structured way?
Ethics
As stated in the ICAEW Code of Ethics and reinforced in your Structured Training in Ethics (STE), the
ICAEW has adopted a principles-based approach to ethics rather than a rules-based approach. The five
fundamental principles are:
(a)
Integrity You should be straightforward and honest in all your professional and business
relationships.
(b) Objectivity You should not allow bias, conflict of interest or undue influence to override
professional or business judgements.
(c)
Professional competence and due care You should act diligently and in accordance with
applicable standards, current practice and the law.
(d) Confidentiality You should respect the confidentiality of information acquired as the result of
professional and business relationships.
(e)
Professional behaviour You should comply with relevant laws and regulations and avoid any
action that discredits the profession.
The suggested advantages of this principles-based approach over a rules-based approach are that:
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It sets more rigorous standards of behaviour as you must comply with the spirit, not just the letter,
of the requirements.
It helps you see the bigger picture rather than just individual rules.
It is flexible it enables you to keep up with a rapidly-changing business environment and it can be
applied in differing circumstances across the world.
Although you need more explanation and guidance with this approach, you end up with more
succinct requirements.
It promotes the development of ethical judgement and decision-making skills.
It helps create a culture of ethical awareness.
It encourages you to take responsibility for your actions.
Case Study
The suggested disadvantages of a principles-based approach are:
1.2
It is not always easy to find the right answer or even to identify the right questions.
There may be more than one correct course of action, and conflicting interests and priorities must
therefore be carefully balanced.
Ethics in professional life

A chartered accountant or a student aspiring to become a chartered accountant must develop, and
adhere to, an ethical approach to work. As with many areas of professional competence, the skill of
being aware of and able to identify and address ethical issues is one that develops over time. This task is
complicated by the fact that an ethical issue does not arrive with a red flag waving to draw attention to
it. Frequently in practice it will arrive in a subtle and inconspicuous manner.
Your work experience puts your learning into context as you experience and observe ethical issues as
they arise and get a chance to put theory into practice. As you have progressed through your training,
you will have found that your day-to-day work has an ethical dimension, affecting everything from how
you treat other people to how you analyse information and make decisions. You will have absorbed the
values of those around you and learnt by formal, structured training and informal, on-the-job discussion.
As you progress in your career, you will be expected to keep high standards of ethical behaviour, set an
example for others to follow and to develop your moral leadership skills to help maintain an ethical
culture in your organisation.
Ethical behaviour pervades the whole organisation. Indeed, we talk about a business having an 'ethos'
(the Greek word, literally meaning 'custom' or 'manners', from which 'ethics' is derived). On occasion, it
is important to be able to determine whether one aspect of business behaviour, or the behaviour in one
area of the business, is providing a signal about the existence of poor ethical business behaviour
elsewhere within the organisation. For example, a manager adopting an aggressive attitude towards his
team may be reflecting the style of management that has been displayed towards him by the directors
and which may in turn reflect the image of the organisation in the outside world.
1.3
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Determining whether an action is ethical
In order to determine whether or not an action, commercial incident or pattern of behaviour presents
an ethical dilemma, it is important to consider the outcomes of the decision-making process. One way
of identifying ethical dilemmas is by using the 'four-way test' to evaluate decisions so-called because it
involves asking four general questions although this is not a definitive list, but a reflective process:
1
2
3
4
Is the decision/action a truthful one?

Is the decision/action fair to everyone affected?
Will the decision/action build goodwill for the organisation?
Is the decision/action beneficial to all parties who have a vested interest in the outcome?
If these four questions can be answered with a 'yes,' it is likely that the decision is an ethical one.
Another way of considering whether decisions/actions are ethical is by using the 'publicity test' that is,
by asking what would be the reaction if the decision/action were published in the local or national
press. Apart from reasons of commercial sensitivity, if the organisation would not want the wider world
to know of the decision/actions, then it may mean that it is a potential ethical dilemma.
1.4
A structured approach
In those cases where a potential ethical dilemma presents itself, there is a need to develop a logical and
structured approach in dealing with the situation. There are a number of key steps to be followed:
Gather the relevant facts and identify the problem

Identify the affected parties
Identify the ethical issues involved
Consider and evaluate alternative courses of action and associated consequences
Decide on a course of action
Ethics
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1.4.1
Gather the relevant facts and identify the problem Find out as much about the situation as you can to
clarify the problem and identify the key issues. For a client this might include:
1.4.2
Identify the affected parties Work out who will be affected and the potential impact on them. This
requires a stakeholder analysis and could involve:
1.4.3
Potential breach of law, regulations or standards

Tax evasion
Pressure from superiors for employees to behave unethically
Creating misleading accounts / recording false data
Submission of misleading information to shareholders or regulators / other authorities
Conflicts of interest such as involvement with competitor organisations
Shareholders / other investors

Regulators / financial markets
The government / government agencies / HMRC / law enforcement agencies
The general public
Directors / employees
Consumers / suppliers
Identify the ethical issues involved Use the information collected to identify the key ethical issues
involved, such as:
1.4.4
Breach of confidentiality
Conflict of interest / lack of objectivity
Dishonesty
Misleading information
Tax evasion
Illegal acts
Consider and evaluate alternative courses of action and associated consequences Think about the
options that are available and their potential outcomes:
1.4.5
All the consequences have been discussed and evaluated

You feel that you are doing the right thing
The action will stand the test of time
A similar course of action would be undertaken in a similar situation
You would feel comfortable with scrutiny from peers, family and friends
Ultimately you need to feel confident that you are doing the right thing
Decide on a course of action Having considered the issues, determine the most appropriate course of
action consistent with the fundamental principles and implement it. It is unlikely that you as a student
will take the ultimate decision yourself. Any decision is likely to be reached in consultation with your line
manager, counsellor, training partner, ethics partner or equivalent.
1.5
Report up the line internally

Raise the matter directly with the client's board of directors
Write to the client's shareholders
Blow the whistle to the regulator (where applicable) in the public interest
Contact the press
Ethics: shades of opinion

It is also very important in practice to be tactful when dealing with ethical issues because, whatever the
origin of a questionable ethical issue, it is sometimes a debatable matter of fact whether an issue has
occurred through wilful actions, or negligence, or accident. It is also frequently a matter of opinion
whether, for a particular situation, there is a clear ethical issue to be addressed there are often shades
of opinion and these must all be assessed as carefully as possible.
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Case Study
2 Ethics in the Case Study

Section overview
2.1
Many of the practical steps identified above will also apply in varying degrees to the Case Study.
The examiners are looking for the way in which candidates assemble the answer to an ethical issue
within the context of the case rather than follow the pathway that would be available to them in
a real working situation.
Provision of ethical help by the ICAEW

One of the differences is that in real life a student would automatically seek support and advice from the
hierarchy available to him/her in the organisation or from outside (e.g. the ICAEW Ethics Helpline) for
any identified actual or potential ethical issue. As this is not possible in an exam, candidates must be
able to analyse, discuss and attempt to resolve the issue themselves. However, this is no different from
the assessment of any other topic in the Case Study: in practice, professional support and help will
usually (to a greater or lesser extent) be available for any problem identified, and this is no more or less
true for the assessment of an ethical issue. Thus it would clearly be an inappropriate answer merely to
state that the identified problem should be 'passed up the line' without providing a convincing
structured analysis of the issue, the ethics involved, and the impact that the issue might have on the
business.
It is therefore important that students develop the techniques for assessing and answering questions
related to ethical issues which should build easily upon their Structured Training in Ethics (STE) and on
their approach to ethics in earlier stages of the ACA and in the workplace. These will be discussed below
but at this stage it is worth considering what the examiners expect for ethics in the Case Study.
2.2
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What do the Case Study examiners expect when they refer to 'ethics'?
Throughout the Case Study, candidates are expected to develop an answer based on their
demonstration of four skills:
Assimilation and Use of Information (A&UI)

Structuring of Problems and Solutions (SP&S)
Applying Judgement (AJ)
Conclusions and Recommendations (C&R).
Tackling ethical issues is by its nature a matter of degrees of professional judgement. A candidates
consideration of, and response to, ethical issues within the Case Study will therefore normally be
assessed mainly under AJ, but this cannot be done successfully without the other three skills areas.
The table below sets out the specific skills areas under which ethical issues are assessed in the Case
Study.
Assessed skills

significance of ethics in the business environment
and the importance of ethical behaviour
Uses the Advance Information, Exam Paper,

knowledge of ethical codes and professional
experience to define the specific issue / situation
Using relevant content of the International &

ICAEW Codes of Ethics
regulatory structure of the profession, its ethos,
culture and role in corporate and social
responsibility
Ethics
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Assessed skills
Structuring problems & solutions

Demonstrating an understanding of the pressures
on professional ethical behaviour, including the
interaction between professional ethics, the law
and other value systems
Uses knowledge of ethical codes and professional

experience to perform relevant analysis
Applying judgement
Appreciating the ethical dimensions of situations,
exercising ethical judgement and explaining the
consequence of unethical behaviour
Uses knowledge of ethical codes and professional

experience to:
Build on implications of analysis
Discuss output
Recognise linkages
Evaluate key points
Evaluate options
Drawing conclusions and making

recommendations
Approaching decision-making using an ethical
framework
Draws conclusions linked to analysis and judgement

Makes practical recommendations
The rubric in both the Advance Information and Exam Paper sets out what is expected of Case Study
candidates in respect of ethics.
2.3
Advance Information rubric

Ethical issues may not form a specific requirement but, within a requirement, may cover such topics
as:
2.4

Exam Paper rubric

Marks allocation
Approximately 15% of the marks are awarded for the executive summary and 10% for the
appropriate discussion of ethical issues within your answer to the requirements.
As well as under the relevant detailed requirements, marks will also be available in the executive
summary for summarising the key findings on ethical issues. Ethics therefore forms a significant part of
the total marks available. As a result a candidate omitting to deal with the ethical issues of the case
would be seriously jeopardising his or her chances of success in the exam.
2.5
Ethical requirements in the Case Study

Ethical issues are embedded in the Case Study and are a component of exam requirements but they will
not normally constitute a specific single requirement. They will usually, but not necessarily, form a part
of requirement 3, which typically asks candidates to discuss strategy. They will not normally have a
numerical component, but again this is not a hard-and-fast rule: candidates may be asked, for example,
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Case Study
to calculate the financial implications of adopting or not adopting a particular approach to an ethical
issue.
2.6
Roles played in the Case Study

In the Case Study, your role will generally be either (i) that of a trainee within an accountancy firm
providing business advice to a client or (ii) that of a student working (whether permanently or on
secondment) for a commercial organisation. The approach you adopt towards an identified ethical issue
will depend to some extent on which of these roles you are fulfilling, although the difference should not
be significant: it will often lie in the language you use to discuss the issue rather than the content of
your discussion. Moreover, it will always be made clear from whose standpoint you are expected to
provide the relevant advice.
Regardless of the role, it is important to be aware that the issues arising will normally be issues of
business ethics rather than professional ethics i.e. you are being asked to discuss how the subject entity
should deal with a particular dilemma that it faces, rather than the implications for you as advisor in
providing advice.
In this connection, one vital consideration is to know the identity of your audience. If you are being
asked to report to the board of directors as a whole (which will often be the case), but you know from
reading the case material that the directors all have different vested interests that may not benefit the
entity as a whole, you will need to be very careful about what advice you give and how you word it.
2.7
The four categories

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As was seen above, the Advance Information rubric indicates the four general categories under which
ethical issues might arise. Note that the four categories are all by nature areas of concern each one
contains a word that suggests inapt behaviour or a difficult situation ('lack', 'conflict', 'doubtful',
'inappropriate').
It is hard to provide a definitive list of ethical issues that could potentially occur in the Case Study under
the four headings, but here are some general examples that might arise under each.
2.7.1
2.7.2
Failing to ensure that your advice is directed at the individual(s) or company that commissioned it
Being tactless when addressing issues that may be sensitive to one or more audience members
Abusing confidentiality
If your role is one of a secondee, being not compromising yourself
Offering to perform further work outside your sphere of expertise
2.7.3
Directors also being main shareholders of the company

Outside investors in opposition to stated company strategy
Cartel arrangement acting against consumers
Redundancies among employees so that the company can maintain profit levels
Environmental responsibilities in opposition to established company practices
Related party transactions (e.g. employing relatives)
Performance-related pay (including commissions and bonuses)
Abuse of close personal contacts for commercial gain
Excessive corporate hospitality / entertaining of clients
Breach of law or regulation

Aggressive attitude towards a supplier
Imposition of unfair contract terms
Misleading tax authorities by incomplete disclosure (e.g. of related party transactions)
Inappropriate treatment of leases in financial statements
Money laundering
Ethics
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2.7.4
Health & safety failings

Abuse of customer information
Falsification of expense claims
Theft of commercial intelligence / breach of copyright
Misleading advertising
Inappropriate pressure to achieve a reported result
Dubious revenue recognition policy in financial statements

Keeping profits artificially low to ensure a low valuation for corporate sale purposes
Manipulation of KPIs
Misclassification of items in financial statements to ensure compliance with bank covenants
Questionable bad debt provision policy
Abuse of cut-off
Potential bias in forecast / business plan to support application for loan
It should again be emphasised that the categorisation is not rigid. For example, 'redundancies among
employees required to maintain profit levels' could equally be listed under 'Inappropriate pressure to
achieve a reported result'.
In the Case Study, the first category (lack of professional independence) is likely to be the least
significant which is not to say that it might not occur at all. Typically, your role has been created in
such a way that the work you carry out in the exam is specifically allowed by your terms of engagement;
and the ethical issues you are being asked to tackle are those relating to the business itself and not to
your role. Among the other three categories, the weighting will vary from case to case: some will have
more of an emphasis on, for example, doubtful commercial practice and others on conflicts of interest.
3 Dealing with ethical issues in the Case Study exam

Section overview
3.1
Ethics will appear in the Advance Information, both obviously and in a more subtle way.
Ethics appear in both the general rubric and the detailed requirements of the exam.
How do I identify ethical issues in the Advance Information?

As part of your work on the Advance Information, you should be on the lookout for ethical issues. Once
you have read through the Advance Information and familiarised yourself with its broad contents, a
good technique is to read it again wearing an ethical 'hat', enabling you to pick out and note all the
ethical issues that you come across. You should highlight these as you identify them.
You will discover that some ethical issues are obvious, while others are more subtle and have to be
discovered as we said earlier, ethical issues will not always come with a red flag waving. By definition,
you will find issues in the second category harder to identify, so you should practise looking for them.
You should quickly realise that some of the exhibits contain more ethical matter than others. You should
also keep in mind the important Case Study skill of recognising linkages (and contradictions), both
within and between exhibits. For example, an exhibit dealing with the wider industry context may
mention a general ethical issue; another exhibit about the subject entity may then explain how the
entity deals with the issue in the context of its own business operations.
For each issue that you identify, you should also try to work out which of the four categories of ethical
issues is/are being addressed in each instance. There will not necessarily be a 'right' or 'wrong' category:
as we have seen earlier, ethics by its nature is not an exact science and can stray into grey areas.
Having identified all the relevant issues, you should ensure that you document them neatly, so that you
can find them easily in the exam. Specifically, you should list them under the relevant category/ies.
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3.2
What other preparation can I do?

As well as your specific work on the Advance Information, there are also some other tasks that you can
perform during your preparation period. As part of your recommended monitoring of the media, you
should be on the lookout for references to business ethics in the media, particularly where they relate
(whether directly or indirectly) to the subject entity and/or the industry in which it operates. It is quite
possible that the Exam Paper will contain a press article (perhaps based on a real article that has
appeared in a recent publication) drawing attention to a potential ethical issue which you will be
expected to address.
You should also be increasingly alert to ethical issues arising in your professional work and get into the
habit of considering how you would address them rather than automatically leaving them to a manager
to take forward.
If the various pieces of guidance in the preceding paragraphs are familiar so they should be. Your
approach to ethical issues should be no different in broad terms from your preparatory work on other
aspects of the Case Study, such as those of financial statements analysis. The same attention to detail
will put you at a strong advantage before you even enter the exam hall.
3.3
How do I identify ethical issues in the Exam Paper?

The generic rubric will often be reinforced in the detailed requirements of the case by references to one
or more of the four categories of ethics.
Example of detailed ethical requirement (from Sovranti (July 2008)) with emphasis added
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3. An assessment of the risks and rewards for Sovranti, including ethical issues, in carrying out
expansion through franchised clubs rather than through owned clubs.
You should take into account the challenges currently facing our existing owned clubs (Exhibit 19),
together with our experiences to date with franchising in the UK and the Netherlands. You should
identify any relevant ethical issues arising in our business such as in relation to conflicts of
interest, doubtful business practice or pressure to achieve results and explain how we should
address them.
In the exam itself, a good tactic is to use part of your planning time to identify references to ethics in the
Exam Paper and link these to your list of issues from the Advance Information. It must be stressed that
this should be done only where it is relevant to the requirements. You are very unlikely to need to
discuss all of the ethical issues you identified in your preparation, so you must avoid the temptation to
adopt a 'scattergun' approach to the requirement and reproduce all the ethical issues you identified in
your preparation, however clever they may be and regardless of the fact they may not be at all relevant.
Remember too that ethical issues are assessed across the whole range of skills: merely listing an issue
without going on to analyse it, apply judgement and reach a recommendation or conclusion will not
earn much credit.
3.4
How do candidates perform in relation to ethical issues in the Case Study?

From the evidence of candidates' performance in the new-style ACA, the examiners have commented
that candidates can generally deal with specific ethical requirements identified in the case and can
develop their analysis by discussing the implications of the points made and make relevant
recommendations. However, candidates are less able to identify wider issues or to demonstrate sufficient
competency with broader, unstructured, ethical aspects of a business environment.
Ethics
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4 Guide to appendices
Section overview
Byx Limited (April 2008 (Pilot))

Appendix 1 Extracts
Appendix 2 Comparative answering techniques
Sovranti Leisure Limited (July 2008)

Appendix 3 Extracts
Appendix 4 Comparative answering techniques
4.1
Byx Limited (Byx)

Byx Limited (Byx) is a UK-based company which supplies and repairs bicycles. The majority of its
business in the recent past has arisen from the replacement of stolen bicycles paid for by insurance
companies. The company is in transition and has prepared a positive three-year forecast which is being
submitted to its bank in support of a 10-year loan to part-fund a change in strategic direction.
Commentary on the forecast is provided by Mark Goldring, Managing Director of Byx, in Exhibit 9 of
the Advance Information: relevant extracts are provided in Appendix 1, together with the ethics-related
parts of the requirements that candidates were asked to address.
4.2
Sovranti Leisure Limited (Sovranti)

Sovranti is a UK-based company owning ten fitness centres in the UK and operating a further eight
under franchise agreements in the UK and the Netherlands. Sovranti is now considering a proposal for
three new franchised centres in Portugal.
There are a number of specific issues that arise in connection with franchising, and these are addressed
in a series of extracts from the Advance Information, provided at Appendix 3. An extract from one key
exhibit in the Exam Paper is also provided, together with the ethics parts of the requirements that
candidates were asked to address.
4.3
Comparative answer
In line with other cases contained in these Learning Materials, Appendices 2 and 4 are illustrations of
comparative answers, in each case covering one element of the ethics part of the requirements:
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Byx ('Developing new business activity Inappropriate use of existing customer information')
Sovranti ('Pressure to achieve results Under-reporting of revenue').
Case Study
Appendix 1: Byx Limited

(Pilot (April 2008))
Advance Information
Exhibit 9 (extract): Commentary on financial forecasts
Future direction overview
After a careful review of our current business trends and activity it has become apparent that Byx is
facing a significant squeeze from the insurance industry which it is predicted will become ever tighter.
The main cause of this is the continuing consolidation of insurance companies. Byx has therefore taken
the decision to diversify from its current core business back into retail sales and at the same time to
launch a comprehensive web-based sales programme A new location for the retail operation has
been identified and Byx is in the process of negotiating final terms and conditions before signing a rent
agreement. There is also sufficient space in our current location to start up a fully-equipped bicycle
workshop
Future revenues
Byx believes that it now is a good time to return to the retail market and its new future revenue stream
will be created by both new retail and new web-based sales. The company has identified that there
is scope in the local market to return to making sales from a physical retail outlet to the general public,
but especially to riders of a more adventurous disposition and also to an important new market: people
who would like to purchase electric bikes from a trustworthy local source.
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In addition, Byx will become a web-based business using a newly-developed, user-friendly, interactive
website to take us past the standard of our competitors
The business plan is developed showing a static level of revenue from our insurance replacement
business. Given that Ultimate have just renewed our contract with them, we are confident that we can
maintain the current level of insurance revenue even in the current market.
The main growth in our business will be achieved from our new revenue streams. The target is for sales
of 50k per month throughout the year 20X8 with the usual higher level of activity in December
approximately three times that which is achieved in a normal month. In December 20X8 we would
estimate this to be 150k. In the year 20X9 we would expect monthly revenue from these new streams
to be significantly higher and have estimated that monthly revenue to be 100k, again with an
equivalent sales peak in December. Revenue is shown to increase again in 20Y0.
We will be using information from our current insurance customer database and our good reputation to
develop our customer base both locally and nationally. Using this and our many personal contacts we
are confident that we can fully develop these new income streams
Exam Paper
Requirements (extract)
From the information supplied, please prepare a draft report for us to discuss with the directors of Byx
ahead of their discussions with their bank manager. Your report should contain a short-term action
plan for Byxs business. Your plan should identify, analyse and evaluate how Byx can build on its existing
strengths and the opportunities available to maintain a strong, sustainable business. You should also
consider how Byx might overcome any potential weaknesses and threats in its operations, including any
ethical concerns regarding its business operations which you identify, to enable the directors to achieve
that plan.
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Appendix 2:
Comparative answering techniques for
ethical issues in Byx
Developing new business activity Inappropriate use of existing customer information
IC script
SC script
CC script
Top script
Byx has a good

reputation (S) and
aims to develop its
customer database
both locally and
nationally to create
new income streams
(O).
Byx has a good

reputation (S) and aims
to develop its customer
database both locally
and nationally to create
new income streams
(O).
Byx has a good

new income streams
(O).
However, it is
proposing to use
information from its
current insurance
customer database to
achieve its plan: this is
not good ethical
business practice (W).
However, it is
proposing to use
current insurance
not good ethical
Byx has a good

new income streams
(O). However, it is
proposing to use
current insurance
not good ethical
It probably also
contravenes Byxs
insurance company
contracts in terms of
confidentiality and
exclusivity of
customers details
(W). If this situation
becomes public the
working practices and
commercial
consequences for Byx
may be severe (T).
It probably also
contravenes Byxs
insurance company
contracts in terms of
confidentiality and
exclusivity of customers
details (W). If this
situation becomes public
the working practices
and commercial
consequences for Byx
may be severe (T).
This practice may also
be illegal. Byx should
immediately review
and remove any lists
being used without the
express consent of the
insurance companies,
who should, in turn,
obtain consent from
their customers for the
release of customer
database details.
Note: The inclusion of SWOT indicators above is for information only; candidates would not be expected to
use them in their answers.
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Appendix 2 (continued):
Comparative answering techniques for
ethical issues in Byx
Developing new business activity Inappropriate use of existing customer information
IC script simply states the strength from the case material but has missed the crucial, linked
weakness
SC script states the weakness, and identifies it as an ethical issue, but does not develop this, or the
wider implications
CC script elaborates on the issue by stating a clear understanding of its immediate commercial and
wider implications, resulting in at least one point under each element of SWOT
Top script emphasises the critical importance of the issue and suggests the appropriate action that
needs to be taken
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Commentary on top script demonstration of skills (examples)

Skill
Component
Example
Assimilating & using information
Uses good understanding of

information and context
Identifies that the use of customer

database is commercially
beneficial for Byx in its
transitional plan
Identifies business and ethical

issues
Recognises that beside financial

benefit there is an ethical issue
Structuring problems &
solutions
Understands and uses the

information given
Uses professional and STE
experience to identify unethical
practice
Applying judgement
Conclusions and
recommendations
Uses knowledge of ethical codes

and professional experience to
recognise linkages and
implications
Identifies that unauthorised use of

customer database is at best
unethical business behaviour
Identifies commercial /
reputational risks of using
unauthorised customer database
Understands the need for an
appropriate customer list
Demonstrates professional
knowledge/skill
Explains expected negative

impact that will occur if
unauthorised database use
becomes public knowledge
Draws conclusions linked to

analysis and judgement
Provides indication of seriousness

by citing legality
Makes practical realistic

recommendations
Identifies need to eliminate use of

unauthorised customer
information and to seek insurance
company authorisation
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Appendix 3: Sovranti Limited

(July 2008)
Advance Information
Exhibit 3 (extract): The UK health club business model (Industry guide,
updated May 2008)
Membership numbers and fees
Many operators have come to realise that flexibility is key to attracting customers, taking particular
account of the different needs of different demographic groups Clubs can take price flexibility to
extremes by tailoring packages to suit individual members. Thus they often do not advertise prices in
their promotional literature or on their websites.
Membership fees vary with location, quality (actual and perceived) and the extent of nearby
competition from other clubs. Annual membership may be paid as a lump sum in advance or in
instalments (a reduction may be offered for the former), and may start on any date in the year. Many
clubs additionally require a one-off joining fee ...
Exhibit 5 (extract): Rachel Woodward (Managing Director of Sovranti) in conversation:

Radio interview broadcast in March 2008
DF:
Not everyone listening to this will be familiar with the concept of franchising. Can you
explain briefly what it means and how it works for Sovranti?
RW:
In summary, a franchised gym is one that is owned by an outside party (such as Grieves), but
the gym is branded as Sovranti. Under the terms of our franchise agreement, we invest in
the refurbishment of the gym (including new equipment) and then collect periodic fees from
Grieves for allowing them to use our brand name and also to pay for some of the ongoing
services (marketing, training etc) that we provide, but we do not run the gym on a day-today basis. To an average member, it does or should look and feel like a regular Sovranti
gym, but the operational situation is somewhat different.
DF:
In what way?
RW:
Perhaps the main thing to mention is that there can be a number of ethical issues in such
arrangements. For example, it is well known in the business that franchisees can under-report
their revenue so as to reduce the fees they have to pay over. There is also the risk that key
franchisee staff might form inappropriate business relationships with close friends and
relatives; or that they will try to cut corners in the way that they run the business and
potentially damage our brand though we do get some legal protection through our
membership of the British Franchising Association.
Exhibit 6 (extract): Franchising: An introduction (Franchising, February 2008 edition)

Overview
Franchising is a way of expanding a business on less capital than would otherwise be possible. A
franchisor authorises proven methods of doing business to a franchisee for an initial fee and an
ongoing fee (typically based on a percentage of sales). Various services such as advertising, training and
support are commonly made available by the franchisor, and may indeed be required by the franchisor,
who will often require audited books, and may subject the franchisee or the outlet to periodic and
surprise spot-checks. Failure of such tests typically results in non-renewal or cancellation of franchise
rights.
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Franchise arrangements are governed by legal documents known as franchise agreements. These specify
the territory/ies to be included, as well as the extent to which the franchisee will be supported by the
franchisor (e.g. training and marketing campaigns). The franchisee is responsible for the day-to-day
running of the franchise. The franchisor may impose quality control measures on the franchisee to
ensure that the goodwill of the franchisor is not damaged...
Fees
Franchise fees can broadly be divided into two types: initial and ongoing The initial fee will generally
be a fixed amount that will vary according to the type of business and number of units included. A
typical ongoing fee might be 6% of revenue, which comprises a royalty and a contribution towards
brand advertising. From this, the franchisor will have to deduct continuing obligation costs in order to
calculate the net profit from the franchise arrangement ...
Exhibit 8 (extract): Sovranti summary management accounts for the year to 31 December
2007: Commentary (prepared by Alf Mondale (Finance Director), 29 February 2008)
Franchised clubs (UK)
As the clubs are located in more affluent areas than the UK owned clubs, it has not been necessary to
give large financial incentives for people to join. However, the growth in membership numbers has not
translated itself into revenue growth, as can be seen from the revenue KPIs: we are investigating the
reasons for this, and are concerned that revenue figures may have been understated. Meanwhile, costs
have been kept under control.
Exam Paper
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Requirements (extract)
With some key decisions to be taken very soon, I would like you to draft a report to the Board,
comprising an assessment of the risks and rewards for Sovranti, including ethical issues, in carrying
out expansion through franchised clubs rather than through owned clubs. You should take into account
the challenges currently facing our existing owned clubs (Exhibit 19), together with our experiences to
date with franchising in the UK and the Netherlands. You should identify any relevant ethical issues
arising in our business such as in relation to conflicts of interest, doubtful business practice or pressure
to achieve results and explain how we should address them.
Exhibit 19 (extract): Sovranti: Summary management accounts for the 6 months to 30 June
2008 (reported 11 July 2008): Commentary
Franchised clubs (UK)
These clubs are continuing to perform well. Following our concerns that revenue might have been
under-reported, we carried out an audit of the UK operations and found that this was indeed the case,
although the under-reporting had started only in the second half of 2007. The Grieves employee
responsible for this has been sacked. Revenue for the first half of 2008 has been adjusted accordingly,
but we are in the process of calculating a revised revenue figure for 2007 (and hence the amount to be
recouped from Grieves) as well as introducing systems to prevent this from happening again at any of
our franchised clubs.
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Appendix 4: Comparative answering

techniques for ethical issues in the
Sovranti case (July 2008)
Pressure to achieve results Under-reporting of revenue
IC script
SC script
CC script
Top script
As we have seen in the

UK, franchisees can
under-report their
revenue to reduce the
fees they have to pay
over.

UK, franchisees can
under-report their
over. We have put in
place systems to
prevent this from
happening again and
must continue to
monitor closely the
results of our
franchises.

UK, franchisees can
under-report their
over. This might
include collecting but
not recording cash
fees for one-off visits,
or manipulating cutoff so that
attributable fees are
delayed until the next
payment date.

UK, franchisees can
under-report their
over. This might include
collecting but not
recording cash fees for
one-off visits, or
manipulating cut-off so
that attributable fees are
delayed until the next
payment date.
We have put in place

systems to prevent this
from happening again
and must continue to
monitor closely the
results of our
franchises.
We have put in place

systems to prevent this
from happening again
and must continue to
monitor closely the
results of our franchises,
both on a stand-alone
basis and in comparison
with owned clubs.
Similar systems would
need to be installed for
any new franchises. As
fees are the only
tangible return we
receive and as these
determine the financial
success of the franchise
it is crucial that they
are calculated correctly.
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Sovranti (July 2008): Pressure to achieve results Under-reporting of revenue

IC script simply states the issue from the case material
SC script sets out in general terms how the issue has been addressed and should be addressed in
the future
CC script elaborates on the issue by showing a deep understanding of its various facets
Top script extends this analysis further and goes on to place it in the wider business context

Skill
Component
Example
Assimilating & using

information
Uses own understanding of

context and findings
Identifies basis on which fees

are received from franchisees
Identifies business and

ethical issues
Understands risks of underreported fees and need to

remove / minimise these risks
Identifies and uses key

information
Uses professional and STE

experience to identify
unethical practice
Appreciates that owned clubs

can be a helpful benchmark
for the performance of
franchised clubs
Structuring problems &

solutions
Applying judgement
Conclusions and
recommendations
Demonstrates awareness of
'cut-off' in a practical setting
Understands relationship
between fees and success of
franchise arrangement
Explains clearly the variety of

methods and practices by
which revenue can be
misstated
Uses knowledge of ethical

codes and professional
experience to recognise
linkages
Demonstrates professional
scepticism
Draws conclusions linked to

analysis and judgement
Advises need for continued

performance monitoring
Makes practical commercial

recommendations
Identifies need to replicate

existing systems when
establishing new franchises
Ethics
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CHAPTER 4
Introduction to Elite Case

Study
Topic List
1 Elite Cars An Introduction
2 Using the Advance Information
3 The Elite Cars Advance Information
4 Integrating and assembling your Case Study binder
5 Developing your executive summary
6 Using your financial analysis in the Case Study exam
7 Tackling the Elite Cars Case Study exam
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1 Elite Cars An Introduction

1.1
The Elite Cars Case Study materials

The remainder of this Study Manual is devoted to the Case Study of Elite Cars (Elite). This case was
originally set in November 2004 and is now provided as a guide to the current Case Study exam. The
purpose of these chapters is to provide a Case Study that can be used to gain experience of the process
which should be followed in preparing for your real Case Study exam.
There are two main sections to any Case Study material: the case material issued in advance known as
Advance Information (AI); and the information which is provided on the day of the exam known as
Exam Paper (EP). In this Study Manual we will be dealing with the AI.
There are a number of changes from the original Elite case which are important:
1.2
The original Case Study has been modified to take account of some of the financial reporting
changes since the time of the original assessment.
The AI case material has been reduced from its original size of around 60 pages to its current size of
around 30 pages for teaching and learning purposes.
This Elite Case Study is analysed and discussed throughout using the Case Study CBA assessment
criteria.
Using the Elite Case Study

In this Study Manual you are provided with a process for using the AI to prepare yourself for the Case
Study exam. You then apply this process to the Elite case AI, with guidance on developing and applying
the broad range of skills that you will need in the Case Study.
The objective is to help you to develop a full understanding of the case information and construct a
Case Study 'binder' which you are allowed to take with you into the exam. This binder should contain
the Case Study AI and any relevant analysis or additional information which you may need to refer to
during the Case Study exam.
Finally, in preparation for your attempt at the Elite Case Study, there are two further sections in this
Study Manual covering areas that are critical to being successful in the Case Study exam itself.
Developing the Executive Summary

Using your financial analysis skills in the Case Study exam
By tackling the Elite case, you will gain an understanding of the role of the Advance Information and,
through a series of exercises, the tasks that you should perform once you have received it and then the
techniques needed to integrate it with the Exam Paper.
2 Using the Advance Information

The recommended approach to the Advance Information is set out in a number of stages below.
2.1
The first stage the skim read

You should do the following immediately on receiving the Advance Information:
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Skim-read the material to get a flavour of what it is all about
Pick up basic facts
What is your role?
For whom do you work (including any particular department or specialism)?
In what industry is the subject organisation based?
How large is the organisation (and its market)?
Case Study
2.2
Is it an area you know something about already? If so, what do you know? And how might
you use it to your advantage? Think about this carefully: there is a natural tendency for
students to parade irrelevant knowledge, and this can take up valuable time in the exam that
might have been better spent including relevant information.
What additional specialist information is being provided?
The second stage the detailed read

Now that you know roughly what the case is about, you should go away and read the Advance
Information in full, so that you are familiar with its contents when you come to start your formal study
sessions. This detailed read is mainly an orientation exercise. Knowing the facts and where to find them
is important but you need to understand what they mean and how they fit together in order to be fully
prepared for the Case Study exam.
You should take a similar approach for your real Case Study , where you receive the Advance
Information a month before the exam. Even if your revision course is scheduled for a few weeks later
you will fall behind your peer group straightaway if your response is to leave the Advance Information in
its shrink-wrapping. You should open it and skim-read it so that, if nothing else, you learn what your
role is and in which business sector you are based; and maybe pair up with a classmate or colleague and
test each other on the contents of the Advance Information. This will also give you an early indication as
to which exhibits are going to be the harder ones to assimilate.
Skills tip
The subject business (or other organisation) in the Case Study will always be modelled on a real-life
business, and the same will be true of any competitor information. You will not benefit from trying to
find the true identity as the underlying financial position and circumstances will have been modified, not
least because of the lapse of time since the scenario was first created. You should rather focus your
efforts on the information as given to you, which the examiners consider sufficient for your purposes.
2.3
The next steps

Having completed this first full read of the Case Study you need to start thinking about matters in more
detail. The work that you need to undertake comes under four broad headings:

Strategic analysis
Financial analysis
Developing your industry awareness
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You will then need to integrate and assemble your preparatory work for use in the Case Study exam.
2.4

The key questions are:
What is the likely significance of each piece of information that has been given? Which are the
important exhibits and which are more by way of general background and context?
What information would you like to have that has not been provided? (Why do you think it is
missing?)
Your aims when going through the Advance Information should be to
Read the material intelligently

Identify connections between different pieces of information
Identify any inconsistencies between different pieces of information
Establish any further information that you might need and that can be obtained easily
Build the business picture
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The most important part of the process is to structure your reading so that you understand and analyse
the information provided.
2.5
Strategic analysis
There are a number of techniques that are typically used in the analysis of a company and the
environment in which it operates. Perhaps the best known are SWOT, PESTEL and Porters 5 Forces.
These techniques if properly applied can provide a structured evaluation of a business.
It is extremely unlikely that you will be asked to reproduce a SWOT, PESTEL or Porters 5 Forces analysis
in the exam. However you will be expected to include relevant items from this type of analysis in a
broader discussion on (say) strategic issues facing Elite. Part of your preparation should be that you
prepare these forms of analysis, but do not expect all of it to be usable in the exam. Most importantly
be prepared for the Exam Paper to change your strategic analysis and be sure to incorporate that
update in your exam answer.
On the following pages you will find some blank proformas of these analytical grids.
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PESTEL analysis Elite and the motor industry

Political / legal (P)
Economic (E)
Social (S)
Technological (T)
Legal (L)
Environmental (E)
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SWOT analysis Elite
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Strengths (S)
Opportunities (O)
Weaknesses (W)
Threats (T)
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Porters 5 Forces analysis Elite
Threat of new entrants
Rivalry
Substitutes
Bargaining power of suppliers
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Bargaining power of buyers
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2.6
Financial analysis
The object of the Case Study exam is to assess whether you have the appropriate level of professional
skills to become a Chartered Accountant. One of the primary skills expected of a Chartered Accountant
is the ability to perform financial analysis on a business. It is therefore extremely difficult to succeed in
the Case Study exam without it.
The Financial Analysis chapter sets out what is meant by Financial Analysis and provides exercises on how
it can be carried out in a Case Study environment. The two main components are:

Before you proceed with the work on Elite Cars, you should review the material in the Financial Analysis
chapter and ensure that your financial analysis skills are sufficient to tackle the Case Study.
2.7
Developing your industry awareness

You are expected to spend a small amount of time carrying out additional analysis and research and
developing an awareness of the industry. Some questions that you might ask yourself are:
What are the current issues in the industry?

What is the impact of the wider economy on the industry?
What are the top companies doing at the moment?
During the period between the publication of the AI and the Case Study exam itself, you should keep up
to date with the financial press and informed about matters that are likely to affect your 'client or
business' whether it is something general like a change in tax rates, a new accounting standard, a
landmark court decision or something more specific such as a major issue affecting the industry.
You can use your strategic analysis as a framework for developing your awareness; PESTEL and Porters
5 Forces in particular lend themselves to this. The political, social, economic, technological, legal and
environmental headings are self-explanatory. Porters 5 Forces to can be used to generate questions
around which your research can be focused; for example:
Threat of new entrants
What are the barriers to entry?

What is the regulatory environment?
Does the economic environment make new entrants likely?
Rivalry
What is the structure of the industry?

Are there niches?
Is the industry national or global?
Substitutes
Is it an open market, oligopoly or monopoly?

Are there alternative technologies?
Bargaining power of
suppliers
Are there dominant players?
Bargaining power of buyers
Are there dominant buyers?
What are the opportunities for using international suppliers?
Are there price controls or an effective regulator?

Does the market work effectively?
As noted earlier, the AI case material for Elite has been reduced from its original size to around 30 pages
for teaching and learning purposes. As there is limited classroom time for practising past papers, this is
an area that you will probably practise least before your real exam.
However, in your real Case Study exam, the AI will be 40-50 pages in length and will have at least one
substantive exhibit setting out the background to the industry in which the business operates. Make
sure you use the period between the publication of the AI and the exam effectively to develop your
awareness as using this knowledge effectively in the exam is a useful source of marks.
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3 The Elite Cars Advance Information

The AI comprises information covering the following:
You, your firm/employer, your role and your client or business
The commercial sector in which your client or business operates
Financial and commercial information about your client or business
Other areas relevant to the case (eg customers, suppliers, financiers, potential acquirers or targets
etc)
The remainder of this section demonstrates processes that you can apply to each of these areas of the AI
with the objective of 'building a binder' of information that will be of practical use when you attempt
the Elite Case Study itself.
3.1

Interactive question 1: Familiarisation
Once you have completed your initial read of the AI, identify the contents of each of the exhibits and
allocate them to one of the four areas set out above. The objective of this exercise is not meant to be
definitive but to provide you with some structure for using the AI that has been provided.
3.2
You, your firm and your client

Interactive question 2: Key facts about you, your firm and your clients
Summarise the key facts regarding you, your firm and your clients from Exhibit 1. Set out the
implications for your approach to the Case Study.
3.3
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Elite: analysis of its business and financial history

Interactive question 3: Key facts about Elite's business
Using Exhibits 1-4 and 11, summarise the key facts about Elites business and financial history under the
following headings:
Business history
Financial history
Implications of incorporation on reviewing the past financial performance
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3.4
Elite: analysis of the 2004 draft financial statements

Interactive question 4: Review of financial statements
Using the insights and the process set out in the Financial Analysis chapter, carry out a review of the
draft financial statements for the partnership for the year ended 30 June 2004 (Exhibit 6).
3.5
Elite: analysis of the financial forecasts

Interactive question 5: Analysis of financial forecasts
Using the insights and the process set out in the Financial Analysis chapter, carry out a review of the
financial forecasts for the partnership for the two years ended 30 June 2006 (Exhibit 5). Use the
following headings:
Impact of change from partnership to limited company

Effect of new finance
Cash flow statements
Income statements
Balance sheets
3.6
Elite: analysis of other business plan information and issues

Interactive question 6: Analysis of other information
Using Exhibits 3, 9 and 10, summarise the key facts regarding the other commercial and operational
aspects of Elites business plan.
3.7
North West Finance: analysis of draft offer

Interactive question 7: Key facts about draft offer
Using Exhibits 7 and 12, summarise the key facts regarding the draft offer from North West Finance
(NWF).
3.8
Lancashire Bank: analysis of overdraft facilities offer

Interactive question 8: Key facts about overdraft facilities offer
Using Exhibit 8, summarise the key facts regarding the terms offered by Lancashire Bank for the renewal
of Elites overdraft facilities.
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4 Integrating and assembling your Case Study binder

4.1
Using strategic analysis to integrate your preparation

Interactive question 9: SWOT analysis
Use a SWOT analysis to summarise the financial and non-financial issues facing Elite.
4.2
Assembling your Case Study binder

You must make sure that you know your way around the material you have assembled in your binder for
the Case Study exam. You may find that, for any number of reasons, the order of the Advance
Information is not the best for your particular needs, even though it is generally presented both logically
and chronologically.
How will you use your information?

Consider structuring under headings that you find more meaningful
Develop a clear structure and accurate cross-referencing
You should keep these in mind from an early stage while this is more of a last-minute task than the
others we have described, you can help your preparation by keeping these practical objectives in mind
as you analyse the case material. Some ideas you might want to try out are:
Do not assemble too much additional information (see guidance in rubric)
Photocopy pages that appear to have relevance under a variety of topics
Create your own index
Highlight key sections
Prepare a list or matrix of topics summarising connections between exhibits or sections
Develop a checklist of e.g. ethical, tax, financial reporting issues that might arise, or lists of the
main financial reporting and auditing standards that are likely to be relevant
Draw up a list of key components for each element of your report, such as executive summary,
contents, appendices and workings
Prepare a glossary of terms including not only definitions but also a list of abbreviations and
acronyms as there will typically be many sets of initials scattered across the material, and a list of
these will potentially come in handy when you sit the exam
The above list is not intended to be exhaustive or prescriptive; you should decide for yourself
what you will find useful.
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Skills tip
Remember, when you are preparing your binder, you will not know what the exam requirements will
be. Therefore, make sure you keep a clean copy of any pages in the AI that contain numerical or
financial data for reference in the exam itself. The exam requirements may approach the subject from a
different perspective to that which you have used in your preparation. It can be confusing and time
consuming to have to use schedules that are covered in notes that are not relevant to the point under
consideration.
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5 Developing your executive summary

This section addresses an important and recurring feature of the Case Study exam the executive
summary.
5.1
5.1.1
What is an executive summary?

The basic requirement
There will always be a requirement in the Case Study for candidates to include a prcis of their output.
This will usually take the form of an executive summary to a report, but it could also comprise (for
example) a key point summary or a briefing summary for someone about to face the press. The
requirement will not always be spelt out but it will always be there! For the sake of simplicity and
because it is the most common form of the summary you should assume throughout that we are
referring to a conventional executive summary to a report.
Executive summaries are vitally important in business as well as in politics and in other areas of life.
Leaders have little time to wade through detailed reports, a task that they can delegate to junior staff.
Where a report is to be discussed at a board meeting, the executive summary may be all that many of
the board members ever look at on the topic.
5.1.2
Marks available
Executive summaries are given a high weighting in the Case Study, typically representing around 10
15% of the total marks available. The quality of a candidates executive summary will often be indicative
of the underlying quality of the overall script. This is certainly more true in the case of a weak script
summarising a weak answer can usually only provide a weak summary. Past results indicate that the best
candidates achieve close to the maximum but some of the weakest candidates score very few marks in
this section.
The marks awarded for executive summaries will reflect the whole area of competence in professional
skills. The weightings will vary but there will normally be fewer points awarded for Assimilating and
Using Information than for Structuring Problems and Solutions, Applying Judgement and Drawing
Conclusions and Making Recommendations. The reason is that the executive summary is not supposed
to contain any material that has not already been discussed in greater detail in the body of the report. It
is not the place to insert your sudden unsupported brainwave, however brilliant it may have been,
although it is possible that an overall conclusion may draw upon information from three separate
sections of the report and not have appeared in that form of words elsewhere.
Using the key assessment headings from the CBA marking key, the executive summary
Summarises key results

Integrates appropriate numbers and text
Evaluates and applies judgement to the key points
Draws conclusions
Skills tip
Many candidates like to write the terms of reference at the very start of the exam as these are unlikely to
depend on the rest of their work and can provide a psychological boost. But terms of reference will vary
from case to case, depending on whether you are an advisor, colleague or other party. They are unlikely
to be awarded many points because they are frequently just repeating information from the
requirements. Ask yourself what sort of terms of reference you need, and with what sort of disclaimer
and/or limitation of scope (if any at all). As in any report these terms of reference should be brief and
must be accurate.
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5.1.3
The good and the not-so-good

You should aim at producing a two- or three-page summary that is both a prcis of the report (probably
around 10% of the total length of your script) and capable of drawing the reader forward into the body
of the report. It is also the point at which the reader (client or assessor) starts to assess the thinking of
the writer. It should be a stand-alone document.
You must also avoid writing an executive summary that simply tells the reader what (s)he already knows
or worse still less than (s)he already knows. An executive summary that fails to summarise the
situation succinctly, or consists of little more than a poor index to a report (In section 2, we talk about
the ; in section 3, we discuss ) that must be read to understand what is being reported on, is
effectively useless.
You need to put yourself in the place of the client who might eventually read your work. The executive
summary should encapsulate the whole report and demonstrate the quality of your work to add value
and knowledge to the reader.
Good executive summaries contain references to all of the main sections of the report with a number of
points identified under each heading. They also contain a summary of the key numerical analysis from
the report.
Poor executive summaries lack sufficient detail. The priority of the matters raised is not clear, points
often being included with little or no justification. The integration of quantitative and qualitative data is
poor, with no real analysis of risks and opportunities available to the client or other recipient. Too many
executive summaries contain few, or no, figures. Consequently, without any focused analysis, and
without indicating any judgement, they lack specific conclusions and recommendations. At worst the
summary simply repeats a section of the report which in itself was simply an extract from the
information given providing what best could be described as negative added value.
Skills tip
In addition to exam practice, you may find it useful to study a few real-life executive summaries. Ask
your colleagues at work to show you some reports that were well-received by clients and which contain
good examples of executive summaries, preferably in relation to an assignment and/or a client with
which you are familiar, so that the context is known to you. Discuss with those who wrote them how
they went about the task of producing the summary. See if you can articulate what it is about these
summaries that made them good.
5.2
5.2.1
Introduction
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Start with a brief introduction to provide a context for what follows. Think about the reader here a
report to the board will not need the same level of detail in the introduction as one to an external entity
such as a bank.
What should a good executive summary contain?
Interactive question 10
Once you have finished reading this section of the manual, produce a prcis or executive summary of
it. Allow yourself 20 minutes, and aim for a maximum of 500 words. Get a friend or colleague to do the
same thing and compare your scripts afterwards. You should find that this is a useful exercise, both
because it is good training and because it will help you greatly in committing to mind the key features
of an executive summary.
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5.2.2
Key issues
The summary should now give a synopsis of all the main areas of the report. It must refer to:
The main factors or issues considered

Since there may be several areas to discuss here, you must make sure you prioritise the issues
clearly and with enough justification for the order that the reader would be convinced of your
logic. Key risks, potential returns, major resource issues and significant stakeholders should all be
brought into the discussion. However, this is not a repetition of the detailed report it is a
synopsis.
Financial analysis
Any discussion of these factors must include references to the key financial analysis you have done
the calculations and the conclusions to which they led. For example, if you are required to
consider the valuation of a particular corporate investment, multiples such as the P/E ratio and
enterprise value/EBITDA are commonly used, and including them in your summary provided that
you do so in a non-technical way that can be understood by a non-financial audience will add
real weight to your arguments.
Applying judgement
The body of the report will have contained assumptions or other considerations of analysis
performed on which judgement has been made. It is very important that these judgements are
identified and summarised in the executive summary so that the reader is aware of the certainty (or
otherwise) of the matter being described or discussed.
The conclusions you have drawn

These must be unambiguous and clearly justified with reasoned arguments. Remember that the
reader may never read the full report, so the conclusion must seem appropriate on the basis of the
preceding discussion of the issues. A leap of logic, or a snap conclusion just because you realise
suddenly that you should have offered a conclusion but have not yet done so, will score few, if any,
marks.
The recommendations you are making

You must now also summarise your recommendations. Think of these as a call to action. You
need to win the support of the reader here to agree the proposed plan / budget / changes; and,
to do that, the recommendations will need to be compelling. Make sure they follow logically from
what you have included so far in the summary it is all too easy to rely on the full report to sell
the recommendations. Ensure that each recommendation is justified, that any interdependencies
between them are clearly identified and that overall they present the reader with a clear sense of
what to do next.
5.2.3
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Tips for effective executive summaries
Allow sufficient time to write an effective summary, having finished the detail of your report
Make a note while you are writing the main body of the report of those key issues that warrant
a mention in the executive summary
Ensure that all key sections of the report are summarised and included
Write the summary in an appropriate logical order of priority
Include a short introduction that summarises the businesss situation, making due reference to
external market conditions and the transaction or other event that is the subject of the report
Integrate your numerical information/calculations where appropriate
Include references (but not just cross-references) to the body of the report for more detail
Identify where judgement has been applied to any assumptions or re-worked information
Provide unambiguous conclusions and clear recommendations, with succinct justification, that
demonstrate thinking outside the box
Where appropriate, consider the perspectives of other stakeholders.
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Skills tip
Note that, although the executive summary is written as the last piece of work, it is placed in its
appropriate place at the front of the report, just behind the terms of reference.
5.3
5.3.1
Exam approach
Summarising the key points
When you are trying to identify the key points, it may help to scan for certain triggers in your writing,
such as words that indicate priority (first, next, finally), key areas (principal, central), reasoning
(therefore, consequently) or contrast (however, on the other hand, unlike). These should help you
identify your main arguments, ready to summarise.
You will not need such a keen eye to pick out the main calculations you have prepared, so it should be
relatively easy to transfer these to the executive summary though it will generally require a bit of
thought as to how to summarise them in a natural, coherent and meaningful way.
5.3.2
Timing
Remember that the executive summary represents around 10% of the total marks available. This
suggests that you should spend 20-30 minutes on it.
5.3.3
Technique
There are several possible strategies for writing the executive summary. One approach is to write it at
the end of the exam. By that time, you will know exactly what your recommendations are and can
therefore ensure that the issues and conclusions you discuss lead towards them logically. Only exam
practice will tell you whether you need more or less time and whether you are sufficiently disciplined on
time so that you complete the main body of your report with 20-30 minutes of the four hours left.
You will then be able to use this remaining time both to write the executive summary and also to look
through your script. If you do happen to have a fantastic new idea while you are writing the summary,
you are unlikely to score many marks for suddenly introducing it into the executive summary, so you
will need to decide if there is also time to mention it at its proper place within the report.
There is an alternative to this approach, or perhaps as a variation on it. To avoid starting from scratch,
create a checklist of the key areas for inclusion as you are writing the main body of the report. Each time
you finish a section, ask yourself what the key points were and add them to the list, with a crossreference to the section number. When you are ready to write the summary, spend a minute or so
reviewing your list and consider whether all the points on it are indeed major and merit inclusion. You
may need to eliminate a few of the weaker points or expand some of the more important ones as
priorities will change as you work your way through the requirements.
As a further variation, you may feel that you cannot plan well enough to have sufficient time at the end
and would rather write the summary as you go along. This would mean that, rather than writing a
checklist, you actually add a couple of sentences to the summary as you finish each section. This
method is certainly preferable to running out of time without completing a summary at all and, if you
really struggle with timing, may be worth considering. However, it is harder to write a clear, logical and
prioritised summary this way, because it is without the benefit of an overview.
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Allow yourself a few minutes at the end of the four hours to read your script, ensure that it is in a
sensible order and that you have answered every section.
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5.3.4
Writing
As you write, remember that your reader will be busy. To maximise your chances of grabbing attention,
ensure that you include sufficient headings that (s)he can see where (s)he has got to. Keep your
sentences and paragraphs short so that your arguments do not get lost (this also helps you to complete
the summary in the 20-30 minutes you have allowed yourself). Clarity of expression is paramount.
6 Using your financial analysis in the Case Study exam

Whether you have developed your financial analysis skills from prior experience, through or by using the
Financial Analysis chapter, there is one aspect of using these skills that is particular to the Case Study
exam. In it, the time for reading, planning and calculations (including the preparation of any financial
appendices to your report) is usually between 1 and 2 hours.
It follows from these times that you will have to perform any financial analysis selectively, at speed and
with confidence. Therefore, in order to demonstrate your skills effectively, you will have to:
6.1
Choose the appropriate tools to analyse any new financial data you may be given in the exam.
Provide a context for the data analysis that you carry out.
Use your initial analysis to identify the 'headlines' of any new financial statement information you
may be given.
Exercise your judgement in selecting the relevant 'headlines' to analyse further
Consider the consistency of the information provided in the three elements of the financial
statements and apply judgement in determining how to analyse and use it.
Apply your professional scepticism (see below).
Link your work on the AI to that done on any new financial data and financial statements in order
to provide depth and breadth to your analysis and demonstrate your financial fluency.

In many Case Study exams, the requirements ask for a calculation based on information provided: a new
P/E valuation, NPV calculation, breakeven analysis, accounting adjustment, or some other similar
calculation.
You must make sure that you use the technique which is most relevant to the given situation posed. In
the Case Study exam the problem of being asked to perform calculations is often compounded by the
requirement to perform them using figures that you have amended yourself. It is frequently at this
stage that weaker candidates confidence appears to wane: they are reluctant to spend time using their
own amended figures as the basis for a second calculation let alone make a decision or
recommendation based on that secondary calculation. You must overcome this reluctance. It is this
development of your own work that will add value to your answer and is one of the differentiating
factors that are factored into the ultimate pass/fail decision. Even if your answer is inconsistent with the
model answer, BUT you have used the correct principles and techniques, then you will be given credit in
the exam.
In the Case Study exam performing the required calculations meets only part of the requirement. You
will need to:
Provide a context for the analysis you have conducted what is the reason for applying the
technique you have used?
Exercise judgement consider any assumptions, are the results appropriate for the specified use
are there any reservations?
Develop your conclusions and/or recommendations what do your results mean or what should
the client do now?
These explanations are as important as the underlying calculations but the marks cannot be awarded
without the appropriate calculations. Therefore a pre-requisite to getting the marks is a good working
knowledge of the analytical techniques you will be required to demonstrate.
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6.1.1

A critical element of financial analysis is the ability to flex, or carry out sensitivity analysis on, the
numbers given and then comment on the impact. Whatever the circumstances, it is important to pause
before plunging into the work and perform a quick plausibility review of the details involved and the
expected output from your work. Choices need to be made.
Accuracy versus speed: Is it better to be approximately right and cover more ground or absolutely
right on some details but risk failing to finish this work? What is at issue here is not sloppy
guesswork but, especially in the case of forecasts, the need to arrive at a reasonably accurate
answer quickly.
Materiality against summary: Can any of the adjustments be grouped to save time will it matter?
This does not mean lumping everything into one meaningless figure to be explained later in a
rambling incomprehensible paragraph of 'notes', but instead it requires the judicious use of
effective and understandable summarised workings for your critical figures.
Original or substitute: Will your output substitute or build on information given is there a
template to follow? Is that template still the most appropriate format for your new workings? Can
it be amended easily or should a new template be substituted?
Explanation and impact: What is the clients potential understanding of the issue in hand and might
the effect of any potential 'adjustments' be fundamental to the whole enterprise? In your report to
the client, what level of detailed explanation of your techniques, and the resulting impact of your
work, will you have to provide?
Appendix or body: Will the reporting format for your workings be as a clearly labelled and crossreferenced appendix, or is it concise enough to feature in the body of the report?
In the Case Study exam you will be assessed on your ability to make these 'flexing' decisions and how
you present them. You are not expected to perform endless similar speculative calculations but you are
expected to be alert to the impact of 'sensitive' key factor changes. It is safe to assume that, if the
problem can be considered by adjusting some financial facts whether by amending, including or
excluding figures which will have a numerical impact on the information under review, then you
should make those numerical adjustments and present the outcome accordingly.
Where additional assumptions have to be made or those assumptions already provided need to be
queried this means you are applying judgement. This should be clearly identified and justified in your
report.
It is also an important exam technique not to waste time re-writing a whole financial statement, such as
the Income Statement, in order simply to amend the profit before tax and subsequent tax figure.
6.1.2
Interpretation of results and reconciliations

As noted above, working with the numbers does not stop with the calculations themselves. The output,
whether from an analytical technique or sensitivity analysis, needs to be explained to the reader of the
report.
When interpreting results, all too often a candidate will try to describe what could be done rather than
actually doing the work then discussing the outcome(s). Attempting to describe a financial outcome
without the adjusted numerical picture is a weak piece of financial analysis. The presentation of the
financial picture needs clarity to make a direct impact on the reader. It will also provide evidence of
your real financial ability.
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A reconciliation is a powerful analytical tool that can explain clearly, in financial terms, what has
happened over period of time. However, to be successful in the Case Study, it is essential that your
reconciliations have meaningful impact. Therefore, they need to be relevant to the requirement (ie you
have demonstrated judgement in choosing an appropriate reconciliation) and include your reasons for
why the identified changes have taken place (ie your conclusions). You need to provide answers to the
questions why and so what relating to the advice given.
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6.2

Any financial statement analysis in the Case Study exam will need to consider the financial performance,
the financial position and cash flow.
All too often there is a belief that providing the data in an appendix is an end in itself. The appendices of
the weaker ACS exam candidates are full of pages of mathematically correct ratios demonstrating that
candidates can cope with this basic skill. This skill has already been tested at the Professional Stage, so
remember that there are minimal marks given for calculation of figures. The emphasis is on your ability
to make sense of the meanings behind changes in the numbers. The higher skill of developing that
mathematical analysis into a demonstration of full financial understanding and explanation by the
analyst is of the utmost importance but for weaker candidates this is frequently missing. Being able to
provide the appropriate written financial advice, to show and discuss possible alternatives based on that
full analysis, is a crucial professional skill. It is this skill that is being tested in a Case Study exam and it is
this skill that is being sought by the clients of Chartered Accountants.
In carrying out your analysis, you must consider whether the three elements of the financial statements
are presenting a consistent picture.
The income statement provides you with a headline story whether the business is making profits
or losses and how.
The balance sheet provided you with information about its financial position and longer-term
strength or weakness.
The cash flow statement tells you how the business is being managed in financial terms at all levels.
What is very important for you to understand and explain to the audience is that if the income
statement and the cash flow statement appear to tell contradictory stories, then the cash flow statement
is likely to be 'telling the truth' about the performance of the business. All financial analysis therefore
must include a succinct analysis of the cash position and/or the information in the cash flow statement.
6.2.1
Professional scepticism
Before embarking on any detailed financial analysis, the development of your financial diagnosis must
be made with regard to the context, the nature of the information provided, and its source both in a
case, and in real life. This is a critical part of the analysis of any financial problem. The appropriate
questioning of the information that is provided is referred to as professional scepticism. The questions
to be asked include:
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Preparer? Was it an internal author with a vested interest or an external author with what
degree of skill or level of awareness and knowledge on the part of the preparer?
Purpose? Why has this information been provided? Is it a set of standard financial statements or
prepared specifically to address the issue under consideration, such as to obtain a bank loan or to
support a bonus payment? Is there likely to be any bias, given its purpose and authorship?
Precision? What is the likely degree of accuracy of the information being considered? Is it from
past audited information or from drafts or management accounts? Does it form part of a body of
projected information? Is it an extrapolation or is it part of the main information?
Predictions? Are the timeframes realistic? Are plausible assumptions made about future levels of
activity? Are the issues linked to the past/current situation or are they new speculations about
future events?
Problems? Are the big issues and the subsidiary concerns easily identified or do they require
revealing? Are the problems purely financial or are there non-financial implications? Are they shortterm financial incidents or long-term fundamental financial issues?
Priority? What is the level of priority and the indicative timeframe for each issue being considered?
For example, is it high-priority with an immediate impact, or low priority affecting a protracted
outcome over the next two accounting periods?
Perspective? From whose perspective is the problem to be considered: the preparer, yours, the
clients? Is it clear who the client is, and does the client understand the contractual position with
you are you seen as a neutral advisor? Who is your audience?
Case Study
From the answers to these questions, you will be able to assess the provenance and the quality of the
information presented in the case context. This assessment does not mean that you are not accepting
the numbers provided but that you are assessing their quality and appropriateness for use in answering
any questions and the level of confidence you can attach to each piece of information presented. By
doing this, you will be demonstrating professional scepticism and applying your judgement a crucial
element in any financial analysis.
6.3
What is the purpose of your financial analysis?

Having performed all the hard work of ratio analysis, flexing of numbers and completion of calculations
together with evaluating the financial statements you need to make judgements concerning their
analysis. These last steps are crucial to your success in the Case Study exam.
6.3.1
Making financial judgements

As with all judgements and the conclusions and recommendations which follow these must flow
logically from the financial analysis. It may be that there is a need to put some reservations, provisos or
parameters around the judgements, based on professional assessment of the criteria, but it is expected
that any judgement you give would be unambiguous, indicate confidence in your own work, and
support your advice.
6.3.2
Demonstrating financial fluency

Financial fluency means being confident with all the numerical information in the case and being able to
work the numbers in whatever way is required then explaining what has been done and why to the
recipient of the report.
Initially you are performing your analysis to gain an understanding for yourself of the company but
eventually this analysis will form part of some output (written report, presentation, or executive
summary). At that secondary stage, it will be crucial to be aware of the intended audience in the
selected presentation of the analysis. Writing to the CEO of a client business pointing out the trend in
sales is not financial analysis which would be worth receiving. Writing to a non-financial audience and
explaining the difference between cash and profit in a succinct and understandable manner would be
extremely good financial analysis.
Nobody wants to have his or her ignorance exposed and this applies in particular to the readers of any
reports containing financial information. For many of these readers, especially those with a non-financial
background, there is a certain acceptance of the accuracy of numerical work, but they also need an
explanation of the underlying assumptions.
The Case Study exam aims to determine your ability to understand the story that the numbers both
given and calculated can tell and how clearly you tell that financial story to the client. It is a skill that a
Chartered Accountant must possess.
Demonstrating good financial fluency is having the skill of conducting good financial analysis and
communicating appropriately that analysis, and the judgements that follow. Demonstrating and
presenting that fluency is crucial in the Case Study exam.
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7 Tackling the Elite Cars Case Study exam

You are now ready to tackle the Elite Cars Case Study. The requirements, along with some further
information that completes the Case Study, are contained in the Exam Paper.
When you are tackling the requirements, you should apply a similar process to that which you applied
to the AI.
Read the requirements carefully but quickly
Skim-read the remaining exhibits to see what is available to help produce an answer and to allow a
rough gauge of the complexity of the requirement
Reread the requirements in detail
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Read all the Exam Paper exhibits in detail to ensure full understanding of the information that has
been presented
Consider how you are going to take best advantage of the material assembled in your file and your
Advance Information generally
Carry out your financial analysis based on your prepared work and using the Exam Paper, and
prepare the financial appendices to your report
Write your report
Use your prepared strategic analysis in the context of the exam requirements
Prepare your executive summary
You will only have four hours in which to complete your exam and so, obviously, you will need to be
selective in what you do.
Once you have had an attempt at the requirements, you will have available the Elite Cars Answer Book
that contains the following:
Using the Exam Paper

Marking key
Illustrative script
Commentary to illustrative script
Suggested financial appendices
At the end of the answer book, there are illustrations of comparative answers for selected elements of
the Case Study against three of the CBA levels: insufficiently competent, sufficiently competent, and
clearly competent. There is also an illustrative top script to demonstrate that you do not have to be
perfect to achieve clearly competent. This is the level you should be aiming at in developing your skills
so that you are prepared properly for your Case Study exam.
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Case Study

Exh
Contents
You, your firm and

your client
The candidate (Alex Millar) and the firm of Chartered Accountants,

Jones Edgar Davis (JED)
Business sector
13
Report on the local economy: Manchester and the North West of

England
14
Report on the Motor Car Industry in the UK
JED engagement letter
A business plan for Elite prepared by Jack Hawkins
Five years financial history to 30 June 2004
Financial forecasts for the next 24 months and income statement

projections for the next five years
Draft final accounts for the year ended 30 June 2004
11
Two articles concerning Elites success in new business areas
A draft offer of finance letter from North West Finance Venture

Capital Fund (NWF) to Elite
A letter from Lancashire Bank detailing loan and overdraft proposals

for Elite
A file note concerning incorporation issues
10
A letter from JED tax partner concerning the taxation implications of

incorporation
12
Financial press article concerning the availability of funding for good

regional projects and ventures
Financial and
commercial
information
Other case information
Note: Well over half of the above information in terms of volume relates to Elites Business Plan and
related financial appendices. A large amount of detailed financial information is provided in those
exhibits. In addition the two financing documents from NWF and the bank are also significant financial
exhibits. Although all Advance Information exhibits are important, it is obvious that in this case
understanding these financial documents is crucial. They require careful reading and detailed financial
analysis as essential parts of the case preparation.
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In a Case Study it will usually be possible to group the exhibits broadly as shown above. However an
important skill is identifying the links which exist within exhibits.
You should now carry out your detailed read of the AI and start your further analysis under the generic
headings above. Apply your financial and strategic analysis techniques to this process.
You are Alex Millar, a third year student at the firm of Chartered Accountants, Jones Edgar Davis
(JED).
Your work experience covers audit, investigations, taxation and small business support.
Your clients have included subsidiaries of listed corporations, owner-managed companies,

partnerships and sole practitioners.
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You have experience of business analysis, tax compliance, and business planning.
You are currently working with Sonia Adams, the partner in charge of the Business Advisory section
of the firm specialising in new client development.
Jones Edgar Davis (JED) is an eight-partner practice with 60 staff, set up 16 years ago, following a
breakaway from a Big Eight Firm, with a good reputation for transaction-based work.
In September 2004 JED were appointed Business Advisors to Elite.
Elites business is prestige car sales, hire and repair.
Elite has recently made the transition from partnership to limited company and is currently seeking
finance for expansion from Lancashire Bank and other sources.
JEDs role will be to:
Negotiate with North West Finance Venture Capital and its own bankers
Advise on the company structure and shareholding arrangements
Liaise with the chosen legal advisors (yet to be appointed) to give a strong professional team
Advise on the tax implications
Review the companys financial forecasts
The implications of this information for the Case Study exam are:
The likely areas of assessment will be business analysis, tax compliance, and planning for small
businesses.
You are likely to have to do some work on the Elites financial forecasts.
Elites transition from partnership to limited company is a key change.
The context for the Case Study is Elites proposed expansion.
You will be expected to demonstrate an understanding of Elites business, which is prestige car
sales, hire and repair.

Business history
The business is currently concentrating on the sale, hire and repair of prestige cars, having moved
away from activities such as petrol sales as recently as 2001.
Since 1971 until June 2004 this business had operated as a partnership.
Currently three of the partners are members of the Hawkins family and the other partner (Tom
Goodenough) is a senior employee within the business.
Financial history
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In three of the past five years the partnership had made net losses but in the past two years had
moved back into profit.
Much of the total balance on the partners capital accounts had been built up prior to the year to
30 June 2000.
Of the total balance of 1,054K shown on the partners capital accounts as at 30 June 2004, 830K
related to Jack and Gillian Hawkins, the longest standing core partners.
The implication is that it is only in the past twelve months that the business has moved significantly
into profit. Only in this last year have the partners drawn out less than the profit generated by
trade (rather than any revaluation surplus).
The breakdown of the gross profit shows that in 2004 car hire appears to have generated the most
significant element of gross profit being 506K of the 1,040K (48%) and that from other
information this would appear to be because of the innovations taken with regard to car hire.
The gross profit on car hire is 10% and this has been a consistent percentage over the past two
years. The gross profit on car sales lies in the range 2.2% 3.7%. The gross profit on repairs is
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consistently 13.7% but, at under 1million, the volume of income is much lower from this activity.
These gross profits offer an indication of the direction that the business should pursue.
Implications of incorporation
The five year historical financial statements are partnership financial statements. If partners
drawings are 'adjusted' as an 'expense' against profit, only the year to 2004 would show a net
profit for the year, and this would be reduced to 269K. All other years would show a deficit.
The decision to incorporate has been taken at the instigation of their bank, because the bank
would like to rationalise Elites overdraft and bank loan situation and secure its position. The
partners may not fully understand the implications of this.

An analysis of the draft financial statements for the partnership for the year ended 30 June 2004 reveals
the following financial position:
From the income statement:
In the year to 30 June 2004 sales rose to 17,435K, an increase of almost 50% over the
previous year.
Similarly, in the same period, gross profit rose to 1,040K almost doubling the previous years
level a review of the five-year summary shows that almost half of this is derived from car
hire.
Net profit also rose to 520K by comparison with 120K the previous year.
Administration expenses have risen by 109K. The most significant increases are: bank
charges and interest 25K indicating the effect of financial strain on the business; wages and
salaries 22K which is probably as a result of increased levels of activity, but therefore
appears low.
From the balance sheet:
From the banks perspective if the bank loan is included as current liabilities then the
partnership accounts for 2004 would show current liabilities of 2,629K and net current
liabilities of 256K.
This re-classification would explain why the bank might be concerned about the level of
borrowings and their insistence that the partnership be incorporated and the loans and
overdrafts secured by fixed and floating charges.
This change in balance sheet format would also emphasise that the business might only be
valued at 1,394K on a net (re-valued) assets basis ignoring any goodwill. This contrasts
significantly with the 2,500K valuation for Elite which is suggested by Jack in the business
plan which he wrote.
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Change from partnership to limited company:
Elite is now an incorporated business. Previous financial statements have been partnership
accounts.
Partners drawings now become directors salaries. For comparative purposes an adjustment of the
expenses would be essential. In 2004 partners drawings were 251K. Directors salaries are
proposed to be 170K for 2005 onwards.
Elite personnel have prepared the financial forecasts for the specific purpose of obtaining future
funding from NWF and the bank.
The layout of these forecasts and projections: the income statements and the balance sheets; need
to be studied carefully to ensure that they are fully understood. Because they are partnership
accounts and are not prepared for public consumption they are obviously drawn up in a slightly
more unconventional format than would be the case for a limited company.
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Effect of new finance:
All of the future financing is inter-laced and the amounts and timings all depend upon each other.
The funding from NWF, the bank loan and overdraft must be put in place simultaneously.
At the same time as the financing from NWF occurs, there will also be a book transfer from the
directors loan accounts into equity capital to 'match' these external funds obviously no cash is
involved in this book 'transfer' transaction.
Cash flow statements:
The cash flow forecasts provided for the next 24 months indicate that the business is constantly
operating in overdraft and that on a number of occasions the business moves close to its maximum
overdraft limit.
In particular it can be seen that April 2006 will be a critical time for Elite as a number of outflows
put the business close to the banks predetermined limit.
Income statements:
The projected profit for the year to 30 June 2005 is shown as 326k after deducting directors
salaries of 170k. The equivalent profit figure for the year to 30 June 2004 would be 269k after
adjusting for drawings of 251k, or 350k if adjusted for an equivalent salary of only 170k.
The inconsistency shown in this calculation raises a question over equivalent expenses and
comparable figures between the Elite historic information and its forecasts and should be examined
further.
It would appear that there has been an understatement of expenses/overheads in the forecasts.
Given the critical nature of these forecasts, especially the monthly balances in the cash flow
forecasts, the expense figures should be treated with caution.
The sales in the year to 30 June 2005 increased to 19,569k an increase of 12.2% by comparison
with the sales of 17,435k in 2004. Given the increases achieved between 2003 and 2004 and the
plans for new business activity and locations this seems to be a reasonably modest and achievable
increase.
The sales in subsequent years are predicted to increase as follows: 2006 (11%); 2007 (7%); 2008
(6%); 2009 (5%). These appear to be acceptable modest increases.
The gross profit in 2005 is projected to be 1,221k which is up by 181k on 2004. This is 6.2% of
2005 total sales, the increasing percentage over 2004 (5.96%) reflecting the changing sales mix
towards more hire and repairs. This is in line with the business plan.
The five-year profit forecast predicts a steady change in sales mix and profitability which may well
understate the potential for growth and profits in the car hire and repair sectors.
Balance sheets:
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An analysis of the balance sheet needs to be made to identify the balance of predicted external
'hard' debt against the funding being provided from directors loans, retained profit and equity
share capital.
Because of the repayment schedule for the preference equity this should be considered, from a
cash flow perspective, as 'loan' capital rather than equity capital. The cash flow implications of this
are very important because on current predictions Elite may struggle to generate the cash needed
to make these capital repayments in 2007 and 2008.
It would be important to ensure that all the components of the projected balance sheets are
understood despite not being shown in their normal groupings.
One item worthy of note is that in these forecasts to 30 June 2006 inventory increases by more
than 31% whilst total turnover increases by only 25%. This together with the large increase in
inventory levels between 2003 and 2004 indicate that there may be some inefficiency in inventory
holding and this has an effect on the predicted overdraft position.
The increase in the share capital to 1m in total represents new cash of 500k from the NWF, as
can be seen in the cash flow forecast, and a book transfer at the same time of 500k, from
Case Study
Directors Loan Account into Share Capital. This is done to match NWF and permanently 'lock in'
the 500k of partners/directors funds.
The importance of these financial forecasts to all future funding from bank and NWF means they must
represent what is achievable and be fully justifiable. Some critical figures will require further
consideration.
The business is planning to expand by increasing its UK presence through a series of new regional
offices in Chelmsford, Windsor and Edinburgh. Elite does not provide any rationale or justification
for these specific sites, which appear far-flung locations when compared to its previous strongly
regional operational base.
Similarly it will be upgrading its IT and investing in an interactive website. Given the existing
management personnel and structure, it is not immediately clear who will have the expertise and
be responsible for this development.
The investment in upgraded workshop facilities appears essential to meet insurance company
requirements, in what is a growth area for this business the Elite Car Replacement Service. Repair
work also appears to be generating a higher gross profit than other activities, so with the
expectation of increased volumes of activity this investment appears to be justified.
From the business plan the management of Elite seems to revolve around the partners/directors
and a small number of key personnel such as the chief mechanic Joe Habishaw. There is no
indication of Elites policy of succession management.
There has already been a rapid expansion in sales activity between 2003 and 2004. This must raise
the question as to whether there is enough strength in depth in terms of personnel for any further
expansion in activity as proposed in the plan.
Tom Goodenough does not want to finance any expansion by further personal borrowing.
Geri Hawkins is reluctant to agree to any significant equity dilution.
The offer is only a draft document and in any case is subject to due diligence.
The initial NWF finance of 500k will comprise 100k of A Ordinary shares (this is not the same as
Ordinary shares these shares could have different powers and conditions) and 400k of
preference shares (which are repayable a timetable is given).
The dividend details of the A Ordinary shares are 7% of net profit before tax and before shareholding
directors emoluments in excess of the business plan which means that the 170K directors
emoluments currently shown in the business plan is the maximum allowable under the terms of this
offer.
The 500k of NWF funds will be matched by the issue of 500k of Ordinary shares to the previous
partners, now directors. This will take place by way of book transfer and a contra against the
Directors Loan Accounts no injection of cash will occur.
No dividend details are given on these Ordinary shares this implies that there may not be any
dividend for them. It also emphasises that it may not be the same as the A Ordinary dividend.
NWF have the right to appoint additional non-executive directors. This may alter the working
arrangements and culture of this business.
The offer also identifies that the directors have expressed a desire to achieve an exit within five
years. The NWF objective is also to achieve an exit in the same time scale. How that full exit is to be
achieved is not stated but the possibility of floating the company may be one such route. Five years
appears to be a realistic timetable.
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Conditions include, inter alia:
Key man insurance
Agreement of management service contracts
Agreement of management and board structure
Agreement of standard institutional veto rights on major issues
Under-performance against the Business Plan will allow NWF extra rights to protect their
investment
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Because of Elites requirement to increase borrowings, the business was incorporated allowing the
bank to take a debenture.
Fixed charges will be set on the freehold properties their values, less a margin, support a loan of
990k.
Overdraft facilities of up to 500k will be provided subject to covenant and financial criteria.
Elite must monitor costs and cash flow to ensure adherence to their plan.
If more finance is needed then personal guarantees on a for basis will be required.
The banks offer is subject to the NWF investment being made.
Directors must be insured as key personnel.
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SWOT analysis for Elite
Strengths (S)
Weaknesses (W)
Well established core business
Age profile of two older directors
Balance of skills/experience amongst directors
Imminent retirements of key personnel
Good suppliers for vehicles
No key personnel contracts
Good customer base (loyal, established)
No personnel strength in depth
Good quality workshop/output
All luxury products - no spread
Good product innovation (Lux Limos +

Insurance Replacement)
Poor systems
Good reputation throughout
Weak financial management no finance

director
First mover advantage re: 'Insurance

Replacements' in the UK
Inexperience in website management
No evidence of senior team cohesion
50% increase in revenues in 2004
Reliance on short term finance and loans from

Jack and Gillian (784k)
Losses incurred until 2003
Dependence on car hire (48% of GP in 2004)
Projected to operate in overdraft for next two

years
Opportunities (O)
Threats (T)
Nationwide presence
Few barriers to entry
Size of 'wealthy' population increasing
Changes in insurance legislation
Car accidents statistical incidence
Change in insurance company repair criteria
Appropriate location of current / new sites
Increasing fuel costs / green issues
Owner's self-perception re luxury cars
Fuel consumption legislation
Lifestyle statements on replacements
Perception re conspicuous consumption
Ownership and rental markets strong
Increases in interest rates
Increase in leisure activities
Modest revenue growth projections may be

exceeded in 2005 and 2006
Interrelationship between proposed new

equity and loan finance
Projected lack of bank overdraft headroom
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CHAPTER 5
Topic List
This chapter contains the Advance Information to the Elite Cars Case Study
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ELITE CARS
This material is issued prior to the examination session so as to allow you to familiarise yourself with the
information provided and undertake any research and analysis you think fit. This information is also
published on the website: www.icaew.com/students.
You MUST bring this material with you to the Examination Hall, annotated if you wish, together
with your preparatory work. Once you have read the material, you are not expected to spend more
than two days working on it: this would include familiarisation with the information provided,
additional research and analysis, developing an awareness of the industry, discussion and assembling
your preparatory work for use in the examination. The use of pre-prepared study material will not
significantly help you in your preparation for this examination. It is essential that you carry out sufficient
analysis work of your own in order to have a good understanding of the Advance Information. You will
not benefit from taking large quantities of additional material with you into the Examination Hall.
At the start of the examination you will receive some additional material which will complete the
description of the case scenario and state the Case Study requirements. Your answer must be submitted
on the paper provided by the ICAEW in the Examination Hall. Any pre-prepared papers, or papers
comprising annotated exhibits from the case material, included in your answer WILL NOT be marked.

The marks in the Case Study are awarded for professional skills, allocated broadly as follows:

Applying judgement
20%
25%
25%
20%
5%
5%
the relevant discussion of ethical issues within your answer to the requirements. Ethical issues do not
form a specific requirement but, within a requirement, may cover such topics as:
Lack of professional independence or objectivity

You should be clear that marks are awarded for demonstrating your professional skills, not for
reproducing facts from the case. In order to be successful, you will need to:
Demonstrate your knowledge of the case material and make use of your research
Carry out relevant analysis of the problems and structure your proposed solutions
Apply your judgement on the basis of the analysis that you have carried out
Draw conclusions from your analysis and judgement, and develop them into practical commercial
recommendations.
Omitting any one of these elements will have a significantly detrimental effect on your chances of
success.
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ELITE CARS
List of exhibits
1
About you, your firm and your client
Letter from Jones Edgar Davis to Elite Cars dated 27 September 2004
Elite Cars Business Plan
Elite Cars Five Year Summary 2000 - 2004
Elite Cars Summary Financial Forecasts 2005 - 2009
Elite Cars Draft Accounts to 30 June 2004
Draft offer letter from North West Finance Venture Capital Fund dated
14 September 2004
Overdraft facilities letter from Lancashire Bank dated 30 September 2004
File Note by Sonia Adams (Partner) dated 23 September 2004
10
Letter from Jo Slater (Tax Partner) to Elite Cars dated 22 September 2004
11
Press reports: Manchester Evening Standard
12
Press report: Investors and Business North West
13
The Economy of Manchester and the North West of England
14
The motor car industry in the UK
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EXHIBIT 1
ABOUT YOU, YOUR FIRM AND YOUR CLIENT

About you
You are Alex Millar, a third year student at Jones Edgar Davis (JED), Chartered Accountants, in
Manchester. Your work has been across the whole spectrum of audit and investigation, interspersed
with periods of time spent in the taxation and small business support departments. You have, in
different capacities, been engaged in work on the full range of clients that the firm has to offer: from
subsidiaries of listed corporations, through owner-managed companies and partnerships to sole
practitioners. From your work in the small business support department you have a clear understanding
of business planning and development activities. Your time in the taxation department has given you
practical experience of tax compliance and planning for small businesses. The managers and partners
with whom you have worked consider you to be good at business analysis and someone who is capable
of understanding practical business issues. You are currently working with Sonia Adams, the partner in
charge of the Business Advisory section of the firm specialising in new client development. In
September 2004 Sonia led the team which was successful in its pitch to become Business Advisors to a
new client, Elite Cars Limited (Elite). Sonia has invited you to become involved with the work for Elite
because of your past experience and the nature of the work with this client.
About your firm

Jones Edgar Davis (JED) is an eight partner practice with 60 staff. The firm was set up 16 years ago,
following a breakaway from a Big Eight Firm, by the three founding partners: Andrew Jones, David
Edgar and Angela Davis. The firm has expanded rapidly since it was established and has a good
reputation for transaction-based work. The proposed JED team for this assignment is:
David Edgar BA FCA a founding partner, responsible for all matters of practice development.
Sonia Adams BSc FCA MBA partner in charge of the Business Advisory section.
Jo Slater BSc ACA CTA partner in charge of tax and finance advisory services.
Frank Walker BA (Econ) ACA an IT specialist, partner in charge of the Audit and Assurance
About your client

Elite Cars (Elite), which has recently made the transition from partnership to limited company, is
currently seeking finance for expansion and took the step to becoming incorporated in order to obtain
continuing funding from Lancashire Bank and further funding from other sources.
Elites existing accountants, Ferguson & Griffiths, have told Elite that they do not have the capabilities to
advise on this transaction. Ferguson & Griffiths are still involved in the finalisation of the partnership
accounts to cessation and in respect of preparing the personal tax returns for the former partners.
In 2004, Elite sought to appoint corporate finance and tax advisors in respect of this financial
restructuring and specifically to undertake the following:
to negotiate with North West Finance Venture Capital and its own bankers;
to advise on the company structure and shareholding arrangements;
to liaise with the chosen legal advisors (yet to be appointed) to give a strong professional team;
to advise on the tax implications; and
to review the companys financial forecasts.
JED successfully tendered for the Elite Car work in September 2004.
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EXHIBIT 2
Jones Edgar Davis
Chartered Accountants
18 Piccadilly Street
Manchester
M12 6RA
Tel: 0161 123 4567
The Directors
Elite Cars Limited
New Marsh Showroom
New Marsh Industrial Estate
Manchester
M15 4AA
27 September 2004
Ladies and Gentlemen
Reference:
Engagement letter concerning Elite Cars Limited and the investment by North West
Finance Venture Capital Fund
We set out below our understanding of the services it was agreed we should provide to Elite Cars
Limited in connection with the proposed investment by North West Finance Venture Capital Fund
(NWFVCF), the debt refinancing and other issues arising from the restructuring of the business. Please
note that our liability for this advisory work will be capped at 2m.
1
We will advise on the corporate finance elements of this transaction leading up to the preliminary
meeting between all parties on Wednesday 10 November 2004. We will also advise on relevant
material tax implications.
Following finalisation of terms, and with the agreement of all parties, we will continue to act as
corporate financial advisors to Elite Cars Limited. We are authorised by the Financial Services
Authority in respect of corporate finance activities.
We will not be responsible for the work on any legal drafting of documents which will remain the
responsibility of your legal advisors.
Standard terms on all professional engagements

Details concerning: our professional fees; the handling of client monies; commissions earned;
complaints procedures and our professional liability for our work are governed by a recommended
Code of Conduct issued by the Institute of Chartered Accountants in England and Wales. We are bound
by the ethical guidelines of our professional Institute and accept instructions to act for you on the basis
that we will act in accordance with those guidelines. If at any time you would like to discuss with us how
our service to you could be improved or if you are dissatisfied with the service you are receiving, please
contact David Edgar or Sonia Adams in the first instance.
Agreement of terms
If the points covered in this letter are in accordance with your understanding of our agreement, we
should be grateful if you would sign the enclosed copy letter and return it to us.
Yours faithfully
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Terms noted and agreed
Signature .......................................... On behalf of Elite Cars Limited
Date ...........................
5
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EXHIBIT 3
BUSINESS PLAN
ELITE CARS
Prepared by: Jack Hawkins
Date: 18 August 2004
Contents
1
2
3
4
5
6
7
8
9
Executive summary
History of the business
Nature of the business
Markets and sales plan
Operating costs and future investments
Management
Financial analysis
Risks and rewards
Financial Appendices: Exhibits 4, 5, 6
Summary
This plan, including its appendices, has been prepared in order to identify the future financial
requirements of Elite Cars for the five year period to June 2009.
This business is engaged in the sale and hire and servicing of elite and luxury vehicles. It is
expanding by increasing its UK presence through a series of strategically placed depots, and by
upgrading its IT and installing an interactive website. The cost of this expansion will be most
significant over the next two years and during that period will total some 650K.
Included in this expenditure is 175K for a complete re-vamping of the Elite Cars workshop to
meet the increasingly stringent requirements of insurance companies. This upgrade will enable a
greater volume of specialist crash repair work to be undertaken.
The business is therefore seeking additional finance by way of an injection of equity capital in the
form of both ordinary shares and preference shares, to the sum of 500K.
History of the business

Elite Cars, was set up in 1971 as a partnership between Grantley Hawkins and his son Jack Hawkins,
who had equal shares. It was created as a traditional car dealership, selling new and used cars,
undertaking servicing and repairs and operating a petrol station and shop. Grantley retired in
1986 handing his share of the partnership to his daughter-in-law Gillian. The husband and wife
team has continued to be involved in running this business up to the present time. In 1997 their
only child Geri, to whom they gave a 25% share, joined them in partnership. In 2002 Tom
Goodenough, who was the head salesman, became a partner and the partnership profit share was
rearranged with Jack and Gillian having 60%, Geri 30% and Tom 10%.
There have been some losses in the past five years as the business sought to re-focus into new areas
of activity, which are now being achieved.
The business currently has three main strands:
(i)
Sales of classic and luxury used cars.
(ii)
Hire of classic and luxury cars including executive rentals (Luxlimos) and Elite Car
Replacement Service.
(iii) Repairs and servicing of classic and luxury cars, especially insurance claims.
Since 1999 the car sales have been under the responsibility of Tom Goodenough who has created
significant car sales growth by relocating the car showrooms to New Marsh, by niche selling, keen
pricing and good marketing. Luxury and classic car sales have grown six-fold in the last four years
to nearly 12m, but this has created working capital issues.
In the past six years the car hire has been very much developed by Geri and now has a turnover of
over 5m. During that time car hire innovations have included the creation in 1999, of the
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Luxlimos service and more importantly, in 2001, the Elite Car Replacement Service UK. Both of
these innovations have demonstrated the ability of the business to identify new streams of business
and to exploit them commercially.
The business has always run a successful workshop, dealing mainly with the luxury and classic
vehicles sold. Joe Habishaw, a mechanic with more than thirty years of experience, who has been
with the business since it started, runs the workshop.
3
Nature of the business

All aspects of the business (car sales, car hire, repairs and servicing) are interrelated. Whilst waiting
to be sold, classic vehicles may be hired out to customers, rented for special occasions or used as
replacements by crash victims. In other instances, vehicles initially taken on for hire may be sold to
enthusiastic customers. The workshop prepares vehicles for sale, services the hire vehicles, and
provides after sales support for all vehicles sold.
Vehicles are purchased from a variety of sources. The most important element in the purchasing of
used vehicles is a network of personal contacts built up by the Hawkins family and Jack in
particular, over the past twenty years. These personal contacts are both trade connections and
wealthy individuals, a comprehensive database is held on all suppliers of vehicles, both corporate
and individual, going back some fifteen years.
The number of vehicles held by the business can vary considerably over any given 12 month period
but currently averages around 65 vehicles with an average value of 25K. Information concerning
vehicles held by the business is maintained on a detailed inventory listing. Vehicle sales tend to be
on a constant level throughout the year.
In the past the car hire business has had a seasonal aspect to it with car hire being more active in
the summer months and also at weekends than weekdays. However this is changing with the
growth in the Elite Car Replacement Service. This insurance-based work has grown exponentially
since its inception. Positive publicity from press reports, and strong word-of-mouth praise by high
profile, fully satisfied customers has been an important element in this growth.
The level of turnover in the workshop has also increased as a result of crash repair work generated
by the car replacement scheme. Investment in good personnel and improved technical and
diagnostic equipment has enabled the business to meet the terms, conditions and quality
objectives expected by the insurance companies. As a result the business has been appointed to
act as the repairer of choice for a number of these companies.
Markets and sales plan

The vehicle sales market
It is anticipated that this luxury vehicle market will continue to grow, particularly in the increasingly
prosperous north west of England, and also that sales outside the region will benefit from an
improved company website. The main competitors to this business are other independent classic
car outlets but on occasions these can also be Elite Cars customers. There are no similar outlets
based locally and the main national competition is based in London which is not considered to
be a direct threat.
The vehicle hire market
Historically the specialist car hire aspect of the business has always anticipated and responded to
changing demand. Currently the main car hire section of the business benefits not only from the
demand by customers who want to hire well established up-market and luxury brand vehicles but
also from customers who have demanded the current versions of specialist vehicles. In this respect
the geographical location of the business has been a considerable benefit. Being close to a number
of major centres of population provides a pool of wealthy customers. In addition the proximity to
the Pennines, the Peak District and the Lake District has also given rise to a demand for top quality
touring and off-road vehicles. The car hire service offers a vehicle home drop off and collection
service throughout the region which proves very attractive to customers.
The aim over the next two years is to establish a nationwide presence by way of other regional
offices in Chelmsford, Windsor and Edinburgh. These offices will be fully on line via a new
interactive website with the centre at Manchester. This link, together with the investment in new
transporter trucks, will enable customers to discuss their needs with a company employee, to book
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the vehicle of their choice and to have that vehicle delivered to, and collected from, their chosen
location.
The luxury car hire market is a niche market and although in the general car hire market there is
intense competition between the major companies, the business for hiring luxury vehicles does not
face that volume competition. Luxlimos has a strong local presence. The Elite Car Replacement
Service (ECRS) has established a clear first mover advantage by being a pioneer business operation
with strong demand from high-profile wealthy customers.
Vehicle repairs and servicing
The core workshop business continues to increase steadily on the back of the increasing volumes of
business in car sales and car hire. In addition, the recently upgraded facilities in the workshop,
including state-of-the-art equipment, have enabled the workshop to match the standards required
by insurance companies in terms of quality and turnaround time for crash repairs. As a result, the
business is now able to offer a comprehensive one-stop facility for the no-fault luxury car
replacement business. It is anticipated that the workshop activity will continue to increase.
Overall
Given the growth in sales over the recent past in all three areas of activity, the business anticipates
that this trend will continue. The financial forecasts reflect this growth and are therefore
reasonable and in line with market experience.
5
Operating costs and future investment

Details are provided on the gross margins for all three segments of this business in the five year
summary (see Exhibit 4). All segments of the business are currently performing well. The policy of
the business has been to replace and upgrade its non-current assets on an incremental basis
whenever it is required. Future investment in non-current assets is proposed to be 400K in the
year to June 2005 and 250K in the year to June 2006. The major components of this are: 175K
for continued workshop improvements; 150K for the new depot in Chelmsford; 125K for
upgraded IT and interactive website and 115K for additional new car-transporters.
The management team

Jack (61) and Gillian (59) Hawkins have managed the business since 1986. They are experienced in
all aspects of the car sales and car hire business and have been responsible for growing the
business to its current size.
Tom Goodenough (42), who became the most recent partner in 2002, has brought extensive upto-date car sales and general car hire experience into the team. He acts as the general manager
and takes much of the responsibility for the day to day running of the business.
Geri Hawkins (29) is in charge of all aspects of marketing. She has always worked in the family
business and became a partner in 1997, following her graduation. Geri initiated the two product
lines of Luxlimos and Elite Car Replacement Services, both of which have proved successful.
Joe Habishaw (50) is the chief mechanic and manager of the workshop. He has worked for Elite
Cars since its inception.
Adrian Molar (46) is in charge of finance. He has been with the organisation for some twelve years.
Financial analysis
Attached to this business plan are a five year summary for the years 2000 2004 (Exhibit 4), the
detailed financial forecasts for the next 24 months and summary income statements for the five
years 2005 2009 (Exhibit 5) and the draft current financial statements (Exhibit 6). As can be
seen from the draft accounts to June 2004, our performance in the past two years has been strong.
Our cash, revenues and profits forecast for the next two years has been made in the light of our
immediate past performance and includes our projections for new capital expenditure to enable us
to expand our activities.
We are seeking a restructuring of our debts and a new injection of long term finance. Our initial
plan envisages an injection of capital of 500K. In addition our current short-term bank debt will
be consolidated into a 10 year 7% bank loan of 990,000 provided by our current bankers,
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Lancashire Bank. This loan will be secured by way of a fixed charge on the land and buildings and
with a floating charge over current assets.
In our opinion the business is currently worth around 2.5 million.
8
Risk and rewards

This business is passing through an important transition from that of family partnership with a
strong regional presence to corporate status with a broader market appeal. With the assistance of
our financiers we are certain that we will be successful at this new level of activity and if our
expansion continues in line with predictions we would be aiming to float the company within five
years.
Appendices
Five year summary to June 2004 (Exhibit 4) including draft 2004 financial statements
Financial forecasts for the years ending June 2005 and 2006 and summary income statements
2005 2009 (Exhibit 5)
Draft financial statements for the partnership for the year ended 30 June 2004 (Exhibit 6)
EXHIBIT 4
ELITE CARS
Five Year Summary Income statements
30.06.04
000
30.06.03
000
30.06.02
000
30.06.01
000
30.06.00
000
5,034
11,596
805
2,257
8,764
671
584
2,191
610
290
1,982
598
965
116
1,781
483
1,931
17,435
11,692
3,385
3,835
4,311
4,528
11,172
695
16,395
2,012
8,569
579
11,160
529
2,145
535
3,209
241
1,970
518
1,058
3,787
84
1,783
434
1,849
4,150
Revenues
Car hire
Car sales
Repairs
Petrol
Cost of Sales
Car hire
Car sales
Repairs
Petrol
Gross Profit
Overheads
Net Profit Before Interest

Interest
Non-recurring items
Loss on sale of Passage
Road
Closure costs on petrol
station
Net Profit
1,040
408
632
(112)
532
330
202
(82)
176
258
(82)
(70)
(4)
520
120
(156)
48
220
(172)
(63)
(55)
(290)
161
166
(5)
(42)
(47)
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ELITE CARS
Five Year Summary Gross Profit Analysis
30.06.04
000
30.06.02
000
30.06.01
000
30.06.00
000
Car Hire Department

Revenues
5,034
2,257
584
290
Wages
Car repairs
Vehicle insurance
Fuel
Sub-contract hire charges
Contract car hire charges
Other costs
1,007
220
153
450
906
1,711
81
378
36
57
178
717
620
26
94
9
19
45
189
136
37
71
12
17
19
4
103
29
11
5
15
39
Cost of sales
4,528
2,012
529
241
84
Gross Profit
506
245
55
49
Gross Profit Percentage
10.1%
10.9%
9.4%
16.9%
27.6%
Car Sales Department

Revenues
11,596
8,764
2,191
1,982
1,781
Cost of cars sold

Salesmen's salaries and bonuses
Preparation costs
10,795
196
181
8,224
170
175
2,039
46
60
1,874
38
58
1,689
37
57
Cost of sales
11,172
8,569
2,145
1,970
1,783
Gross Profit
424
195
46
12
( 2)
3.7%
2.2%
2.1%
0.6%
0.0%
Repairs and Servicing Department

Revenues
805
671
610
598
483
Parts etc
Wages
Cost of sales
461
234
695
384
195
579
350
185
535
340
178
518
272
162
434
110
92
75
80
49
13.7%
13.7%
Gross Profit
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000
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12.3%
13.4%
116
32
10.1%
ELITE CARS
Five Year Summary Balance Sheets
30.06.04
000
30.06.03
000
30.06.02
000
30.06.01
000
30.06.00
000
400
1000
250
1,650
400
802
202
1,404
400
753
98
1,251
400
800
68
1,268
258
501
105
864
1,528
1,181
364
433
430
353
439
246
275
87
134
53
2,373
32
1,734
19
604
18
583
23
485
4,023
3,138
1,855
1,851
1,349
1,054
340
1,394
735
142
877
708
142
850
497
441
938
940
940
408
449
486
1,231
131
859
2,221
954
93
765
1,812
369
3
147
519
272
34
607
913
221
67
121
409
4,023
3,138
1,855
1,851
1,349
Non current assets

Church Road freehold property
Passage Road freehold property
New Marsh Showroom
Plant & equipment
Current assets
Inventory
Accounts receivable
Finance companies
Car hire
Other receivables and
prepayments
Total assets
Equity
Partnership accounts
Revaluation reserve
Long term liability

Bank loan
Current liabilities
Accounts payable
Contract hire liability
Bank overdraft
Total equity & liabilities
33
99
30
2
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ELITE CARS
Five Year Summary Partnership Accounts
Total
000
Mr & Mrs
Hawkins
000
Geri
Hawkins
000
B/fwd @ 30.06.00
Loss for the year
Drawings
At 30.06.01
940
(290)
(153)
497
816
(217)
(85)
514
124
(73)
(68)
(17)
Loss for the year

Drawings
Revaluation
Capital introduced
At 30.06.02
(156)
(132)
299
200
708
(117)
(77)
224
100
644
(39)
(55)
75
100
64
Profit for the year

Drawings
Capital introduced
At 30.06.03
120
(193)
100
735
72
(104)
612
36
(65)
35
12
(24)
100
88
Profit for the year

Drawings
Capital introduced
At 30.06.04
520
(251)
50
1,054
312
(144)
50
830
156
(71)
120
52
(36)
104
Ownership at date of incorporation
100%
50%
30%
Tom
Goodenough
000
20%
Prior to incorporation it was agreed that Tom Goodenough would increase his ownership from a 10%
to a 20% interest in return for paying a further 50,000 as a goodwill payment to Jack and Gillian
Hawkins which they introduced into the business.
Opening Directors Loan Accounts
Total
Balance on Current Accounts

Revaluation of properties
To be capitalised
as share capital
Balance on directors loan accounts
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000
Mr & Mrs
Hawkins
000
Geri
Hawkins
000
Tom
Goodenough
000
1,054
340
1,394
830
204
1,034
120
102
222
104
34
138
500
894
250
784
150
72
100
38
ELITE CARS
Five Year Summary Supporting Notes
Non current assets
The old Passage Road property was not suitable once the business decided to concentrate on the luxury
car hire and sales business in 2000/01. It was sold at a small loss compared to its valuation in the
accounts.
Inventory
All cars are treated as inventory because the intention is to sell within 12 months, whether or not they
have been used for hire in the interim. Initially the car hire business developed from using cars in
inventory but the business also has access to a fleet of cars on contract hire arrangements with other
fleet providers.
Accounts receivable
Amounts due from finance companies represents finance on car sales, which averages 14 days of sales,
minus deposits. Deposits average 20% of car selling price.
Amounts due for car hire are due from insurance companies, corporate accounts and from other car hire
companies.
Accounts payable
This includes amounts due to HM Customs & Excise.
Current Accounts
Tom Goodenough was asked to become a partner in 2002. He acquired a 10% share in return for
injecting capital of 100,000 by a remortgage of his property. He did not make any payment for
goodwill at that stage.
The other partners introduced more capital by remortgaging their properties in 2002 at the request of
the bank.
Bank Loan
A bank loan was taken out in 2002 to help finance the acquisition of the New Marsh Showroom.
Sub-contact hire charges
These represent costs incurred with other car hire providers in respect of providing cars to customers.
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ELITE CARS LIMITED

SUMMARY FINANCIAL FORECASTS
Forecast Income Statement Summaries
Note
Revenues
Car hire
Car sales
Repairs
Gross profit
Car hire
Car sales
Repairs
10
2005
000
Corporation tax
Net profit
2007
000
2008
000
2009
000
6,025
12,700
844
19,569
6,950
13,750
1,065
21,765
7,500
14,500
1,250
23,250
8,000
15,250
1,400
24,650
8,500
16,000
1,500
26,000
633
472
116
1,221
799
510
159
1,468
900
580
188
1,668
1,040
610
210
1,860
1,190
640
225
2,055
318
129
60
87
48
642
360
204
72
72
72
780
390
236
80
60
96
862
410
252
85
60
108
915
425
264
96
60
108
953
579
113
466
(140)
326
688
100
588
(177)
411
806
100
706
(212)
494
945
90
855
(257)
598
1,102
85
1,017
(305)
712
Overheads (incl. depreciation)

Employment costs
Premises costs
Promotional costs
Legal & professional
Other admin costs
PBIT
Interest
2006
000
ELITE CARS LIMITED

Notes
1
Sales, sales receipts, purchases and purchases payments

Sales and purchases are shown net of VAT in the forecast profit and loss accounts and inclusive of
VAT in the cashflow forecasts.
Share issues
The forecast includes the subscription of 500,000 by North West Finance
Bank loan
The new bank loan is for 990,000 payable over 10 years with an arrangement fee of 10,000 and
monthly payments (interest and capital) of 12,000. The interest charge at 7% per annum has
been calculated to be 51,000 in the period to 30 June 2005 and 71,000 in the year to 30 June
2006.
Capital expenditure
The capital expenditure in the year to 30 June 2005 is as follows:
Tax on transfer of properties 60,000
Car transporters 115,000
Website development and IT 50,000
Chelmsford depot 75,000
Workshop improvements 100,000.

Depreciation is 60,000.
The capital expenditure in the year to 30 June 2006 is as follows:
IT 75,000
Chelmsford depot 75,000
Workshop improvements 75,000
Other 25,000.
Depreciation is 96,000.
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Directors loan accounts

These arise on the transfer of the business to the limited company. No new goodwill was created
on incorporation. The assets were transferred at their closing values in the final partnership
accounts.
The initial share capital is only 10 owned as to Mr & Mrs Hawkins 5, Geri Hawkins 3 and Tom
Goodenough 2. The share capital will be increased to 500,000 at the same time as the
investment by North West Finance Venture Capital.
Bank overdraft
On incorporation the existing bank loan was transferred to an overdraft facility of 1.3 million, as
an interim measure by the bank at an interest rate of 3% over bank base rate.
The projections to 30 June 2005 and 2006 are prepared on the basis of an ongoing bank overdraft
facility of 500,000 subject to bank terms.
Employment costs - these include directors remuneration each year as follows:

Geri Hawkins 50,000
Tom Goodenough 50,000
Jack Hawkins
Gillian Hawkins
40,000
30,000
Legal and professional costs: this includes the venture capital investment fees
Corporation tax: this has been provided in these forecasts at a rate of 30%
10
Hire cars: these are not capitalised and have been treated as operating leases
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EXHIBIT 6
ELITE CARS
DRAFT FINANCIAL STATEMENTS

(Prepared by Ferguson & Griffiths)
ELITE CARS
INCOME STATEMENT
30 JUNE 2004
Revenues
Cost of sales:
Opening inventory
Purchases
Wages
Other direct costs
Closing inventory
Gross Profit
Administration expenses:
Wages and salaries
Rates and water
Rent
Heat, light and power
Insurances
Telephone
Postage and stationery
Advertising
Repairs and renewals
Equipment leasing
Motor expenses
Accountancy charges
Bad debts
Miscellaneous expenses
Bank charges and interest
Loan interest and charges
Hire purchase interest
Depreciation of office equipment
Net profit
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Year to
30.6.04
Year to
30.6.03
17,435,191
11,692,181
1,181,203
11,408,799
1,436,993
3,896,079
(1,528,238)
16,394,836
364,291
8,665,223
743,182
2,568,940
(1,181,203)
11,160,433
1,040,355
531,748
112,178
32,357
18,000
20,688
34,973
13,942
9,652
36,929
19,305
15,080
18,422
27,950
4,700
18,482
15,394
61,258
34,427
16,801
9,813
520,351
89,742
26,964
12,500
18,808
25,961
12,674
8,043
33,572
13,790
10,771
16,019
21,580
3,500
12,322
12,828
36,857
37,537
7,161
10,903
411,532
520,004
120,216
DRAFT
ELITE CARS
BALANCE SHEET
30 JUNE 2004
Schedule
NON CURRENT ASSETS
Freehold properties
Furniture, fittings and equipment
1
2
CURRENT ASSETS
Inventory
Accounts receivable
Cash
TOTAL ASSETS
REPRESENTED BY:
OWNERS EQUITY
Current accounts
Revaluation reserve
NON CURRENT LIABILITIES
Bank loan
CURRENT LIABILITIES
Contract hire liability
Accounts payable
Bank overdraft
TOTAL EQUITY AND LIABILITIES
Year to
30.6.03
1,400,000
250,604
1,650,604
1,201,880
201,838
1,403,718
1,528,238
845,122
793
2,374,153
1,181,203
552,995
1,052
1,735,250
4,024,757
3,138,968
Year to
30.6.04
1,054,032
340,424
1,394,456
735,487
142,304
877,791
408,096
448,669
131,234
1,232,007
858,964
2,222,205
92,781
953,931
765,796
1,812,508
4,024,757
3,138,968
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DRAFT
ELITE CARS
SCHEDULES
30 JUNE 2004
1
PARTNERSHIP PROPERTIES
Cost and valuation at 30.6.04
Church Road
New Marsh Showroom
400,000
1,000,000
1,400,000
FURNITURE, FITTINGS AND EQUIPMENT

Cost at 1 July 2003
Net additions
364,435
115,634
480,069
(229,465)
250,604
Less depreciation
Book value at 30 June 2004
3
CURRENT ACCOUNTS
Total
Balance at 1 July 2003

Share of profit
Capital introduced
Drawings
Balance at 30 June 2004
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735,487
520,004
50,000
(251,459)
1,054,032
Mr & Mrs
Hawkins
612,525
312,002
50,000
(144,526)
Ms G
Hawkins
35,044
156,001
(71,025)
830,001
120,020
Mr T
Goodenough
87,918
52,001
(35,908)
104,011
EXHIBIT 7
North West Finance Venture Capital Fund
2 King Plaza, Manchester, M3 6PA
The Directors
Elite Cars Limited
MANCHESTER
M15 4AA
14 September 2004
Ladies and Gentlemen,
Draft Offer: subject to contract
Following our discussions, I write on behalf of North West Finance Venture Capital Fund (NWFVCF) to
confirm our intention to provide funding of 500,000 to Elite Cars Limited, on the basis of the following
capital structure:
NWFVCF
Mr J & Mrs G Hawkins
Ms G Hawkins
Mr T Goodenough
Total
Ordinary
000
A
Ordinary
000
250
150
100
500
100
100
Preference
000
400
400
Total
000
500
250
150
100
1,000
This letter provides a summary of the level of investment and the main terms on which we would
propose to invest. Although we are very interested to invest this offer is subject to the satisfactory
outcome of financial and commercial due diligence, which will include:
Commercial and technical due diligence. This will involve discussions with customers (current and
potential), key suppliers, partners, and market commentators. This work would be handled
confidentially and discreetly and in conjunction with the company.
Management referencing. We reserve the right to appoint a third party to undertake referencing of
the management team.
Financial review. We reserve the right to appoint a third party to perform a detailed review of the
projections.
Historical results to date. We also reserve the right to appoint a third party to perform a review of
historical results.
Legal due diligence. This will cover all normal aspects including litigation, ownership of physical
assets and intellectual property, and contracts and trade agreements.
In order to progress further, we shall require a commitment to a period of eight weeks of complete
exclusivity prior to undertaking further due diligence and completion of the investment, and therefore
require this letter and the Termsheet to be signed and returned as a formal response. All proposed
financing is to subsequent final approval by the Investment Committee of the North West Finance
Equity Fund and to legal contract.
I look forward to hearing from you.
Yours faithfully
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Carole Smith
Investment Director
On behalf of North West Finance Venture Capital Fun
149
TERMSHEET
This termsheet sets out the main terms on which NWFVCF is proposing to invest 500,000 into Elite
Cars Limited (the Company). Along with other sources of finance, this will provide the Company with
funding for acquisition and working capital.
500,000 investment details:
100,000 A ordinary shares and 400,000 cumulative redeemable preference shares (CRPS)
Drawdown of both A Ordinary share capital 100,000 and CRPS 400,000 on completion
7% dividend for A ordinary shares based on net profit before tax and before shareholding
directors emoluments in excess of business plan dividends accruing from July 2005, payable
January 2006 and then annually thereafter.
7% dividend payment on preference shares dividends accruing from date of investment, first
dividends payable in January 2006 and annually thereafter.
Repayment of preference shares: January 2007 200,000; January 2008 200,000
Equity stake 16.67%
Main terms
1
NWFVCF will have the right to appoint a Non-Executive Director to the Board of Directors. The
remuneration will be agreed with the Non-Executive Director.
During our discussions, you have indicated your desire to achieve an exit within five years. We
would like you to note that it is also our objective to achieve an exit in that timescale.
All legal and any other fees will be paid out of the proceeds of the financing. Such costs are to be
kept to a minimum.
A negotiation fee of 2.5% of the total NWFVCF investment will apply, together with a 1%
monitoring fee per annum thereon.
This proposal is subject to a contract, to satisfactory results from the due diligence programme
outlined in our letter above and (inter alia) to:
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Keyman insurance for key directors to be agreed, such policy(ies) to be secured to the
minimum value per capita of NWFVCFs investment, and to be assigned to NWFVCF.
Agreement of management service contracts and remuneration terms.
Agreement of the management and board structure following investment.
Agreement of appropriate legal documentation, including suitable warranties and

indemnities and standard institutional veto rights on major issues.
As is our practice, substantial under-performance against the Business Plan projections which could
prejudice the business will grant NWFVCF certain extra rights to protect their investment.
Case Study
EXHIBIT 8
Lancashire Bank
2 Queens Square
Manchester
M1 9QM
The Directors
Elite Cars Limited
New Marsh Showroom
MANCHESTER
M15 4AA
30 September 2004
Cc:
Jones Edgar Davis

North West Finance Venture Capital
Ladies and Gentlemen,

Elite Cars Limited: Overdraft facilities
In view of your requirement to increase borrowings, but the unwillingness of the partners to take on
personal guarantees, the business was incorporated on 1 July in order that the bank could eventually
take a debenture. The overdraft facility has therefore been increased to 1.3 million on a temporary
basis to 31 December 2004, as you are projecting further changes in your working capital requirements
and additional capital injection.
We understand that you are negotiating an equity investment of 500,000 with North West Finance
Venture Capital and that you have appointed Jones Edgar Davis to advise on your overall financing
needs. The matter of support from North West Finance Venture Capital is crucial to the banks support
for the expansion plans and our formal offer will be subject to their investment being made.
In order to assist with your planning, I write as requested to set out the basis on which the bank is
prepared to advance facilities on an ongoing basis. The following items are the conditions of support:
1
Fixed charges on the two freehold properties together with the fixed and floating charge on the
banks standard terms. Whilst we have yet to receive the formal valuations, our panel valuers have
indicated values of 1 million for the New Marsh Showroom and 400,000 for the Church Road
property this would permit the bank to advance a maximum secured loan of 990,000.
In terms of other working capital based lending the bank is prepared to rely on the fixed and
floating charge, subject to suitable covenant arrangements. We would want debtor cover of 2.5
times. The bank would be reluctant to rely upon any other fixed asset security in view of the hire
purchase and other asset based financing. Further, stock of cars and parts are unlikely to be good
security for the bank as they are likely to be subject to retention of title
This should support an eventual ongoing overdraft of 500,000 with some short-term leeway.
The bank will also want a covenant in respect of servicing in respect of interest cover (3 times) and
retained profits of at least, say 100,000. The bank would expect close monitoring by the company
of costs and cash flow to ensure adherence to the plan presented, and that all directors will be
adequately insured as key personnel
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Yours faithfully
Peter Pearce
Business Manager
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EXHIBIT 9
Jones Edgar Davis

ELITE CARS LIMITED
FILE NOTE - INCORPORATION ISSUES
As arranged, I went to see the director/shareholders of Elite in order to keep things moving as the
timescales are tight.
The incorporation of Elite Cars has been made necessary to structure the balance sheet properly. The
deal is not being driven by taxation but by the objective of refinancing the business so that it can
expand.
Whilst I was there, I met with all of them and they were very keen to talk to me, jointly and individually,
about their personal objectives.
Jack Hawkins thanked me for my efforts so far and said that he and his wife Gillian were appreciative of
my concern to protect their personal position as a result of entry into any agreement with NWFVCF. He
made it clear that, at the forthcoming meeting on Wednesday 10 November, he wishes us to represent
them to ensure that their interests are protected.
They are however keen to support Elite Cars and want Geri to make a success of it. They see Tom as a
steadying influence. I am not sure what the relationship is between Tom and Geri.
For his part, Tom is anxious to reduce personal risk and so does not want to expand the business solely
by further personal borrowing. Tom also said that they had no particular loyalty to their existing bank
and that they would be happy to consider any better offers from other banks. Tom is also very aware of
having invested all the money he has in Elite Cars and having to make a success of it. He has recently
had to put a further 50K into the business in order to bring his interest up to 20%. I got the
impression that Tom feels under financial pressure. He is certainly heavily borrowed with loan funding
for his 50K additional capital. He had already re-mortgaged his house for the additional investment.
He was asking about loan interest relief for his personal borrowings (which is a big issue for him).
Geri came in to the meeting briefly. She seemed to have a much more carefree attitude to debt. She
realises that they need the equity funding but is reluctant to give too much equity away. On a personal
level, she is looking to borrow further and was talking about buying another buy-to-let property.
Sonia Adams
23/09/04
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EXHIBIT 10
Jones Edgar Davis
Chartered Accountants
Manchester
M12 6RA
Tel: 0161 123 4567
STRICTLY PRIVATE AND CONFIDENTIAL
The Directors
Elite Cars Limited
New Marsh Showroom
Industrial Estate
MANCHESTER
cc
NWFVCF
Lancashire Bank
22 September 2004
Dear Sirs and Madam,
INCORPORATION OF THE PARTNERSHIP
As requested I write to document the taxation implications of the incorporation of the Partnership which
took place on 1 July, the purpose of which was with the objective of refinancing.
The business of Elite Cars (the partnership) was sold to Elite Cars Limited on 1 July for a consideration of
1,344,000. From this figure share capital was invested and the balance is due to the former partners as
directors loans. The tax implications for the new company are that two elections need to be entered
into between the new limited company and the former partners these will be dealt with as part of the
normal tax compliance for you and the new company. The detail of the elections is as follows:
1
An election needs to be entered into between the former partners and Elite Cars Limited to transfer
the plant and machinery at the tax written down value under Section 266 CAA 2001.
Subject to legal confirmation the goodwill is being transferred at a value of 1 which is below its
market value. However, any additional goodwill would give rise to a tax liability. As the goodwill
figure is below market value then an election will need to be submitted under Section 165 TCGA
1992 in order to prevent the partners being subject to capital gains tax on a higher figure.
There will be no capital gain on the transfer of the Church Road to the company as it has a high
indexed March 1982 value.
Small capital gains tax liabilities did arise on Mr and Mrs Hawkins and Geri Hawkins on the transfer
of the additional incremental partnership share to Tom Goodenough in June 2004, but these are
minimal.
Regarding the New Marsh property this will give rise to a gain on the transfer to the company but
S165 TCGT 1992 relief will be available as for the goodwill above.
There is a substantial stamp duty land tax (SDLT) liability in view of the need to transfer the
properties into the company at open market valuation which is a requirement of North West
Finance Venture Capital Fund. No VAT issues arise as the Transfer of Going Concern provisions
apply.
Ferguson & Griffiths inform us that there are significant tax payments due in respect of 2004/2005, so
that all cessation income tax liabilities for the partners, and any capital gains tax due, arises on 31
January 2006.
Yours sincerely,
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Jo Slater
Partner
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EXHIBIT 11
MANCHESTER EVENING STANDARD

GERI HAWKINS OF LUXLIMOS DRIVES THE LUX LIMO BUSINESS TO SUCCESS
Alan Blease
Walking through Manchester
on practically any evening, but
particularly over a weekend, you
cannot fail to notice an occasional
stretch limousine cruising past.
The main users of these vehicles
are none other than the local
students and other young adults
and their even younger brothers
and sisters intent on starting,
and ending, the night out in real
style.
Geri Hawkins, an inventive
entrepreneur with a background
in marketing started her business
five years ago. She is the ideas
person within the family business
in which she works, having also
identified and brought to fruition
the Elite Car Replacement Service
for crash victims.
Business Section
Ms Hawkins has the drive
to turn ideas into real money.
Three years after graduation
she persuaded her parents to
invest in two stretch
limousines to start a new
business venture: Luxlimos
Manchester UK. From the
outset this was to be a serious
business, run for real profit.
Carefully targeted
advertising was initially aimed
at discerning university
students and final year pupils
from the more exclusive local
schools. The strap-line was
that executive limousines
could be exclusive but
affordable and that they
were an ideal, fun way to
arrive at that all-important
coming-of-age or graduation
celebration.
2 July 2003
The limousines are booked
on a strict time basis for both
start, and, where appropriate,
end of the evening. Sensibly the
credit control for this business is
on a payment in advance basis,
drunken young customers have
a habit of forgetting their debts
amongst other important
things on such evening
excursions.
Nowadays the business has
grown to a fleet of vehicles and
the drivers are all professional
sub-contractors. It has become
a real success, said Geri, who
occasionally acts as chauffeur.
And I love being part of the
early evening glamour, and the
end of evening pantomime.
HOW CRASH LED TO BOOM FOR GERI HAWKINS OF ELITE CARS

Alan Blease
At the Northwest Regional
Business Women of The Year
Dinner, the story of the crash
which led to riches gained Geri
Hawkins the top award for
2003.
Geri Hawkins was already a
successful entrepreneur in
January 2001. She was driving
back to her parents house in
her own Audi convertible when
it was hit by a truck pulling out
of a side road without stopping.
The resultant crash put Ms
Hawkins in hospital for the
night and caused significant
damage to her car which was
nonetheless repairable. For
Geri it was clearly a no-fault
accident and the truck drivers
insurance would pay.
The problem, which later led to
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Business Section
the business venture, was that
the replacement car offered by
the insurance company was a
Ford Fiesta not that in
themselves there is anything
wrong with such cars but for
an Audi owner with an instinct
for style, this was unacceptable
The battle with the
insurance company, for the
right to have an equivalent
vehicle to act as the
replacement during the time
that her car was off the road,
would have taxed the resolve of
most of us but Geri Hawkins is
not like most of us. Following
her success, she saw a major
business opportunity.
Armed with her own
experience and backed by her
23 March 2004
parents as business partners she
created Elite Car Replacement
Service UK the first business of
its kind in the UK to deal with
these insurance problems.
Geri, backed by a legal team
brings recalcitrant insurance
company to heel. In addition
the business has financed, and
has on its books, a full range of
head-turning luxury cars to
provide as accident
replacements. As an important
spin-off the organisation also
runs a top quality body repair
and paint shop service.
Now this business, created by an
accident, is heading for the
boom times, and Geri Hawkins
acts as an inspiration to all in
triumph over adversity.
EXHIBIT 12
Investors and Business North West

September 2004
Funding Available for Regional Initiatives

Charles Critchley
At a business breakfast seminar organised by Manchester Chamber of Commerce and hosted jointly by
Emperor Hotels and Lancashire & Cheshire Fund Management Limited (LCFM), more than 80 of the
regions business leaders heard keynote speaker Carole Smith give an upbeat summary of prospects for
the region and the funding available to support commercial developments and proposals.
Carole Smith, who was formerly chief economic analyst at LCFM, is currently the Investment Director of
North West Finance Venture Capital (NWFVC) one of this regions major venture capitalist
organisations. Her informative presentation was followed by a lively question and answer session as
local commercial leaders discussed the need for and availability of funding for this part of the UK.
The message which came over was that there is an abundance of venture capital available for
appropriate local projects. The whole region is seen as having excellent growth potential and with large
pockets of the region outstripping the national average in terms of growth venture capitalists are keen
to invest here.
Citing the investments made by her own organisation over the past two years Ms Smith charted the
upward trend of regional investment. With loans and capital invested ranging from as little as 200,000
up to schemes of ten times that amount her organisation has provided regional funding totalling more
than 16 million in the past 12 months alone an increase of over 25% on the previous year. Ms Smith
defined the region as within 25 miles of the centre of Manchester.
Delegates were positively impressed by the presentation and the information delivered. As Joe Kinsard,
the CEO of Warglec plc, the Warrington-based marketing group, commented We know that this is a
successful area of the UK. We see the prosperity reflected in local housing values and high quality
consumerism in this area. Businesses around here are confident and just need to know that funding is
available to assist with their expansion plans. Carole Smith gave the right analysis and message to
confirm local commercial confidence.
This was the third in a series of eight well attended breakfast seminars. Previous keynote speakers have
included Peter Oswald from leading commercial solicitors Nerthboly Wasburgh on Corporate Money
Laundering and Directors Responsibilities, and Irvine Rogers MEP, on European and UK Government
Regional Investment.
Information regarding North West Finance Venture Capital can be found on their website at
http://www.nwfvc.co.uk. For information on the breakfast seminar series visit the Manchester Chamber
of Commerce website. For bookings at these events contact Tracey Curtis of Emperor Hotels on 0161
589 7482.
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EXHIBIT 13
THE ECONOMY OF MANCHESTER AND THE NORTH WEST OF ENGLAND

Greater Manchester, with a population of 2.5m, has benefited from its role as a regional capital and in
particular has developed its pharmaceuticals and media based industries (e.g. in newspaper printing and
publishing; and in television production). It has also reinvented itself by developing the services side of
its economy, which now accounts for 79% of jobs. The local economy has benefited from the
redevelopment of the docks area, and east Manchester was given a major boost in 2002 by construction
projects associated with the Commonwealth Games. The three universities located in the city have also
been expanding rapidly in recent years, and currently some 2bn of residential, commercial, leisure and
retail related investment is being made in the four square miles around Manchester city centre, already
extensively rebuilt following an IRA bomb outrage in 1996.
Manchester has also successfully exploited its economic infrastructure, with the completion of the M60
outer-ring motorway link in 2000, which gives ready access to the M62 to Leeds and Liverpool, the
M61, M66 and M6 to Lancashire and the north, the M56 to Chester, the Wirral and North Wales, and
the M6 to the south. Manchester International Airport, with direct rail and motorway links, had a
passenger throughput of 20m in 2001, the year in which a second runway was opened. Passenger
traffic is projected to increase to 30m a year by 2020. Over 80m people visit Greater Manchester
annually, and the city also benefits from its proximity to the Peak District National Park to the
southwest, while the resorts on the Fylde and North Wales coasts can be reached by car within an hour
and the Lake District, Yorkshire Dales and Snowdonia National Parks within 90 minutes.
Apart from the city itself, the most prosperous areas are in the satellite towns to the south of the city.
whose economies are for the most part based on services, including a number of research facilities.
Although manufacturing still plays an important part at some locations (e.g. silk at Macclesfield, and
heavy engineering and aerospace at Stockport).
Detailed figures show that the strongest growth point in the North West region is Greater Manchester
South, with per capita GVA rising by 29.2% between 1997 and 2001. By contrast, per capita GVA grew
by 18.5% in Halton and Warrington and by 14.2% in the rest of Cheshire. This compares to an increase
of 18.9% overall for the North West region and 19.4% for the UK as a whole, where London (21.7%)
and the rest of the South East (24.8%) provided the main engine for growth.
Gross Value Added per capita ()
Greater Manchester South
Greater Manchester North
Halton & Warrington
Cheshire (ex Halton/Warrington)*
Lancashire
Merseyside
Cumbria
North West
South East (ex London)
London
United Kingdom
1997
13,170
9,296
13,519
13,743
10,405
8,642
10,580
10,884
12,725
18,270
12,390
1998
14,369
9,578
14,328
14,330
10,849
9,227
10,763
11,490
13,761
19,717
13,075
1999
15,485
9,764
14,818
14,825
11,316
9,637
10,807
11,997
14,623
20,651
13,616
2000
16,408
10,040
15,368
15,192
11,820
10,012
10,901
12,477
15,178
21,702
14,291
2001
17,015
10,361
16,022
15,694
12,301
10,414
11,092
12,942
15,880
22,236
14,798
* The combined population of the wealthy Cheshire dormitory towns across the border from
Manchester (e.g. Wilmslow, Alderley Edge, Macclesfield, Congleton and Knutsford) is around 200,000,
or 30% of the total for Cheshire, excluding Halton & Warrington.
The relative GVA per capita data for areas of the UK clearly show that Halton and Warrington and the
rest of Cheshire are wealthier than the UK average and even match the South East as a whole, excluding
London. The capital, in fact, is easily the wealthiest part of the country, its GVA per head being around
1.5 times the national average. Other areas with well above average per capita GVAs include Berkshire,
Swindon, Portsmouth and Edinburgh, all with 1.5 times the national average.
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EXHIBIT 14
THE MOTOR CAR INDUSTRY IN THE UK
Output, employment and production in the UK motor vehicle industry
Manufacturing output in the motor vehicle sector was valued at 44.7bn in 2002, with car
manufacturing accounting for 27.1bn of that figure. Servicing, repairs and breakdown and recovery
are estimated to have been worth 12.9bn in output terms in 2001, the latest year for which data are
available. The motor industry is one of the largest employers in the UK, providing over 1.4m jobs.
The number of cars on the roads in the UK has continued to increase in recent years by an average of
500,000 a year. In 2002 total car registrations were almost 29m. Of the total of 2,564,000 new cars
registered in 2002, 583,000 were manufactured in the UK and 1,981,000 were imported.
UK car sales and car ownership
The demand for cars in the UK has risen inexorably over the past 25 years as the proportion of the adult
population holding driving licences has risen from 48% in 1976 to over 71% (or 32m) in 2001.
Consumer tastes and preferences have always varied, and in recent years there has been a greater
demand for mini and super-mini cars, as well for estate cars, sports utility vehicles (SUVs), and people
carriers. Demand for larger cars, especially luxury vehicles and sports cars, continues to be strong,
although they remain minority tastes. In an even narrower segment of the market there is also strong
demand for limousines, especially stretched versions.
Whereas just under a tenth of cars on the road have been first registered within the past 12 months,
more than a fifth are over 10 years old. In fact, the second-hand car market is far larger than that for
new vehicles, with annual used car sales at around 6m estimated to be two and half times greater than
new car registrations.
Car servicing and repairs
In 2001 it was estimated that there were some 26,500 outlets in the UK offering car servicing and
repair facilities around 60% of these were independently owned garages, relying for most of their
servicing and repair work on the owners of older cars. Of the total 9,848m spent in 2001 on service
and repair work some 18% was earned by these independent garages and workshops for whom an
important endorsement is to be recognised by insurance companies as an authorised repairer.
Car hire, leasing and short-term rental

Leasing and contract hire is a distinct sector from the short-term car rental business, the former coming
increasingly under the control of banking groups and other financial institutions. The fortunes of UK
short-term car rental market as a whole are closely linked to activity levels in the economy. This market
is heavily segmented between national and regional/local operators.
Around 1.5% of the population hire cars short-term for business purposes and 4.5% for personal use.
Recently, customers have also been able to make better comparisons of rates being charged by
accessing the internet. Car rental companies market themselves by offering customer loyalty schemes
and by developing partnerships with airlines, hotel chains, travel agencies and insurance companies
in the latter case agreeing to supply cars to policy holders whose cars have been involved in accidents.
Current discounted daily rates for standard cars are around 25, whereas rates for more upmarket
vehicles (e.g. Mercedes E240s) and people carriers (e.g. the Renault Espace) are around 175 a day.
Rental companies can also benefit by servicing and repairing vehicles themselves and by selling on their
hire cars when they are replaced. The hiring of limousines for weddings, funerals and other special
occasions is very much a localised activity, while other specialist firms hire out vintage cars (often
chauffeur driven), minibuses, beach buggies and off road vehicles.
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CHAPTER 6
Elite exam paper
Requirement
Exhibit List
15 E-mail to Alex Millar from Sonia Adams
16 Letter from Tom Goodenough to Sonia Adams
17 Letter from Jack Hawkins to Geri Hawkins
18 E-mail from Ferguson & Griffiths
19 E-mail from North West Finance
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Case Study
Elite Cars
Case Study requirement
You are Alex Miller, a third year student at the firm of Jones Edgar Davis (JED), Chartered Accountants,
working directly for Sonia Adams, a partner in the firm.
Elite Cars Limited, which is new corporate finance client, is engaged in a second-hand car sales and car
hire. It has recently made the transition from partnership to limited company status and is currently
seeking finance to fund its future plans.
Requirement
You are to prepare an internal memorandum to Sonia Adams, as set out in her email (Exhibit 15). State
clearly any assumptions that you make. All workings should be attached to your answer.
The following time allocation is suggested to candidates:
Reading
Planning, calculations and preparation of appendices
Drafting memorandum
1 hour
1 hour
2 hours
Marks allocation
All of the marks in the Case Study are awarded for the demonstration of professional skills, allocated
broadly as follows:
Applied to the four elements of your report (as described above)

Applying judgement
20%
25%
25%
20%
90%
Applied to your report as a whole

5%
5%
100%
the relevant discussion of ethical issues within your answer to the requirements.
In planning your report, you should be aware that not attempting one of the requirements will have a
significantly detrimental effect on your chances of success, as will not submitting an executive summary.
In addition, as indicated above, all four skills areas will be assessed under each of the four elements of
your report. Accordingly, not demonstrating your judgement and failing to include appropriate
conclusions and/or recommendations in each element of your report will affect your chances of success.
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The following items were included in the materials sent to candidates as Advance Information:
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About you, your firm and your client
Letter from Jones Edgar Davis to Elite Cars dated 27 September 2004
Elite Cars Business Plan
Elite Cars Five Year Summary 2000 - 2004
Elite Cars Financial Forecasts 2005 - 2009
Elite Cars Draft Accounts to 30 June 2004
Draft offer letter from North West Finance Venture Capital Fund dated
List of Exhibits
14 September 2004
8
Overdraft facilities letter from Lancashire Bank dated 30 September 2004
File Note by Sonia Adams (Partner) dated 23 September 2004
10
Letter from Jo Slater (Tax Partner) to Elite Cars dated 22 September 2004
11
Press reports: Manchester Evening Standard
12
Press report: Investors and Business North West
13
The Economy of Manchester and the North West of England
14
The motor car industry in the UK
The following items are newly provided to candidates:

15
E-mail to Alex Millar from Sonia Adams dated 4 November 2004
16
Letter from Tom Goodenough to Sonia Adams dated 2 November 2004
17
Letter from Jack Hawkins to Geri Hawkins dated 1 November 2004
18
E-mail from Ferguson & Griffiths dated 28 October 2004 re: Partnership tax agreement
19
E-mail from North West Finance dated 27 October 2004 re: Alternative funding arrangements
Elite exam paper
161
EXHIBIT 15
From:
Sent:
To:
Subject:
Sonia Adams<sonia.adams@jed.co.uk>
4 November 2004
Alex Millar<alex.millar@jed.co.uk>
Elite Cars Limited (Elite)
Alex,
There have been a series of important developments, regarding the Elite work, which require careful
consideration in order that we can present a clear picture to the Elite directors of their impact, ahead of
the meeting with the bank and North West Finance next week.
We have been given new information, which affects the forecasts prepared by Elite. This is attached and
comprises:
A letter from Tom Goodenough of Elite Cars Limited to us, identifying a number of factors which
appear to have a direct impact on the cash flow of the business (Exhibit 16).
A letter from Jack Hawkins to his daughter Geri, expressing his concerns and thoughts on an exit
strategy for his wife and himself (Exhibit 17).
A letter from Ferguson Griffiths to Jack Hawkins, setting out some of the tax issues affecting the
former partnership tax liability (Exhibit 18).
An e-mail from North West Finance to Jack Hawkins proposing alternative financing structures for
Elite (Exhibit 19).
You will need to provide me with an internal memorandum, including a summary of the key issues you
have identified, containing:
1
An analysis of the impact of the new information on the cash flow forecasts and financial
statements already provided for the year to 30 June 2005 (Exhibit 5). You should identify the new
peak funding requirement, provide explanatory notes on any changes you make to the forecasts,
and comment on the proposed conversion of the bank overdraft to a bank loan (see Exhibit 8).
Your proposal, with justification, for the future financing structure of the company, taking into
consideration the matters raised by Jack Hawkins in the attached correspondence and your
evaluation of the proposals from North West Finance.
A discussion of the relevant financial management, operational and strategic issues which may be
of concern to North West Finance when assessing this investment proposal, and how the directors
could address these concerns.
Although I will not be giving your memorandum to the directors, it will form the basis of our discussion
with them tomorrow, ahead of the meeting with the financiers next week. Please can we meet to
discuss your work tomorrow morning before that meeting with the Elite directors.
Sonia
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EXHIBIT 16
ELITE CARS LIMITED

1 New Marsh Showrooms
Manchester
M15 4AA
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Ms Sonia Adams
Jones Edgar Davis
Manchester
M12 6RA
2 November 2004
Dear Ms Adams,
I am writing to inform you that Adrian Molar, our in-house accounts manager, has been taken ill and is
currently in hospital. He has already been incapacitated for about six weeks.
Because of his illness we have had to use some seconded staff from Ferguson & Griffiths to enable us to
process our financial information for the past two month endings. However the effect has still been to
create a certain amount of disruption in our systems - it appears Adrian had his own individual ways
which caused delays in some key figure reconciliations. Everything is now agreed up to the end of
September.
One result of his illness has been a slowdown in our receipts from the Added Insurance Company. It
seems that Adrian could charm the money out of them in a way that others cannot. We are currently
running about 50,000 behind expected receipts from them although our work and our sales volumes
themselves appear in line with forecasts. We are working hard to correct this and expect to recover from
this cash flow slowdown by April 2005.
We also made additional payments of 20,000 for capital expenditure in August and 25,000 in
September which had been authorised but which were overlooked in putting the forecast together. It
also appears that the estimate for overheads made by Adrian Molar could be light in comparison with
previous actual figures. We believe that the under-estimation could be as much as 10%.
I am concerned that we might reach the ceiling of the agreed overdraft limit with the bank. The actual
position towards the end of October was just under the maximum overdraft facility. Obviously the bank
knows our overdraft position but so far they have said nothing since their letter of 30 September (see
Exhibit 8).
North West Finance emailed us recently (see Exhibit 19) confirming details of potential financing
alternatives which might be available to us.
We have not had time to re-work the cash flow forecast nor the other financial statements. Given the
proximity of the financial meeting next Wednesday we would welcome your comments and your help.
Please would you review the forecasts and meet with us on Friday to discuss your findings.
Yours sincerely
Tom Goodenough
Tom Goodenough
Elite exam paper
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EXHIBIT 17
Jack and Gillian Hawkins

The Goldings
Ettington nr Knutsford
M63 7PZ
1 November 2004
Dear Geri
As we have discussed within the family, your mother and I have always wanted to remain involved in the
business because after more than 30 years, it is hard to let go. Initially, with the changes proposed, your
mother and I had agreed a reduced role and shareholding. However, we now think that with the North West
Finance money and their potential future participation as shareholders in the business, we should be bought
out from the business completely, as soon as possible. We have also been considering our plans for our future
and have given some thought to our financial needs concerning living expenses and our own immediate
plans.
We still owe 160K on the mortgage for The Goldings and as you know we would also like to purchase a
small property in Spain for approximately 140K. We reckon that we will need a future income of 40K per
annum gross in total to maintain a reasonable lifestyle. In order to step back from the business we need
enough money to clear the mortgage, pay for the property in Spain and to invest for that target income.
An independent financial adviser has suggested we target a real yield of about 6%. He suggested this could
be achieved by a combination of the yield on commercial property of approximately 9%, from equities of
approximately 6% and from monies on deposit at 2%. Ill take further advice on how our capital is invested
for our future.
By my reckoning, we have approximately 1m invested in the business. We would expect to withdraw this in
three, more or less, equal annual instalments and would require at least 300K from the business by April
2005 to achieve our immediate plans. As regards the remainder we could consider any other arrangements
but we would want our capital to be secure and we would still require an income in the meantime.
I told you that I met with Duncan Ferguson last week to discuss and to try to settle the tax dispute over the
cars. I see from his subsequent email, that he copied to you, that a settlement figure of 40K has been
proposed. The tax has always been paid by the business and so Im expecting this settlement to be paid by
the business as well.
I think we need to resolve all the issues in one go and hope you will agree that this is the right way to go.
Your loving father,
Jack
PS I am sending a copy of this to Tom and Sonia Adams to keep them informed of our thinking.
164
Case Study
EXHIBIT 18
From:
Date:
To:
Cc:
Subject :
Duncan Ferguson <d.ferguson@fergusonandgriffiths.co.uk>

28 October 2004
Jack Hawkins <jack@hawkinselitecars.co.uk>
Sonia Adams <sonia.adams@jed.co.uk>, Geri Hawkins
<geri@hawkinselitecars.co.uk>, Tom Goodenough <tom@hawkinselitecars.co.uk>
Partnership taxation
C
H
A
P
T
E
R
Dear Jack,
Thank you for coming in to see me last week. As discussed the firm have been trying to agree the
tax computations of the partnership for 1998/99 through to 2003/04 which are under enquiry
because of the personal usage of motor cars. Included in stock were a Bentley and a Ferrari which
were kept at your house. The running costs for these cars, which are under dispute, were as
follows:
Year ended:
30 June 1998
30 June 1999
30 June 2000
30 June 2001
30 June 2002
30 June 2003
000s
20
15
16
18
21
20
110
As discussed we have now accepted that there was no business use with the result that additional tax,
(reduced by losses) interest and penalties are payable. The inspector will recommend a contract
settlement of 40,000 and the written offer has been sent to the Inland Revenue. Once accepted the tax
will have to be paid within 30 days.
As part of the settlement with the Revenue it was agreed that these cars were not partnership assets and
so need to be removed from the accounts. The values of the cars as included in the final partnership
accounts, and opening company balance sheet, were:
Bentley
Ferrari
000s
60
55
115
Partnership Taxation 2002/03 and 2003/04

Overall, there are still significant losses arising in 2002/03 which are enough to more than cover
the assessable profits in 2003/04. Geri and Tom fully utilise their losses in 2003/04 but there is no
tax because of personal allowances and other deductions. Jack and Gillian still have some losses
left which are utilised in 2004/05. The tax payable in 2004/05 is also affected by overlap relief
which is also offset.
The tax payable for 2004/05 is as follows:
Jack & Gillian
Geri
Tom
000s
90
55
15
160
These figures are still provisional as they can not be finalised until after April next year. However, this is
broadly the amount of tax due on 31 January 2006 in respect of 2004/05. In addition there will be
payments on account due as well. Whilst these can be reduced, interest will be payable if tax is
subsequently due.
Duncan
Elite exam paper
165
EXHIBIT 19
From:
Date:
Carole Smith <carole.smith@NorthWestFinance.co.uk>

27 October 2004
To:
Cc:
Subject :
Jack Hawkins <jack@hawkinselitecars.co.uk>

Sonia Adams <sonia.adams@jed.co.uk>
Elite Cars Limited alternative funding arrangements
Dear Jack,
As per the recent telephone conversation we had concerning our draft proposal and future financing for
Elite Cars Limited we have undertaken a review of the deal taking into account the possibility of a higher
level of required financing and variation in timings. From our side, there is the need for any investment
to match our expected return of 30% per annum on the total investment and, for a business like Elite
Cars, our normal valuation procedures would anticipate a projected P/E ratio of 5 on profits before tax.
Please find below an indicative offer of two new options showing different financing structures with
detailed conditions to be added. It now appears unlikely that anything can be finalised before January
2005, and we would expect to be able to exit fully from this investment in early 2009.
1m investment
150,000 A ordinary shares and 850,000 preference shares
10% dividend on net profit before tax for A ordinary shares dividends accruing from July 2005
10% dividend payment on preference shares dividends accruing from date of investment
Repayment of preference shares: January 2007 300,000; January 2008 300,000; January 2009
250,000
Equity stake 23%
1m investment
100,000 A ordinary shares and 900,000 preference shares
10% dividend on net profit before tax for A ordinary shares dividends accruing from July 2005
10% dividend payment on preference shares dividends accruing from date of investment
Repayment of preference shares: January 2007 500,000; January 2008 200,000 January 2009
200,000
Equity stake 16.7%
With both of these options, the actual structure/equity stake would depend on financial results to the
date of funding, progress with the business plan, approval by the Investment Committee etc. but we
have tried above to give you an indication of what a deal could look like.
We look forward to seeing you on Wednesday 10 November.
Best regards
Carole Smith
166
Case Study
CHAPTER 7
Introduction
Topic List
1 Using the Exam Paper
2 Marking key
3 Illustrative script
4 Commentary to illustrative script
5 How to improve your answer
6 Suggested financial appendices
7 Illustrations of comparative answering techniques
167
Introduction
Included within the following pages you will find the following:

Marking key
Illustrative script and commentary
Illustrations of comparative answering techniques

The section begins with a walkthrough of the Exam Paper for Elite Cars. This will enable you to see how
you might have approached the exam requirements. This guidance is then elaborated in the following
sections.
Marking key
The marking key for Elite Cars presented in this Answer Book uses the Case Study exam Competency
Based Assessment (CBA) criteria. For each topic marks are awarded for

Applying judgement
Reaching conclusions and making recommendations
For a more detailed explanation of each of these assessment headings please refer to the Case Study
Workbook. The Elite Cars marking key shows how marks might be awarded under each specific heading
relating to this case. Candidates would be assessed on their level of attainment in each section. The
competency of each candidate is assessed according to the standard achieved using the following
range:
NA
ID
IC
SC
CC
Not Attempted
Insufficiently Demonstrated
Insufficiently Competent
Sufficiently Competent
Clearly Competent
Illustrative script and commentary

As with the other two cases in these Learning Materials, the illustrative script included within this Answer
Book has been included to provide an example of the sort of answer that a top-quartile or Clearly
Competent candidate would achieve in a Case Study exam. The script is reproduced in its entirety as it
was written.
The important thing in reviewing this illustrative script is to see what can be written in the time
available, and to understand the quality of the answer necessary to achieve a clear pass.

This offers guidance on some techniques and tools that candidates could have used in each skills area
and for each topic in order to enhance their performance. The comments are based on the experiences
of candidates who sat the paper in November 2004.
168
Case Study

These comprise a series of schedules that candidates might have prepared in respect of these
requirements. You would not have been expected to produce all of these in the time available: the
illustrative script shows what a good candidate might have done.
Illustrations of comparative answering techniques

Included in the last section of this Answer Book is a set of example scripts with comments provided on
the key differences between each one. These examples show a range of answers which would be
assessed between Insufficiently Competent, through Sufficiently Competent to Clearly Competent.
A suggested Top Script answer is also provided to reflect the scope in any Case Study to provide a
fuller answer. You should review this progressive series of answers and consider how they differ one
from another so that you can understand their relative qualitative merits, with a view to improving your
answers.
1 Using the Exam Paper

The Exam Paper contained five pages of additional information by way of four exhibits. The new
documents provided to candidates were:
Email from Sonia Adams, JED partner in charge of Elite work, dated 4 November 2004 to Alex
Millar, subject: Elite Cars Limited (Elite).
Letter from Tom Goodenough, a director of Elite Cars Limited, dated 2 November 2004 to Sonia
Adams, concerning operational and financial issues affecting Elite at the current time (a formal
letter).
Letter from Jack Hawkins, a director of Elite, dated 1 November 2004 to his daughter Geri with
copies to Tom Goodenough and Sonia Adams concerning the thinking of Jack and his wife Gillian
on an exit from Elite (an informal letter).
Email from Duncan Ferguson, partner in Ferguson and Duncan, Accountants, dated 28 October
2004 to Jack Hawkins, copied to all other directors and Sonia Adams, subject: Partnership taxation
(a formal document).
Email from Carole Smith, Investment Director of North West Finance Venture Capital, dated 27
October 2004 to Jack Hawkins, copied to Sonia Adams, subject: Elite Cars Limited alternative
funding arrangements (not a full formal document).
C
H
A
P
T
E
R
Through this new information you are informed inter alia that:
Because of a series of different factors concerning Elites business operations and forecasting, the
cash flow forecasts need to be revised
Elite is about to breach the overdraft limit set by the bank
Elite will need to re-work the cash flow forecast and other financial statements ahead of
meeting the bank and NWF.
Jack Hawkins and his wife Gillian have been thinking that with the NWF money and NWF future
participation, they would like to be bought out from the business as soon as possible.
Jack outlines the lifestyle that they would like
He believes their investment in the business is (1m)
He and Gillian have a view on what they would like to receive from the business and when
at least 300K by April 2005.
The partnership tax enquiry has resulted in an additional tax charge of 40k, payable in 30 days or
so
The enquiry has also identified the need to adjust the business accounts for 115k of cars
which are considered to be private assets and not business inventory.
There is on the horizon a further partnership tax liability of 160k for 31 January 2006.
169
Two new alternative financing proposals are provided by NWF in their email:
Both are for an investment of IM in Elite but there are different equity and preference
proportions, and different repayment schedules.
They also state that it is now unlikely that anything can be put in place before January 2005.
NWF also provide the financial criteria that they require: a return of 30% on the total
investment with the helpful prediction that their valuation procedures would anticipate a
projected P/E ratio of 5 on profits before tax.
Apart from this investment assessment criteria and the change of dates the information
contained in this email is identical in format to that provided in Exhibit 7 in the advance
information.
From the analytical work on the Advance Information which should have been done as prior preparation
candidates should have developed a clear picture of Elites financial state of affairs and its business plan.
They should also have been fully aware of the current plans and the immediate future cash flow
situation and the possibility of having to rework the figures. The fact that this is what is being required
in the Exam Paper should have been no surprise.
Using the new information it would first be necessary to make an adjustment to Elites cash flow
forecasts and financial statement projections to take into account the new information.
Although there are a series of adjustments to be made they are all straightforward and none of them
should have taken much time to assess or calculate. Even the implications of the revised tax calculations
only require that the information provided is to be included in the adjustments.
Because the revised NWF offers are in a similar format to the original offer in the Advance Information
your assimilation should also be reasonably rapid. The evaluation of this new information, following the
appropriate calculations should be within all candidates abilities.
1.1
Requirements
You, in the role of Alex Millar are required to prepare a memorandum to Sonia Adams. In Exhibit 15, it
is requested that the memorandum should contain:
1
An analysis of the impact of the new information on the cash flow forecasts and financial
statements already provided for the year to 30 June 2005 (Exhibit 5). You should identify the new
peak funding requirement, provide explanatory notes on any changes you make to the forecasts,
and comment on the proposed conversion of the bank overdraft to a bank loan (see Exhibit 8).
Your proposal, with justification, for the future financing structure of the company, taking into
consideration the matters raised by Jack Hawkins in the attached correspondence and your
evaluation of the proposals from North West Finance.
A discussion of the relevant financial management, operational and strategic issues which may be
of concern to North West Finance when assessing this investment proposal, and how the directors
could address these concerns.
Exhibits 16 18 identified a series of specific items which will affect the cash flow forecasts and
projected financial statements. Exhibit 19 will also have an effect on these forecasts but will need to be
assessed separately.
The following time allocation was suggested to candidates:
Reading and assimilating information
Planning, calculations and preparing any appendices
Drafting memorandum
1 hour
1 hour
2 hours
Given the five pages of Exam Paper to read, the time should have been spent assimilating how the new
financial information fits into the Advance Information. Once you had decided which financial
appendices were appropriate, these should be prepared at the outset, allowing you to write your
memorandum from that information.
170
Case Study
1.2
Approach to the Exam Paper

There are a number of stages to go through in any Case Study exam before starting to write the
detailed answer. These may vary depending on the balance of written and financial exhibits provided in
the Exam Paper but the process is broadly similar every time. For Elite Cars the process would be as
detailed below.
1.2.1
Read the requirements carefully but quickly

This involves reading the requirements in order to understand what is being asked of you and to give
you a context for your skim read of the rest of the paper. From this first reading you should understand
that in the requirements you are being asked to
1
2
3
Re-work the cash flow forecast and projected financial statements for Elite
Evaluate the NWF offer
Consider the financial management, operational and strategic issues facing Elite
This is only a summary and so each requirement will have to be broken down in detail later to understand
precisely what is required.
1.2.2
Skim read the remaining exhibits to see what is available to help produce an answer and
to allow a rough gauge of the complexity of the requirements
Exhibit 16 amplifies and contextualises Requirement 1. This formal letter from Tom Goodenough
provides information concerning current operational and financial matters and the fact that there will be
a meeting between Elite and all financiers in the near future.
C
H
A
P
T
E
R
This exhibit provides the detail for a number of (but not all) the adjustments to the forecasts which will form
the basis for the answer to Requirement 1.
Exhibit 17 is an informal letter from Jack Hawkins to his daughter Geri providing his thoughts about his
(and Gillians) future.
This information is important but not necessarily fundamental to the situation facing Elite. It is relevant new
background information for consideration in Requirement 2. It needs to be assessed when dealing with
Requirement 3 but it is more of a wish list than a financial ultimatum. It may have an impact on
Requirement 1.
Exhibit 18 is formal correspondence from the accountant Duncan Ferguson concerning the immediate
tax liability and potential future tax situation facing the partners.
This information affects Requirement 1: both the cash flow forecast and the directors loan account in the balance
sheet.
Exhibit 19 provides information from NWF on two larger alternative financing offers.
This information is essential for Requirement 2 but the timing and size of these new offers affects Requirement
1.
From this skim read you should be able to assess the complexity of the tasks being requested, how the
various new exhibits and information tie in to each requirement and how your time should be spent.
It should also enable you to consider how your advance preparation (binder) will be integrated into your
report.
1.2.3
Re-read the requirements in detail

This involves reading the requirements and breaking them down into their components.
The components of Requirement 1 appear to be:
An analysis of the impact of the new information on:
The cash flow forecasts

Financial statements already provided for the year to 30 June 2005 (Exhibit 5).
171
Identify the new peak funding requirement:
Provide explanatory notes on any changes you make to the forecasts

Comment on the proposed conversion of the bank overdraft to a bank loan (see Exhibit 8).
The important element is going to be the flexing of the cash flow forecast and the identification of the peak
funding requirement the impact on the other financial statements and the accompanying notes will follow
from that calculation.
It will be important to consider what will be the easiest and quickest way to update this financial information.
Your proposal, with justification, for the future financing structure of the company
Considering the matters raised by Jack Hawkins in the attached correspondence
Your evaluation of the proposals from NWF.
It would appear that this is a clear requirement to assess the NWF offer apart from assessing the
importance of and making a consideration of Jacks correspondence. You will eventually need to tie your
analysis of this offer back to your advance preparation of the initial offer from NWF.
A discussion of the relevant financial management; operational and strategic issues

Which would be of concern to NWF when assessing this investment proposal
How the directors could address these concerns.
The important element of this requirement broadly speaking an overall review of Elites activities and plans
is that it will include some of the outcomes of your work from Requirements 1 and 2 so it cannot be just a
straight regurgitation of a pre-prepared SWOT or other analysis.
This deconstruction of the three requirements will allow you to assess the components of each
requirement and to understand how the examiner would like you to structure your answer, as well as
giving you the detailed framework for your second read-through of all the other exhibits.
1.2.4
Read all the Exam Paper exhibits in detail to ensure full understanding of the information
that has been presented
Exhibit 16 provides the context for the requirements already set out and adds important details which
provide an indication that Elites financial position has become frailer in the short term.
The correspondence from Tom Goodenough states:
Adrian Molar is ill and that his illness has created both an operational and a financial problem
Extra staff (and presumably extra costs) have had to be taken on to cover his key role
Receipts from accounts receivable are running late because he has not been around to ensure
prompt settlement (cumulative effect circa 50k)
Expenditure on non-current assets has been higher than forecast because, although authorised, it
had been overlooked (cumulative effect 45k)
Estimates for overheads appear to be understated (estimated at 10% of total)
Tom is concerned that Elite may breach the bank overdraft limit and he refers back to the bank
letter (Exhibit 8)
Tom refers to the correspondence from NWF
There will be a meeting with financiers next week this fact sets the context for all work to be done
your work will be used in a crucial discussion.
Overall this letter is a comprehensive indication of the start of the work required. It identifies (some of) the
short-term financial problems and the fact that there is very little strength in depth in Elite particularly in the
area of financial management.
172
Case Study
Exhibit 17 is the letter from Jack Hawkins to his daughter (although it has been copied to Tom and
Sonia Adams). It provides details of his thinking about his and Gillians immediate and longer-term
future. He writes that:
They have reconsidered their thinking and would now like to be bought out from the business as
soon as possible
He identifies some immediate cash needs (circa 300k) to pay off their mortgage and buy
additional property
They would need a future annual income of 40k
There are various investment opportunities to achieve the requisite percentage return to provide
that income from their bought out sum
The balance on their capital account is approximately 1m which he would like in three equal
annual instalments
The first instalment should be of at least 300k in April 2005
The remaining capital should be secure but they require an income
In his opinion the business should pay their imminent 40k tax charge settlement as it always has
done
Prima facie this appears to be a crucial and difficult letter identifying their desire to be bought out as
soon as possible. However, this is one exhibit for the assessment of which your professional scepticism is very
important. None of this information was part of the original business plan and so this letter has to be
considered in that context. The details of the letter have to be read as more of a hope than a demand but it
will have to be assessed in answering the requirements.
C
H
A
P
T
E
R
Exhibit 18 is the tax letter from Duncan Ferguson. In summary it states:
There is an additional tax liability of 40k payable imminently (within two months)
An adjustment to inventory must be made of 115k to remove two vehicles from the business
financial statements
A further 160k tax liability will be payable in January 2006.
These adjustments will affect the cash flow forecast; the forecast financial statements and the directors loan
accounts. They appear straightforward but given the directors understanding of financial statements they will
have to be clearly detailed and carefully explained.
Exhibit 19 is the email from Carole Smith of NWF providing details of their new proposals. These are:
Two new offers both of 1m but structured differently in terms of equity split, dividends required
and timings of repayments
The new start date is suggested as January 2005
An NPV method of investment appraisal is to be used
The NWF required rate of return is given as 30%
There are other detailed investment criteria including Elite achieving key financial targets
The detailed reading, actual computation and subsequent analysis of this exhibit will be the essence of
answering Requirement 2 and so it will not be analysed any further here.
173
1.2.5
Consider how you are going to take best advantage of the material assembled in your file
and your Advance Information generally
Each requirement expects you to use or integrate information from the Advance Information into your
answer and report. If you have performed the correct familiarisation procedures on the Advance
Information then you should be able to perform that integration comprehensively and easily.
However, if (for example) you had never bothered analysing or understanding Elites financial forecasts in
advance then both Requirement 1and Requirement 2 would be very difficult to answer in the time frame.
The time guidance from the examiners is just that guidance but the 1hour for reading and assimilating
should include this reflection on integration of all your material prepared as part of advance preparation.
2 Marking key
Under new Competency Based Assessment (CBA) criteria the examiners identify five topic headings
under which marks would be awarded. The total marks available for Elite may be summarised as follows:
Topic
Topic heading
A&UI
SP&S
AJ
C&R
Total
Key points summary
15
Funding requirement
10
25
Future financing structure
10
25
Review for Elite Cars
10
25
Overall paper
10
12
11
40
100
Total
(Key to professional skills: A&UI = Assimilating and using information; SP&S = Structuring problems and
solutions;
AJ = Applying judgement; C&R = Drawing conclusions and making recommendations)
Provided on the following pages is the marking key for Elite.
The original key used to mark this case study exam has been re-written to be more in line with the cope
and layout of the current version of the marking key in order to give students a better idea of the way
skills are assessed and the ways in which they can demonstrate these skills to the satisfaction of the
examiners. The changes in scope and layout of the key aim to improve the marking process but should
not impact the way in which students prepare for the case study or the way in which students tackle the
exam itself.
174
Case Study
CASE STUDY: ELITE CARS - MARKING KEY

DATE
CANDIDATE NO.
TIME
MARKER NUMBER
ES
Req 1
Req 2
Req 3
Overall
TOTAL
CC
C
H
A
P
T
E
R
SC
IC
ID
7
NA
Total
10
10
10
40
CHECKER
SIGNATURE
SUPERVISOR
SIGNATURE
Changes made?
ID = Insufficiently Demonstrated
IC = Insufficiently Competent
SC = Sufficiently Competent
CC = Clearly Competent
Na
iD
lc
Sc
Cc
175
EXECUTIVE SUMMARY
Funding requirements
Future financing structure
Brief background comment on current situation
Sets out bases of NWF options
Explains adjustments (with number)
Gives NPV figure for option 1
Identifies peak cash requirement (with number)
Comments on impact of option 1 / assumptions
Identifies timing of breaches / peak cash requirement

Gives NPV figure for option 2
Impact of NWF funding
Comments on impact of option 2 / assumptions
NA
ID
IC
SC
CC
NA
ID
IC
SC
Appreciates critical nature of cashflow issue
Evaluates J & G calculation and plans
Implications for J & G planned exit
Considers longer term issues
Considers potential bias / professional scepticism
CC
Recognises use of estimates / need for negotiation
Concludes on impact of breaching o/d terms

Concludes on which option to recommend
Makes commercial recommendation
NA
176
Case Study
ID
IC
SC
CC
NA
ID
IC
SC
CC
Financial, operational and strategic review
Brief comment on current internal situation

Considers external factors affecting Elite
Comments on main financial management issue(s)
Comments on main operational issue(s)
Comments on main strategic issue(s)
NA
ID
IC
SC
C
H
A
P
T
E
R
CC
Considers how to address main financial management

issue
Considers how to address main operational issue
Considers how to address main strategic issue

Concludes from NWF point of view
NA
ID
IC
SC
CC
CC
SC
IC
ID
NA
Total
177
REQUIREMENT 1 - FUNDING REQUIREMENTS


Uses relevant AI & EP info to adjust cashflow forecast
AR slowdown (eg 20k Sept, 30k Oct, reverse 50k in year)
Comments on impact of adjusting cashflow

IS: employment costs
IS: overheads / depreciation
Share capital injection delay (500k Nov->Jan)

IS: interest / dividends
Bank loan finance delay (980k Nov->Jan)
BS: NCA
Increase in NCA expenditure (20k Aug, 25k Sept)
BS: inventory
Additional tax payment (40k Dec)

Suggested exit payment to J & G (300k Apr)
NA
ID
IC
SC
CC
Comments on cashflow forecast
NA
ID
IC
SC
CC
Identifies months when o/d breached

Identifies issue of finance delay v bank o/d limit terms
Identifies peak funding requirement

Partnership changed to limited company
Identifies change from bank o/d to bank loan
Partners v directors roles / directors' responsibilities
Explains adjustments / assumptions
Business currently near overdraft limit
Elite position very weak in the short term / variable historically
Own research
NA
ID
IC
SC
CC
Comments on proposed finance
NA
ID
IC
SC
CC
Deteriorating cashflow position

Problems caused by errors and delays
Taking up new funding from NWF will ease cashflow
Loss of control if new funding accepted
Bank o/d will need to be renegotiated
NA
178
Case Study
ID
IC
SC
CC
APPLYING JUDGEMENT
Considers / explains implications for J & G
Elite is running out of cash / profit & BS overstated
Considers implications for future shareholders
Cash flow problem exacerbated by exit plans
Considers implications of breaching o/d terms
Short time frame for action / renegotiation with bank
Cashflow is a critical issue for Elite
Elite should not be operating at max o/d level all the time
Considers critical nature of profit calculation
Further breaches may trigger personal guarantees
Considers need for sensitivity analysis
NA
ID
IC
SC
CC
NA
ID
IC
SC
CC
Recognises linkages between areas

AR delay v staff cover and ability
Ensure forecast figures correct / need for staff training
Errors on NCA forecast v staff competence

Need to prepare longer term forecasts
Effect of NWF timing v bank terms
Try to renegotiate continuation / new o/d terms
Profit overstatement v loan and VC criteria

Bank loan conditional on getting NWF funding
Implement profit & cash monitoring to avoid breaches
J & G exit terms will breach new o/d limit
Consider slowing payments to creditors
NA
ID
IC
SC
C
H
A
P
T
E
R
CC
NA
ID
IC
SC
CC
Appreciates possible bias / scepticism

Forecasts prepared by Elite management
Possible over-optimism on sales and receipts
CC
SC
IC
ID
NA
Total
Pressure not to breach o/d terms

Adjs from a letter / not confirmed by JED
Known 'errors' already / poor staff supervision?
10
May be further (as yet unknown) adjustments
NA
ID
IC
SC
CC
179
REQUIREMENT 2 Future financing structure

ASSIMILATING AND USING INFORMATION

Comments on options
Uses relevant AI /EP information

Calculation of information re directors
Considers partial exit / issue of ptnrshp final tax liability
Recalculate J's estimate of balance 'invested'
Considers appropriateness of NWF's use of NPV
Need to fund tax bill
Considers timing and amount of funding from NWF
Impact of tax bill on directors' loan account
Considers timing and amount of ord/pref dividends
Adjust for vehicles (115k)
Considers final repayment of equity finance
Contra vehicles adjustment against loan

3 X equal annual instalments of balance on loan account
NA
ID
IC
SC
CC
Pros and cons of options from Elite's position
NA
ID
IC
SC
CC
Criteria set by NWF

Option 1: greater loss of equity control / less demanding
cashflow

Jack's letter is just a 'wish list'
NWF - original proposal needs to be considered
Option 2: more at risk from lack of cashflow / less loss of

control
NWF - new options to be considered
Initial option: apparently no longer on offer
Relate Elite to the wider economy
Explain assumptions
Own research
NA
NA
ID
IC
SC
CC
ID
IC
SC
CC
Pros and cons of options from NWF's position

Criteria: 30% return & PE=5
Option 1: marginally greater NPV than option 2
Option 2: payback faster (given uncertain forecasts) than
option 1
Initial option: highest NPV but no longer offered
Explain assumptions
NA
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IC
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APPLYING JUDGEMENT

Draws conclusions
Evaluates J & G calculations

J's figure of 1m is not correct / needs explaining to J
J & G need to adjust their expectations
Balance after adjustment is significantly lower (629k)
Concludes on which option to recommend
After requested payout (300k) balance is 329k
Elite would be weaker after refinancing
Financial expectations seem over optimistic
Risk for Elite would be higher after refinancing
Currently have 'soft' directors loans (no pressure to repay)
Difficult for both Elite and NWF to be happy with deal
Would change to formal external debt financing
NA
ID
IC
SC
CC
NA
ID
IC
SC
CC
Considers other factors / options

Elite has short term cashflow problem
Look for a longer-term solution with the bank
Currently in a weak bargaining position
Negotiate a revised (smaller) option with NWF
Long-term plans seem unrealistic
Reconsider J & G exit plans (consider partial exit)
Changes in financial structure not fully thought through
Reconsider all expansion plans
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Loss of J & G expertise will impact business

NWF may not want to pay J & G to leave
NA
ID
IC
SC
CC
NA
ID
IC
SC
CC
Demonstrates professional scepticism

Calculations all based on estimated financial forecasts
Final equity calc based on average estimated earnings
Discount factor (30%) used in calc seems high
New NWF options are double original / too much?
Directors need to have realistic requests
Parties involved have very different agendas
NA
ID
IC
SC
CC
SC
IC
ID
NA
Total
10
CC
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REQUIREMENT 3 Financial, operational and strategic review

Uses AI & EP to identify internal situation

Comments on financial management issues
Recently changed from ptnrshp to ltd company
Close to/breaching bank o/d terms
Mature business looking to expand
New financing depends on accurate forecasts
Directors seeking an exit
Limited awareness of S/T and L/T cashflow issues
Facing financial and operational choices
New finance means new business structure
Future is uncertain
Potential onerous personal guarantees
NA
ID
IC
SC
CC
Identifies wider business issues
NA
ID
IC
SC
CC
Comments on operational issues
Affected by strength of local economy
Staffing: range of skills / supervision / key people
Affected by motor industry trends
Systems: new technology / insurance requirements
Affected by insurance industry trends
Dependent on J & G expertise
Affected by world oil prices / interest rates
Vulnerable to competition / low barriers to entry
Affected by UK / global recession/growth
Increasing geographical spread may stretch resources

too far
NA
ID
IC
SC
CC
NA
ID
IC
SC
CC
Comments on strategic issues

Components of expansion plans
Timing of expansion plans
Consideration of realistic alternative plans
Considers priorities / critical factors
Consider 'essential' v 'preferable' plans
NA
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ID
IC
SC
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APPLYING JUDGEMENT
Addresses financial management concerns
Forecasts should be re-done
Current position is marginal
Sensitivity analysis needed / best & worst case scenarios
Expansion plans probably too optimistic and unnecessary
Plan for future cash requirements
Concludes on main financial issue
J & G need to reconsider exit plans
Concludes on main operational issue
Need to reconsider expansion plans
Concludes on main strategic issue
Need to plan for 'what if' contingencies
NA
ID
IC
SC
CC
NA
ID
IC
SC
CC
Addresses operational concerns

Detailed SWOT / PESTEL analysis review needed
Better if J & G remain at least part-time
JED could help with this
Need for further market research
Identify major weaknesses and threats
Consider diversifying away from luxury end of market
Plan for these scenarios
Reconsider expansion plans / develop existing location
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Succession planning needed for key staff

Address staff training issues / supervision needed
NA
ID
IC
SC
CC
NA
ID
IC
SC
CC
Addresses strategic concerns

Review strategy
Consider possibility of major external changes/issues
Research planned area of expansion
Consider existing business potential
J & G leaving may be a deal breaker for NWF
NWF will eventually want an exit route
NA
ID
IC
SC
CC
SC
IC
ID
NA
Total
10
CC
183
Appendices
Main Report
Appendices R1: Content and style
Report: Structure
Adjusts monthly figures for forecast cashflow
Sufficient appropriate headings
Adjusts annual forecast income statement
Appropriate use of paragraphs / sentences
Adjusts projected year-end balance sheet
Legible
Assumptions stated where appropriate
Correctly numbered pages
NA
ID
IC
SC
CC
Appendices R2: Content and style
NA
ID
SC
CC
Report: Style and language
Logical approach and numbers clearly derived
Doesn't need disclaimer (internal report)
Well presented and labelled
Suitable (formal) language for audience
NPV and payback for option 1
Tactful / ethical comments
NPV and payback for option 2
Reasonable spelling / grammar
NA
ID
IC
SC
CC
NA
ID
CC
SC
IC
ID
NA
Total
184
IC
Case Study
IC
SC
CC
3 Illustrative script
3.1
Elite Cars: sample script

The script which follows has been included to provide an example of the sort of answer that candidates
manage to achieve when sitting the Case Study examination.
Rather than showing an unrealistic model answer written by the examiners which could not be
achieved under normal exam conditions, this students script is included to try to show the sort of
answer that is written by a successful exam candidate.
The script is that of a top-quartile or Clearly Competent candidate

It is reproduced in its entirety as it was written
It is marginally shorter than the average script
Overall the important thing is to see what can be written in the time available, and to understand the
quality of answer necessary to achieve a Clearly Competent pass.
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Elite Cars: sample script

7
Memorandum
TO:
SONIA ADAMS
FROM:
ALEX MILLAR
DATE:
5 NOVEMBER 2004
RE:
ELITE CARS LTD
Sonia
You have asked me to prepare a memo concerning the following points:
An analysis of the impact of the new information on the cash flow forecasts and financial statements
for the year to 30 June 2005.
Proposal for future financing structure of Elite Cars Ltd.
A discussion of the relevant financial management, operational and strategic issues.
The key issues and conclusions drawn are summarised below.

Analysis of financial forecasts
The new information results in a lower profit before tax and places significant strain on short-term
cashflow causing the temporary overdraft limit to be breached.
However the additional venture capital available results in a more healthy cash position, albeit with
additional future obligations (to pay Jack and Gillian Hawkins) and to redeem preference shares.
The conversion of the bank overdraft to a loan is strongly recommended to facilitate payment of these
obligations.
Financial structure
The decision of Jack and Gillian Hawkins places significant pressure on finances of Elite.
Large percentage of directors loans will become current.
Existing shareholders will be reluctant to lose control so may be required to purchase equity, which could
potentially lead to conflict.
NWFVCF could be offered a proportion of equity but this is unlikely to appeal to current shareholders.
Recommended that Jack and Gillian sell shares to Tom/Gerri to retain family control of business.
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Funding (loan) from Lancashire Bank represents vital method of alleviating liquidity problems and is
essential.
Of the 2 financing options from NWFVCF, option 1 is considered preferable as it smoothes the cash flows
required for redemption of preference shares (although it does reduce shareholders' equity stock).
The structure is effectively a balance between the need of the company to meet its obligations and the
needs of the shareholders to retain equity.
Operational and strategic issues
NWFVCF will need to see better control over financial management which may warrant the appointment
of an FD and the creation of a finance department.
The loss of Jack Hawkins is a significant operational concern and NWFVCF will need to be assured that
the business can continue without him.
The proposed website and geographical expansion are inherently risky and NWFVCF will need to be sure
that the management skills are in place to make the changes.
It is possible that Jack could be appointed as a non-exec.
Conclusion
Elite Cars Ltd is experiencing short-term liquidity problems, however financing options are available which
can resolve these problems.
The business has strong past growth and an ambitious business plan.
The success of the plan has been threatened by recent operational issues.
Analysis of financial forecasts
The key impact of new information on the forecasts is to delay the timing of the investment thereby putting
pressure on the companies cash flow in the short-term.
The key adjustments made are shown in Appendices l to lll and discussed in detail below.
Forecast profit for the period has been revised downward to 247,000 reflecting an under-estimation of
overheads.
The delay in receiving venture capital has stretched the cashflow to a maximum required overdraft of
1,373,000. This is in excess of the limit currently in force, however Lancashire Bank have not advised of
any issues with the current level of overdraft.
The conversion of the overdraft to a loan is contingent on the receipt of venture capital from NWFVCF, and
hence if this offer is not accepted it is likely that Lancashire Bank would not allow a continuing breach of this
facility and may potentially call in receivers.
Upon receipt of additional finance and conversion of the loan the cashflow situation significantly improves
and the overdraft is effectively replaced by a large cash balance.
However, this is quickly eradicated by the need to repay Jack and Gillian Hawkins 33k of their stake in the
company.
The overall effect of new information is to improve the cashflow situation, however it will put a greater strain in
the short term on the cash position.
The conversion of the bank loan to overdrafts is recommended as although cash position is strong after
conversion significant liabilities exist in the short term for which funds are required.
Proposal for financing structure
The structure of Elites finances depend to a large extent on the motives of each of their financiers.
The most significant players will be the current shareholders, however Elite does have a very pressing need for
cash in the short-term which will have a significant effect on finance levels.
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Current shareholders
The news that Jack and Gillian Hawkins wish to divest their shareholding in the business creates a problem as
a buyer will need to be found for their shares.
Of the 1m stake they have invested in the business they have 784,000 of loans. This will need to be repaid
and creates a significant extra cashflow obligation in the short-term.
The need for finance is compensated by the other shareholders, particularly Geris, need to retain the bulk of the
equity.
Tom Goodenough is already highly indebted and is unlikely to be able to purchase the shares of Jack and
Gillian Hawkins.
Geri Hawkins has a more carefree attitude to debt and has been looking to invest in a buy to let property, so
may be prepared to purchase her parents share capital.
The share capital of 250,000 could not be sold for less than nominal value however and represents a
significant investment.
An alternative would be to offer a proportion of shares to NWFVCF to increase their equity stake, however this
is unlikely to appeal to either of current shareholders.
Hence it is recommended that Jack and Gillian Hawkins shares are sold to Geri at nominal value and debt
finance is sought to cover the remaining obligation.
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In this way the current shareholders retain control, although Tom Goodenough is likely to be unhappy in this
situation.
Lancashire Bank
The proposal from Lancashire Bank will help to alleviate short-term liquidity problems whilst increasing
overall gearing.
This will be particularly important in light of the fact that part of the directors loan is now short-term.
Although the adjustments made to forecasts do impact profit before tax they are unlikely to reduce returned
earnings below 100k.
In light of the new finance deal neither are any of the other covenants likely to be breached.
If short-term concerns regarding the overdraft limit can be resolved it is recommended that the loan from
Lancashire Bank is taken up to alleviate short term liquidity problems.
However this offer is contingent on the receipt of finance from NWFVCF.
North West Finance Venture Capital Fund (NWFVCF)
The revised offer from NWFVCF will help alleviate the cashflow problems previously discussed.
However NWFVCF have stated that they require a return of 30% p.a. on their investments.
Based on the forecasts initially prepared by Adrian Molar neither of the two options are likely to achieve this
return (see Appendix IV).
Option 1 achieves the high return and is likely to be the preferred option by NWFVCF.
However option 1 will require the current shareholders to give up a greater % of the equity.
An advantage of option 1 for Elite however is that the redemption of preference shares is spread more evenly
across the period of the deal reducing the initial cashflow burden.
Hence, in light of the decision of Jack and Gillian Hawkins to sell their equity stake, option 1 may be the
preferred option as, although it does reduce shareholders equity stake in total, it is likely that individually
their stake will have increased anyway.
It also smoothes cashflows and also is more likely to be obtained as it represents a higher return for NWFVCF.
Financial management, operational and strategic issues
The business plan represents a significant change in the Elite business from a local to a national player.
187
Financial management
As a result of the new financial structure proposed and the high gearing of the company, working capital will
need to be very tightly managed.
Adrian Molar may not be able to deal with the new challenge and NWFVCF may want to consider the need for
Elite to expand its finance department to be able to stick to budget.
There is already some doubt concerning Adrian Molar as he has made errors in preparing forecasts.
The directors can address this concern by recruiting a new finance director to improve financial control.
There is also risk that Elite may end up over-trading as a result of the proposed new venture.
The appointment of a finance director is likely to appease NWFVCFs concerns.
Operational issues
The current car sales business is reliant on Jack Hawkins personal contacts for sales and with the likely loss of
Jack from the business this may cast doubt on the achievability of the forecasts.
The directors will need to demonstrate that the network of contacts still exists and is not dependent on Jack.
Another key operational issue will relate to the proposed interactive website.
NWFVCF will need sufficient evidence that Elite have the skills to operate such a website and that it will be of
sufficient quality not to damage the strong reputation of the company.
Prices of classic cars are also volatile and NWFVCF may want some kind of sensitivity analysis performed on
the forecasts to provide comfort.
Strategic issues
The move into a new geographical area is inherently risky as there is
lack of local knowledge
lack of contacts/brand not well-known
difficulty of managing multi-locations.
NWFVCF will require evidence that demand exists in the new areas and management are equipped to handle a
national operation.
Reports should be produced re: demand in the new markets to provide comfort.
The key concern will be the management structure and on departure of Jack and Gillian a new management
structure needs to be agreed which NWFVCF are likely to believe have the competence to drive the business
forward.
Other issues
A key concern may be the relationship between Tom and Geri.
If one becomes the majority shareholder will the two be able to work together.
NWFVCF may even wish to consider appointing Jack Hawkins as a non-executive director to ensure smooth
running of the business.
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Appendix II : Revised P&L Y/E 30 June 2005

Note
Per forecasts
000
Sales
Adjustments
Dr
Cr
Revised
000
19,569
19,569
1,221
1,221
642
219
861
PBIT
579
219
360
Interest & fees
113
113
Profit before tax
466
219
247
Gross profit
Overheads
4/7/8
Appendix III : Revised balance sheet y/e 30 June 2005

Note
Per forecasts
000
Fixed assets
1,990
Stock & WIP
1,768
Debtors
Adjustments
Dr
Cr
45
Revised
000
2,035
115
1,653
1,334
1,334
Creditors
(1,788)
(1,788)
Bank loan/odraft
(1,084)
500
(894)
300
Directors loan
Share capital
Retained profits
1,000
326
345
(929)
(594)
500
219
1,326
1,500
247
1,747
Explanatory notes : Appendices II to III

1.
Sales receipts are running 50k behind plan at the end of October 2004, but are expected to be recovered
by April 2005.
The October sales receipt figure has been adjusted by 50k and the subsequent 5 months receipts have
been uplifted by 10k.
2.
The proceeds of the share issue will be significantly increased by the new NWFVCF offer although it will
occur later.
3.
The loan from Lancashire Bank is contingent on the availability of finance from NWFVCF so its receipt
will be delayed.
4.
Overheads have been inflated by 10% as understated by A Molar.

Overheads relating to the share issue have been delayed to January 2004.
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5.
Additional capital expenditure has been incurred in August and September 2004.
6.
Jack Hawkins requires repayment of 300k from his stake in the business by April 2005.
7.
Class 1a NICs overdue on cars used by Jack Hawkins are overdue.
8.
Cars not belonging to business have been capitalised in the B/S but should have been charged as wages.
Case Study
Appendix IV : Return on NWFVCF Investment

Option 1
'000
PBIT in 2009 per forecasts
Value using P/E ratio 5
NWFVCF share = 23%
1,102
5,510
1,267
Cash flows
2004
2006
2007
2008
2009
59
71
86
102
1,267
42.5
85
(1,000)
42.5
144
57.5
300
428.5
40
300
426
DF @ 35%
PV
1
(1,000)
0.74
31.45
0.55
79.20
0.41
175.48
0.3
127.80
0.22
358.82
NPV =
(227.25)
0.769
0.591
0.455
0.350
0.269
32.68
85.1
194.970
149.10
438.8740
A ordinary
(150)
Preference shares
Dividend
Redemption
(850)
DF @ 30%
PV
(1,000)
NPV =
IRR
2005
12.5
250
1631.5
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(99.28)
(227.25)
35% +
x (30 - 35)
(227.25) - (99.28)
= 26.1%
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Option 2
Cash flows
NWFVCF share = 16.7% in 2009 = 920.17
2004
A ordinary
(100)
Preference shares
(900)
2006
2007
2008
2009
59
71
86
102
920
45
90
(1,000)
45
149
65
500
636
30
200
316
10
200
1232
DF @ 35%
PV
1
(1,000)
0.74
33.3
0.55
81.95
0.41
260.76
NPV =
(257.97)
DF @ 30%
PV
1
(1,000)
0.769
34.605
0.591
88.059
0.455
289.38
NPV =
(145.948)
Dividend
Redemption
IRR
35% +
(258.15)
(30 - 35)
(258.15) - (145.94)
= 23.5%
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2005
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0.3
94.8
0.350
110.6
0.22
271.04
0.269
331.408
4 Commentary to illustrative script

st
1 quartile candidate
The commentary below follows the order and numbering of the script, with references to the topics in
the marking key. Spelling, punctuation, arithmetical and other errors from the original have been
retained.
Examiners comments
This script was assessed as Clearly Competent. It is considered to be a strong pass within the parameters
of the assessment which contains the attributes of being a well-structured, concise yet complete report.
It includes clear logical analysis, with appropriate balance between numerical and narrative elements.
At a total of nine typed pages, four of which were narrative and five computational pages (the
appendices), this was a shorter than average script. However it contained the essential elements which a
partner would have needed ahead of the meetings with the client, the bank and the financiers.
4.1
Summary of key issues [Topic 1]

The memorandum format, the title and the summary of the contents of the report are set in a clear and
professional manner with no wasteful, extraneous information.
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The key issues are enumerated in a logical and succinct list of expanded points. The summary is properly
divided into the relevant sections and contains the important information and conclusions that result
from the analysis performed. Any reader coming fresh to this report is informed of the major issues
facing Elite Cars before reading the detail of the report which is the purpose of such a summary.
Improvements could have been made to this summary by including the key financial facts stemming
from the appendices to this report; this would have provided a numerical context for the reader.
Given the quantity of financial analysis which is contained in this report it is a pity that these financial
details were omitted. Furthermore some simple cross-referencing in the summary would have helped to
guide a reader to the sources of the key issues.
The points contained in this summary appear to have an order of priority under each of the headings.
These specific points are also put into the context of the past success and future plans of this business.
This would enable the partner, Sonia Adams, to identify the work and discussions that should follow
with this client and its financiers.
Overall this is an informative and structured summary containing clear conclusions and tailored, in large
measure, to its recipient.
4.2
Funding requirements [Topic 2]

This section which is headed up Analysis of financial forecasts contains a clear series of points which
follow from the financial calculations performed.
The section starts with the key issue the pressure on the companys cash flow and then,
appropriately, refers the reader to the relevant appendices that provide the numerical detail.
These appendices, which are assessed under the Overall section, form an integral part of this report and
show the amended financial picture.
Appendix 1: Revised Cash flow Forecast, is re-worked on a monthly basis, indicating the cash peaks and
troughs. This detailed information is essential for control and planning purposes and an informed reader
can clearly see the critical result. The short notes accompanying the forecast provide an appropriate
level of detail for the reader and indicate the thinking behind the calculations.
However, combining adjustments with the original information does result in some loss of clarity. As a
matter of technique it would be better to show all the adjustments in the cash flow forecast on separate
lines rather than adjusting previously provided figures such as the sales receipts. This would clarify the
forecast, speed up the calculations and reduce the risk of mathematical errors.
193
Appendix II: Revised Profit and Loss Account, and Appendix III: Revised Balance Sheet are shown on an
annual basis only, which is entirely appropriate and demonstrates sensible professional judgement and
good mathematical and exam technique.
Although all of these appendices do contain some errors they provide a clear picture of the impact of
the new information on the financial position and potential future for Elite. They are assessed as a
combined Appendix for Requirement 1.
Good use is made of this numerical information in the remainder of the written analysis in this section.
The candidate considers those factors which will alleviate and those factors which will weaken the cash
flow position and identifies the impact on future profit. The candidate demonstrates good judgement
here. One possible weakness is that no comment is made about the situation beyond the next twelve
months.
Overall this is a strong section with good use of Advance and Exam Paper to flex the financial forecasts
and then to analyse the key impact of the changes. The analysis is logical, there is evidence of good
judgement and clear conclusions and these points are carried forward into the summary presented to
the partner.
4.3
Future financing structure [Topic 3]

This section draws together analysis of the position of each of the main parties. It identifies how the
parties may be affected by, and respond to, the new developments. There is good evidence of
integration of advance information and Exam Paper in this analysis.
The position of the current shareholders is considered with the assumption that the exit of Jack and
Gillian is a foregone conclusion. Given the context of that assumption the analysis is logical and
consistent with previous case information this error in the assumption concerning their exit was a
common error amongst candidates. Importantly in the case of this candidate the issue is also dealt with
in the review of financial management, operations and strategy section, where a recommendation is
made to maintain Jacks future involvement in the business.
The consideration given to the Banks position with regard to its overdraft and proposed loan is also
appropriate. The candidate identifies the fact that Elite will not breach its bank covenants but
emphasises that bank finance is contingent upon the NWF financing thereby demonstrating an
understanding that all these elements are conditional upon one another.
The candidate also identifies the potential change and weakening in the structure of the balance sheet
identifying that there will be a change from long-term to short-term liabilities.
The review of the offer of finance from NWF is closely tied into the calculations shown in Appendix IV.
This appendix analyses the returns which might be expected by NWF, using the IRR method of
appraisal, and is correct in principle. Performing an NPV calculation using the criteria provided by NWF
would probably have saved time.
Unfortunately no notes are provided to accompany and explain the calculation which, if this schedule
were to be used in any eventual discussion with the client, might well prove to be necessary. As in any
report it is always important to explain any assumptions being made particularly where the
assumptions involve matters of judgement.
The time value calculation is reviewed in the narrative section together with an appropriate
consideration of cash flow implications of these two new options, and the conclusion given is logical.
This section is a comprehensive attempt to assess the future financing of Elite. It is a good section of the
report.
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4.4
Financial management, operational and strategic review [Topic 4]

The candidate makes use of the Advance Information and integrates it with the Exam Paper to provide
evidence of familiarisation with the case material in this section. From the outset this section identifies
the significant changes that are being proposed as Elite attempts the transition from local to national
player.
There is a clear review of the current roles and importance of the key people in Elite Cars as regards
financial management and operational issues. The need to strengthen the financial team (given the
apparent weaknesses of Adrian Molar) and the need to avoid weakening the operational team (which
would occur with the departure of Jack and Gillian Hawkins) are essential points.
The issue of over-stretching is also clearly identified and reviewed in terms of technology, geography
and direction. These matters are all placed in the context of NWFs probable concerns over these
matters and suggestions are given to alleviate those concerns.
4.5
Throughout this section there is logical analysis, sound judgement and some good conclusions and
recommendations under each sub-heading, which are carried forward into the key points summary.
This is another good section of this report.
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Overall [Topic 5]
Appendices
Detailed commentary on the appendices has been included above, but it is worth stating that overall
this report made excellent use of appropriate financial appendices this candidate had created the
numbers and then made them talk.
Overall
This is a well-structured report with clear headings and divisions which addresses all of the major issues
requested by Sonia Adams. Importantly, as a partner knowing this client, she would have been able to
work with (and on) this report. The main points have all been covered there is room for improvement
but no doubt would exist about the concerns over this clients position. The financial appendices
demonstrate a shrewd use of basic skills and time-saving ability. The balance between numerical work
and the written analysis in this report appears appropriate.
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5 How to improve your answer

5.1
Overall
The case of Elite Cars concerns an established four-partner partnership making the transition to limited
company status ahead of refinancing necessary to pay for an expansion and upgrade of activities.
The business operates in three interrelated areas: luxury car sales; a luxury car replacement service;
executive limousine hire. Apart from the partnership history the nature of the business is relatively
straightforward and easy for candidates to understand. The case scenario was set by the fact that Elite
has a strategic plan for expansion and upgrade of its activities which require increased bank overdraft
facilities and an injection of finance from NWF this created the need to become a limited liability
company.
To ensure that the context was fully explained a candidate would need to understand and emphasise
that in Elites financial future:
The bank overdraft and NWF finance funds are dependent on certain financial criteria being met by
Elite
The two external sources of finance are interdependent
The external financing was being provided to meet the details identified in the current business
plan
The general case requirements were clearly going to centre on the future financing of this business. In
fact, the requirements comprised:
A recalculation and review of the monthly overdraft forecast and projected financial statements
An appraisal of the NWF offer(s)
A financial management, operational and strategic review of Elite.
A keynote summary for the partner, Sonia Adams, was also required.
To be successful, candidates would have needed to produce a well-balanced and focussed answer to the
main requirements and to answer the questions being posed without becoming submerged in
unnecessary detail. In general terms this required:
Working efficiently and effectively through the details of the material changes to Elites cash
position and financial statements. This did not mean re-writing the existing full 12-month existing
cash flow statements before adding any changes which would put a candidate under heavy time
pressure and achieve very little.
Writing a clear set of explanatory notes to accompany the cash flow statement changes. This
would mean explaining succinctly which adjustments had been included and why.
Calculating and evaluating the NWF offer using only the terms of reference and the method
provided. This meant focussing only on what was asked, not on what a candidate had preprepared and was determined to include in any event.
Performing an effective review from the perspective of NWFs concerns which would be any
perceived weaknesses or threats and providing suggestions for overcoming these concerns. This
evaluation had to include the effect of the information from the Exam Paper exhibits in order to
obtain good marks.
The fact that Elites monthly cash flow forecast had been included in the Advance Information, together with
the forecast financial statements, should have alerted all candidates that they would need to understand
Elites financial information in detail. Flexing that financial information in accordance with any changes
identified should have been an obvious potential requirement.
In the Elite case, as in all Case Study exams, there were requirements to perform financial analysis both
financial data analysis and financial statement analysis. In this case the financial data analysis was an
examination of the NWF offer. The financial statement analysis was focussed on the forecasts which
had to be flexed before further analysis which identified the potential problems of cash flow
management and loss of control to outsiders.
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To write a good answer for Elite required solid financial common-sense and the application of
fundamental techniques to a typical business situation: the evaluation of the financial position of a
business ahead of meeting(s) with its financiers. There was a need to review, amend and then comment
sensibly on the financial position of the business. A candidate should not be intimidated by apparent
complexities such as taxation its impact is straightforward. This case required a series of financial
adjustments and evaluations before commentary. It was essential to have done these calculations
accurately first before being able to make the numbers talk you must prepare the numbers to talk
about.
Overall in order to maximise success in this case where a lot could be written on any one section it
would be important to plan how to use the four hours available to answer the case and to control the
time on each topic. Self-induced time pressure can be avoided by planning the work and writing the
balanced answer required in the time available. Proper planning, a vital part of good exam technique,
avoids the problem of weak answers to the last requirement and a short/poor executive summary.
To improve an answer or to achieve a good result scripts needed to be accurate, succinct and relevant;
dealing with the requirements set, and with an average length of 15-20 pages (including 3 or 4 pages
of appendices). In the case of Elite, which was relatively easy to understand but where time could easily
be lost through poor exam technique, a weak final section and a poor summary would have been
evidence of poor planning.
5.2
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Integration of prior work from your binder

There was certain preparatory work that would have helped your answer including:
5.3
A prior evaluation of the business using PESTEL and SWOT
A good understanding of the NWF financing offer and of the related business valuation models and
time-value techniques essentially a dry-run calculation
A good understanding of Elites cash flow forecast and their projected financial statements
New exhibits and professional scepticism

There is a need for some professional scepticism concerning the new exhibits and information contained
in them, together with a reflection on the information previously studied:
The letter from Jack to his daughter is an informal one a wish to exit in the near future.
Both NWF and the bank requested key man insurance as a condition for funding the business
meaning that they would not expect key people to leave in the short term
All the financing is intertwined, including the conversion of directors loans to equity to
provide an integrated long-term financial commitment.
These conditions should have alerted candidates to the fact that none of the directors would be allowed, by
the financiers, simply to pick up their bags (full of newly provided cash for expansion) and to walk away
they would be required to stay to ensure the success of this venture.
Overall the immediate main challenge was for Elite to be able to present itself as being financially sound
to ensure that all the necessary financing would be forthcoming.
Given the existence of errors in the forecasts on which all of the funding depends this should make JED
sceptical about full reliance on the current information.
5.4
5.4.1
Professional skills
As in all Case Study examinations, to achieve a good result a candidate needed to demonstrate
good familiarisation with this changing business. Good familiarisation would involve demonstrating
full assimilation of the Advance Information this would have involved working through all the
numbers provided very carefully.
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5.5
The key to saving time in the exam was to know and understand the financial story of this business
in detail.
An understanding of the broader scenario and the need to have conducted additional research was
limited. An awareness of the competition, such as Bristol and London plc (a company similar to
Elite and listed on AIM), and the fact that there are low barriers to entry was good background
information, as was an understanding of the strength of the local economy.
A candidate needed the basic knowledge of how to calculate an NPV based on the criteria
provided.

Candidates were required to perform both flexing of numbers and a calculation before analysing the
situation for Elite. Candidates would maximise their success by:
5.6
Providing good financial statement analysis after the flexing of the numbers as indicated this
would involve deciding which numbers were to be adjusted and which aspect of the financial
statements would need amending
Delivering good financial data analysis, particularly the evaluation of the future NWF financing of
the business
Writing clear explanatory notes throughout to provide the requisite depth of written analysis for
Sonia Adams and the Elite directors.
Using part of the prior identification of the strengths and weaknesses of the business this would
have speeded up the analysis of Elite from NWFs point of view:
Many of the strengths were apparent in the business plan
Identifying Elites weaknesses which could be seen from the Advance Information but they
became explicit in the Exam Paper.
Applying judgement
In all Case Study examinations, judgement is a crucial area and frequently the weakest area for
candidates who fail. There are areas where weak candidates do not state any judgements at all and
there are always examples of erratic judgement. In order to achieve a good result in this case,
candidates would have had to make sensible judgements from the information provided and their
subsequent analysis. Providing evidence of clear judgement is a key skill in this case, That judgement
would include the following points and must:
Identify and establish the provenance of each of the new exhibits in this case
Demonstrate an understanding that the correspondence newly provided came from a range of
different sources:
Some was very important and signalled specific problems, which had to be acted upon such
as the information contained in Toms letter
Other correspondence should not have been treated with the same degree of formality such
as Jacks letter which was best considered as a wish list but which needed diplomatic
handling
Consider and explain that there would be no possibility of either the bank or NWF providing
finance to Elite to allow Jack and Gillian to exit in April 2005 and create both additional financial
strain and an operational problem of continuity for Elite.
Consider the implications of accepting the new higher level of funding being offered by NWF:
On the one hand, more funds may appear to solve one problem
On the other hand, the current owners of the business lose control
A candidate would need to understand, make this judgement and advise Elite accordingly.
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Identify the areas of concern for NWF (Elites weaknesses and threats) and judge their importance
for Elite and how they might be dealt with by Elites management.
Case Study
5.7

In order to achieve a good result a candidate must provide clear conclusions and recommendations
throughout each section of the report and bring all conclusions and recommendations together in the
key points summary. Candidates maximise their chances of success by:
Always drawing conclusions and making recommendations for each topic which follow on logically
from their analysis and judgement
Bringing all their conclusions and recommendations together in the executive or key points
summary and providing a brief cross-reference from each topic into those overall conclusions and
recommendations
Having the confidence to follow through from their previous work and the situation as it exists in
the case. Something has to happen following the analysis and judgement; for example:
A recommendation must be made to Elites directors that they must meet and agree on
collective action
New negotiations must happen with the bank immediately
A decision must be made over which elements of expansion should continue
The offer of finance from NWF has to be evaluated and a recommendation made
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5.8
Topic 1: Summary of key issues

The key point summary is often a guide to the quality of the rest of the report. In order to maximise
success in this section, you would have needed to:
Ensure that you allowed enough time to complete an appropriate summary identifying the crucial
issues
Provide the key numbers from your analysis, properly cross-referenced to the appendix or to the
body of their report
Include all the essential points of your judgements, together with clear conclusions and
recommendations for Elite in a succinct manner
Specifically for Elite the following points were essential:
With an internal memorandum to an informed reader you would not need detailed or lengthy
terms of reference.
The numerical information and the course of action suggested to the partner must be sharp.
The partner will follow this report through with Elite your report must contain clear business
advice.
The immediate cash crisis may be solved very easily, by tighter cash management of cash
payments
The maximum change in negative flow due to trading is just over 50K per month
The other issues identified concern the forecasts and Elites planned activities many of which
are embryonic and can be changed with justifications: the planned expansion, the capital
expenditure, the exit.
Cash outflows identified could be postponed and would only occur when the cash was there.
There was a need for basic business common-sense in these recommendations:
Elite has a significant monthly cash flow more than 1.5M passes through the bank both
ways in a normal month
By holding back on paying creditors for just a few days the business may not reach its
immediate overdraft ceiling, or may just graze it and recover
By good daily financial management Elite may avert a difficult meeting with the bank.
Elite has had the ability to grow organically in the past: it can do so again in the future
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Organic growth would avoid: the external shareholders pressure, any loss of control, the punitive
NWF rate of return of 30%
You needed to state the sensitivity of the NPV numbers to the projected profit (especially in 4 or 5
years time)
You could state that JED had a key role to play at this time by:
Steering the Elite directors to accept their new responsibilities
Helping to create a cohesive management team, during this transitional phase.
Given that all of the issues in this case appear to have been identified only recently perhaps a good
starting point would have been to perform a detailed review of the forecasts and their plans.
The lack of really good internal financial management is apparent, and you should recommend
that the business appoint an appropriate person as soon as possible a good final point.
By pulling together all of the numerical and written work from the three main sections in the body of their
report, identifying the judgements made and presenting an overall set of conclusions and recommendations
which built on each other in the key points summary a candidate would have demonstrated a logical and
progressive approach to answering the case.
5.9
Topic 2: Funding requirements

This was a topic that it was possible to predict in principle from the Advance Information although the
detail could not be identified. The requirement is clear; it is relatively easy to identify correctly most of
the figures that would change and to make the appropriate alterations. In order to maximise your
success in this straightforward section you would have needed to:
Make sure that having correctly postponed the funds to be received from NWF you also adjusted
the timing of the banks funding to bring it in line as per the bank letter in Exhibit 8
Ensure that you did not miss this point because otherwise you would not identify the immediate
cash crisis a serious error because you needed to identify the peak funding requirement and
that as a result an immediate bank re-negotiation would be needed
Ensure that your notes accompanying the cash flow adjustments were not too wordy or detailed
Understand that all adjusted items would have involved judgement and needed a commentary but
many items needed only a brief comment you should try to be incisive here
Adjust the other financial statements and present them in an appropriate way: use an annual
income statement and a single balance sheet as at 30 June 2005
Note that only a few items affected the income statement these should be fully explained
Identify that a larger number of adjustments affected the balance sheet; you had to show your
accounting knowledge by identifying which specific accounts would have to be adjusted an
expected skill
Make sure that you adjusted the Directors Loan Account where appropriate
Identify, by performing this detailed exercise, that cash and not profit was the problem
State that now was not the time for any of the directors to be able to cash in their personal
investment and leave: neither the bank nor NWF would allow this to happen
Make sure that your comment on the proposed conversion of the bank overdraft to a bank loan
was appropriate, with the issues of certainty, costs and timings all being correctly identified.
Overall this section would have depended on your ability to flex a cash flow forecast and the related financial
statements and then make sensible judgements, draw some appropriate conclusions and make clear
recommendations
It should be clear that the bank has to be informed of the situation and action taken (to slow payments to
creditors, for example) or a full re-negotiation conducted.
Elite or its advisors must perform a critical review of all forecast figures.
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A deal with NWF must be completed and most importantly the business will have to monitor its future cash
balance very carefully.
All these recommendations must be clearly stated.
5.10
Topic 3: Future financing structure

In order to demonstrate your ability to answer this section appropriately you would have had to prepare
yourself by some detailed numerical analysis on the Advanced Information. However, what you must not
do is attempt to introduce some alternative valuation model into your answer the case requirement is what
you have to answer
In this topic specifically you needed to:
5.11
Question the thinking of Jack and Gillian to seek an early exit from the business
Be sure that you considered the time value when appraising the NWF financing
Keep in mind the initial lower financing offer that NWF made as well as considering their offer of
more finance and not rule it out without further consideration
Evaluate the status of all the documents affecting this issue: for example, Jacks letter (written to his
daughter) may at one level be considered to be a wish list rather than a document of proper
intent. However, some of the items in Jacks letter, such as the 40K tax bill, would have had to be
taken into consideration in any cash flow and balance sheet adjustment
Identify that the potential exit of Jack and Gillian would be likely to be a deal breaker for NWF and
the bank and could not occur
Jacks letter also points up his lack of understanding of the exact amount that he and his wife have
as an investment in the business:
The distinction between Directors Loan Accounts and Equity Capital Accounts does not
appear to be understood by them
This level of financial and legal understanding may well be the case for all current directors
The directors of Elite may not understand the full implications of incorporation or their role as
directors
You would need to explain to them the overall impact of having an injection of venture
capital such as that being offered by NWF
Make sure that you could calculate and explain a full NPV (or IRR) evaluation of the offer from NWF
of increased financing in order to be able to calculate whether the Elite venture would meet the
required rate of return of 30% for NWF. This is a straightforward calculation
Know whether Elite met the NWF investment criteria or not, in order to maximise Elites
negotiating position with NWF in their meeting
Initially consider the financing using the NWF criteria, and then review that financing from Elites
point of view in order to arrive at your conclusions and recommendations.
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Topic 4: Financial management, operational and strategic issues

This is a topic where you needed good advanced preparation, which then needed to be integrated into
the relevant information from the new exhibits to present good analysis and judgement on the main
factors affecting this business.
Under the consideration of financial management issues, you had to provide a full range of the sort
of issues that might concern NWF, covering:
Financial monitoring
The accuracy of recording and forecasting
The eventual future exit strategy such as flotation
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Elite will have to be able to overcome any obvious weaknesses or run the risk of having NWF
impose their solutions onto the business. You would have needed some sensible commentary on
how these issues could be addressed:
New personnel
Better financial planning and review
Better monitoring by the board
Under operational issues you must identify the fact that:
The management team appears stretched
The team will need to be strengthened
There is a need to protect and maintain the current teams leading employees: in particular
Joe Habishaw who should be wrapped more closely into the business to ensure that the
workshop success will continue
Elite needs to balance the provision of service to the new customers who were victims of nofault accidents with the need to keep the insurance companies satisfied in terms of quality, in
the search for increased workshop business
The issue of the proposed new geographical locations and the proposed new web-based
operational methods should be discussed:
The local market should be exploited and expanded further
The new locations and new technology will increase a number of costs exponentially and
stretch the management team too far
In moving into the south Elite would be moving into the territory of Bristol and London plc,
an established operator in the luxury car replacement business
Elite might be more successful expanding into other locations nearby such as Leeds or the
Midlands
You could have made the review of strategic issues a very strong topic by identifying:
The issues of expansion

The need for marketing and market research
The issue of succession planning
The weakness of Elites concentration on luxury products
The low barriers to entry for any potential competition.
It would also be important to provide your appropriate suggestions for dealing with these issues.
In your strategic review you could offer some reflective thinking by questioning the idea of the suggested
expansion. This would demonstrate applying judgement. If it did not take place would the business be any
less successful; and, once the bank had been placated, would Elite need the involvement of NWF at all?
This ability to view the bigger picture would demonstrate that you have good strategic vision and can apply
judgement to the case scenario.
5.12
Topic 5: Overall paper

In order to achieve the best result in terms of the overall paper, you would have had to:
Follow the prescribed format as laid out in the requirements

Try to produce a well-structured, easy to follow, document
Make good use of appendices
Write clearly and legibly
Aim the report at the directors of Elite
Use both vocabulary and style that are appropriate to the audience.
Make sure that you follow a sensible format and produce a well-structured document. Try to make it as
legible as possible to give the examiners a fighting chance of assessing your worth. Make good use of
appendices, and try to give yourself time to produce a good effective keynote summary.
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Remember that you were addressing a partner who would understand the details of your work and
you needed to write accordingly, trying to consider any ethical matters such as the JED role and the
issue of duty of care to both NWF and the bank.
6 Suggested financial appendices

The suggested financial appendices to the case are offered below:
They present examples of what has to be included as the basis for the financial evaluations
They follow the template for the cash flow forecast provided in the Advance Information
They use an annual version for the Projected Income Statement and Balance Sheet saving time
but not detracting from the need to provide enough information for commentary
They include a series of short notes to accompany the numbers.
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Explanatory notes many of these points are examples of applying judgement

1
It is assumed that the slowdown has been cumulative up to 50k and is therefore shown in stages
It is clear that the start date for the original (draft) offer has passed and that a new start date will
have to occur. Jan 2005 is one later date given
It is assumed that the start date for the new bank loan will have to line up with the new injection of
equity finance (an original condition of the loan)
This error of overlooking the authorised fixed asset expenditure is significant and crucial. It is a
fundamental oversight by Adrian Molar (? competence)
The understatement of overheads must be an ongoing problem and has implications for all
subsequent cashflow & income statement calculations
The tax liability will probably have to be paid by the company and contra'd against the directors
loan accounts
The payments (to be contra'd against directors' loans) suggested by Jack are included but these
could be negotiated depending on circumstances
If Jack and Gillian leave as Jack suggests, then their salary is no longer payable and this is effectively
an inflow of funds
The interest calculation reflects the increased level of borrowing and is based on 8% (3% points
above future base).
10
There could well be other adjustments given that there appears to have been a series of basic errors
made
11
In comparison with the draft 2004 figures some other overheads may well have been overlooked
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Conclusion and recommendation concerning conversion

Elite will have to re-negotiate the continuation of the new overdraft until January 2005 and will have to
request a new limit.
The new limit may require personal guarantees on a for basis from the directors.
The future conversion of overdraft into loan will depend on the bank's willingness to do this with or
without the directors having to give personal guarantees.
The conversion may also depend on whether NWF are willing to step in to fill the void if the bank
refuses to go forward with the loan.
The adjustments above will run forward over the next four years projections.
Advice
The re-calculated projections are based on information provided: our firm needs to ensure the validity of
all key assumptions and figures good professional scepticism.
We also need to communicate clearly to the directors the critical need for accuracy in these forecasts.
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Appendix 1 (continued)
ELITE CARS LIMITED
Projected Income Statement to 30 June 2005
Note
Sales
Original
Adjustments
Revised
Car hire
6,025
6,025
Car sales
12,700
12,700
844
844
19,569
19,569
Car hire
633
633
Car sales
470
470
Repairs
118
118
1,221
1,221
Repairs
Gross profit
Overheads (inc depreciation)

Employment costs
Premises costs
318
-21
297
129
129
Promotional costs
60
60
87
87
Other admin
48
48
Other overheads
Additional depreciation
PBIT
Interest
60
60
10
10
642
49
691
579
49
530
113
24
137
466
73
393
Corporation tax
140
140
Net profit
326
253
Notes
1
2
3
4
5
6
Sales and therefore GP% have remained the same as per Tom's letter
There has been a reduction in employment costs relating to Jack and Gillian's exit
The increase in overheads is per Tom's letter and agrees back to the expenditure in 2004 accounts
There is a need to increase depreciation in line with overlooked expenditure
Interest has been increased to cover the additional overdraft and higher limits
Dividends have not been included and will affect future retained profit and cash flow
For the above year the dividends (payable Jan 2006) would be:
Per original offer:
Per new offer option 1:
Per new offer option 2:
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Prefs
7% x 6 months
14
A ords
7% x PBT
16
Prefs
10%
85
Ords
10% x PBT
46
Prefs
10%
90
Ords
10% x PBT
46
Overall conclusion
The projected retained profits and future cash flow will all need to be reviewed and adjusted downwards
in the light of the adjustments 2 6 above.
These adjustments will have an effect on the NPV calculation which may therefore fail to meet NWF
criteria.
This in turn may create the situation where the bank may be unwilling to provide its loan.
Advice
Explain to directors the critical nature of the projected profit and ensure they understand the gravity of
their position.
Ensure that our firm is clear as to its professional responsibility to treat these potential problems as
significant and onerous.
Appendix 1 (continued)
ELITE CARS LIMITED
Projected Balance Sheet to 30 June 2005
Non-current assets
Notes
Original
Comment
1,990
{ Additions
45
{ Depreciation
-10
-115
1,653
1,334
-80
5,012
Inventory
1,768
Vehicles
Accounts receivable
1,334
Slow/Recovery
Total assets
5,092
Share capital
1,000
Retained profits
Bank loan
Directors loan accounts
Accounts payable
Bank overdraft
326
Adjustments
894
{ Overheads
{ Interest
(extra)
{ Depreciation
-60
-24
5,092
2,025
{ Salary saved
21
253
-10
950
{ Tax payment
-40
{ Vehicles
-115
{ New payout?
-300
1,788
134
1,000
950
5
Revised
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1,788
Net changes
448
582
-80
5,012
Notes
1
The non-current assets have been adjusted by the overlooked capital expenditure and related
depreciation
The adjustment to stocks relates to the private ownership and removal of vehicles identified in the
tax memo
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Although there is no adjustment shown for final debtors all projections need to be reviewed
The cumulative effect of these adjustments on profits is significant. This could put at risk the NWF
involvement
The position for Jack and Gillian is that their directors loan account stand as follows:
Balance at start
(p12 AI)
Tax payment
Vehicle adjustment
Balance available
Requested payout
Remaining balance
784
-40
-115
629
-300
329
Conclusions
Overall the balance sheet is weaker after the adjustments have been made: soft directors loans
replaced by higher external short-term debt.
The balance on the Jack and Gillian loan account is considerably less than they have suggested and may
cause them to reconsider their exit strategy (could remain on a part-time basis).
Although the bank overdraft will reduce if the new NWF options are taken up, currently the position is
very difficult for the company in the short term and this finance comes at a huge price.
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Appendix 2
Elite Cars limited
Proposed Financial Structure
NWF finance NPV calculation and comparison
Timings
Amounts
Final equity
value
Starts Jan 2005 assume all payments to NWF on anniversary

Dividends per calculations and repayment schedule per offer
Based on expected P/E of 5 and E = earnings before tax : %
as given
Flow
Option 1
Factor
NPV
Flow
-1,000
-1,000
-1,000
Option 2
Factor
NPV
Flow
Original
Factor
-1,000
-500
NPV
Jan 2005
Equity
-500
Jan 2006
0.769 69.21
0.769 35.374
28
33
0.769
0.769
21.532
25.377
Pref Divi
Ord Divi
85
46
0.769
0.769
65.365
35.374
90
46
Pref rep't
Pref Divi
Ord Divi
300
85
58
0.592
0.592
0.592
177.6
50.32
34.336
500
90
58
0.592 296
200
0.592 53.28 28
0.592 34.336 42
0.592 118.4
0.592 16.576
0.592 24.864
Pref rep't
Pref Divi
Ord Divi
300
55
70
0.455
0.455
0.455
136.5
25.025
31.85
200
40
70
0.455
0.455
0.455
91
200
18.2
14
31.85 49
0.455
0.455
0.455
Pref rep't
Pref Divi
Ord Divi
Eq'ty value
23%
250
25
86
0.35
0.35
0.35
87.5
8.75
30.1
200
20
86
0.35
0.35
0.35
70
7
30.1
1,076
0.35
376.6 %
780
0.35
Jan 2007
Jan 2008
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6.37
22.295
Jan 2009
16.67
9.35
59.32
Total NPV
273
60
780
0.35
21
0.35 273
120.414
Equity calculation
Earnings before tax
2008 = 855
'value' =
2009 = 1017
'value =
Average value
=
4,275
5,085
4,680
23% = 1,076
16.67% = 780
Conclusion for VC
Option 1 better for NWF if forecasts are accurate because NPV is greater
- Explain NPV
- Explain factors
- Explain assumptions
Option 2 better for NWF if forecasts less certain because payback is faster
Conclusion for directors
- Elite lose more control under option 1
- Elite are more at risk in terms of cash flow under option 2
- Critical time is Jan 2007 for big repayment under option 2
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7 Illustrations of comparative answering techniques

Some extracts from answers are provided below to illustrate qualitative differences between scripts.
EXAMPLE 1: FUNDING REQUIREMENT

Requirement
An analysis of the impact of the new information on the cash flow forecasts and identification of the
new peak funding requirement.
IC script
SC script
CC script
Top script
The effect of the

changes in cash
flow will create a
problem for
Elite.
The effect of the

changes in cash flow
will create a problem
for Elite causing the
company to exceed
its current bank
overdraft position
in October,
November and
December 2004 by
up to 270k.
The effect of the

changes in cash flow
will create a problem
for Elite causing the
company to exceed
its current bank
overdraft position in
October, November
and December 2004
by up to 270k.
Following the
reduction in the
bank overdraft
limit a second
breach is projected
starting in April
2005 and
continuing
thereafter.
The effect of the changes in cash

flow will create a problem for Elite
causing the company to exceed its
current bank overdraft position in
October, November and December
2004 by up to 270k. Following the
reduction in the bank overdraft limit
a second breach is projected starting
in April 2005 and continuing
thereafter. These breaches will
require Elite to prepare for,
arrange and manage a meeting
with the bank to review the level
and the terms of its projected
overdraft in order to ensure that it
has the facilities to cover its
working capital requirements in
the future.
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IC script offers bland comment about the possible cash flow position for Elite.
SC script identifies the future dates when, because of the cash flow problems, the current overdraft
limit will be breached.
CC script identifies the undulation of the cashflow and applies judgement to identify the potential
second serious breach because of the lower overdraft limit.
Top script extends the discussion and identifies a clear course of action for the directors of Elite
answering the so what question, important in any analysis.
Case Study

Skill
Component
Example
Assimilating and
using information
Uses relevant Advance Information

and Exam Paper information to
adjust cashflow forecast
Uses financial forecasts

Uses overdraft facilities letter
Uses monthly cashflow
Structuring
problems and
solutions
Comments on impact of adjusting

cashflow
Recognises potential financial

adjustments
Comments on proposed cashflow
Identifies numerical impact of

adjustments on forecasts
Identifies understanding of banks
position
Identifies funding requirement
Applying
judgement
Drawing
conclusions and
making
recommendations

Evaluates key points/recognises
linkages
Draws conclusions
Identifies serious level of cash flow

problems
Identifies the risk of breaching
current bank terms
C
H
A
P
T
E
R
Concludes that company faces

cash crisis and its outcome
Provides suitable recommendation
re meeting
211
EXAMPLE 2: FUTURE FINANCING STRUCTURE

Requirement
Your proposal with justification, for the future financing structure of the company, taking into
consideration the matters raised by Jack Hawkins in the attached correspondence [private letter to his
daughter re an imminent exit and the payment to him and his wife Gillian of the balance on their directors
loan accounts]
IC script
SC script
CC script
Top script
One aspect of the

financing of the
company is the fact
that there are
significant directors
loan accounts in the
balance sheet.
One aspect of the

financing of the company
is the fact that there are
significant directors loan
accounts in the balance
sheet. These total 894k
(not 1m as suggested
by Jack) and are
classified as non-current
liabilities.
One aspect of the

(not 1m as suggested
by Jack) and are classified
as non-current liabilities.
However, this amount
still represents a
significant and integral
part of Elites present
and future long-term
financial structure.
One aspect of the

(not 1m as suggested by
Jack) and are classified as
non-current liabilities.
However, they still
represent a significant
and integral part of Elites
present and future longterm financial structure.
As such they would not
normally be repayable
in the near future and
Jack cannot expect that
the amount owing to
him and Gillian is
available to be repaid to
them without the full
agreement of all
financiers and interested
parties, present and
future.
212
IC script merely presents the directors loan as a component of the balance sheet.
SC script identifies the balance of the loan and its category as a non-current liability, and
challenges the figure presented.
CC script applies judgement and identifies the context and importance of this loan.
Top script extends the discussion, applies further judgement and identifies the implications of this
loan for the directors, the company and the financiers of Elite again answering the so what
question.
Case Study

Skill
Component
Example

information
Uses relevant Advance

Information and Exam Paper
information
Identifies balance invested

solutions
Makes use of Jacks letter to his

daughter
Comments on options
Discusses Jack and Gillians exit
Pros and cons of options from

Elites position
Identifies understanding of loan

accounts and directors ability to
realise debt
Pros and cons of options from

NWFs position
Applying judgement
Identifies non-current liabilities
Evaluates J&Gs calculations

Considers other factors
Identifies NWFs concerns
Considers the desire of Jack and

Gillian to leave taking their
directors loan balance as exit
payment versus Elites needs.
Identifies that directors may not
fully realise their new roles and
financial/corporate responsibilities
Drawing conclusions and

making
recommendations
Draws conclusions
C
H
A
P
T
E
R
Concludes that Jack and Gillian

cannot expect an immediate exit
with their money
Emphasises the need for all
interested parties to agree
213
EXAMPLE 3: FINANCIAL MANAGEMENT, OPERATIONAL AND STRATEGIC

REVIEW
Requirement
A discussion of the relevant financial management, operational and strategic issues which may be of
concern to North West Finance.
214
IC script
SC script
CC script
Top script
Elite does not appear

to be employing the
appropriate quality or
number of financial
personnel.
Elite does not appear to

be employing the
number of financial
personnel. It can address
this problem by
appointing
appropriately qualified
additional financial
personnel to perform
the necessary financial
management tasks.

be employing the
number of financial
personnel. It can
address this problem by
appointing
appropriately qualified
additional financial
personnel to perform
the necessary financial
management tasks.

be employing the
number of financial
personnel. It can address
this problem by
appointing appropriately
qualified additional
financial personnel to
perform the necessary
financial management
tasks.
This will also require

Elites current
directors to exercise
their responsibilities
by reviewing and
controlling the
financial affairs of the
business on a more
regular and systematic
basis thereby
ensuring fuller direct
financial
management, on
behalf of all.
This will also require

Elites current directors to
exercise their
responsibilities by
reviewing and controlling
the financial affairs of the
business on a more
regular and systematic
basis thereby ensuring
fuller direct financial
management, on behalf
of all.
Case Study
By addressing this issue

as a priority, Elite will
address the current
and operational issues
ahead of its expansion
plan, enabling whatever
future strategy is
adapted to be launched
from a stronger starting
position.
IC script merely states the current problem concerning the financial personnel.
SC script describes the first step in a partial solution to the problem.
CC script extends the solution to include the directors role in reviewing and controlling, making
them aware of their responsibilities.
Top script extends the discussion further, applies judgement and identifies the fact that by solving
the immediate problem the company will also be in a stronger position to carry out its strategic
plan once more answering the so what question.

Skill
Component
Example

information
Uses Advance Information and

Exam Paper to identify internal
situation
Facing financial and operational

choices
Comments on operational issues
Staffing: strength of financial

team
Structuring problems
and solutions
Comments on strategic issues
Future is uncertain
C
H
A
P
T
E
R
Identifies issues of lack of review

and control
Considers strategic priorities
and critical factors
Applying judgement
Addresses operational concerns
Addresses strategic concerns
Drawing conclusions
and making
recommendations
Draws conclusions
Identifies weaknesses in financial

management
Identifies current lack of
involvement of directors
Concludes that directors need
to take more responsibility for
Recommends closer
involvement of directors in
financial management to aid
future strategy
215
EXAMPLE 4: SUMMARY OF KEY ISSUES

Requirement
A discussion of the relevant financial management, operational and strategic issues which may be of
concern to North West Finance when assessing this investment proposal, and how the directors could
address these concerns.
216
IC script
SC script
CC script
Top script
The business has an

ambitious business
plan.
The business has an

ambitious business plan.
However, in the past it
has enjoyed strong
organic growth year
on year, which is
expected to continue
into the future.
The business has an

However, in the past it
has enjoyed strong
organic growth year on
year which is expected to
continue into the future.
The business has an

However, in the past it has
enjoyed strong organic
growth year on year which
is expected to continue
into the future. By building
on this past success and
scaling back on its
proposed rapid expansion,
Elite may be able to meet
an amended business plan
using only a proportion of
the 1m NWF finance
being offered and thus
avoiding heavy financial
exposure.
Case Study
By building on this past

success and scaling back
on its proposed rapid
expansion, Elite may be
able to meet an
amended business plan
using only a proportion
of the 1m NWF finance
being offered and thus
avoiding heavy financial
exposure.
This would also enable

Elite to continue to
develop and grow
without any severe
dilution of control or
immediate loss of its
independence. These
factors need to be
assessed more carefully
before any commitment
to change is finalised.
IC script offers a basic, somewhat ambiguous, conclusion from the body of the report.
SC script qualifies that conclusion and puts the plan into the positive perspective of the companys
financial history.
CC script applies judgement and offers a suggestion for the way forward with clear reasons.
Top script applies further judgement, extends the discussion and identifies the fact that control and
independence can also be maintained by an adjusted business plan yet again answering the so
what question.

Skill
Component
Example

information
Comments on current internal

situation
Identifies ambitious Business

Plan
Identifies main financial
management issue

solutions
Comments on main
operational issue
Identifies loss of control
Applying judgement
Considers how to address

main financial management
issue
Can build on past success
Drawing conclusions and

making recommendations
Quantifies problem of using

1m of NWF finance
C
H
A
P
T
E
R
Discusses how to avoid loss of

independence
Considers how to address

main operational issue
Draws conclusions
Concludes on how to address

major financial management
issue
Recommends scaling back:
avoiding dilution of control and
loss of independence
217
218
Case Study
Notes
Notes
Notes
Notes
Notes
Notes
Notes
Notes
Notes
Notes
Notes
Notes
Notes
Notes
Notes
Notes
Notes
Notes
Notes
Notes
Notes
Notes
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The Institute of Chartered Accountants in England and Wales

For exams in 2013

First edition 2009

Your learning materials are printed on paper obtained from traceable,

The Institute of Chartered Accountants in England and Wales

Faculties and Special Interest Groups

ICAEW publications for further reading

Introduction to the Case Study

Financial analysis skills

Introduction to Elite Case Study

Elite Cars Case Study

Elite exam paper

Debrief of Elite Case Study

The knowledge base

Progression from Professional Stage and Technical Integration

Skills progression through the ACA qualification

All areas of the syllabus may be tested over time.

Expect to receive some materials in advance

Cognitive, analytical and evaluative skills

Identification of business, technical and ethical issues

Application of technical knowledge to identified issues

Understanding of scenario and wider business issues

Selection of appropriate analytical tools

Analysis of requirements, situation and data

Assessment of quality of information

Candidates balanced judgement of priorities, strengths, weaknesses, opportunities and

Consideration of other perspectives, including competitive reaction and internal reaction

Conclusions and recommendations based on evidence, implications, assumptions and

(b) Communication and articulation skills

Structure in presentation of data and written work

ACA Skills Development Grid

The link to work experience

The examinations embrace all of these skills.

Professional skills and the Case Study

The specific skills that are assessed

Case study: Skills and how they are assessed

How skills are assessed

Assimilating and using information

Understanding the subject matter

Accessing, evaluating and managing data and

Uses the Advance Information (AI), Exam

Uses own understanding of context and

Describes wider context

Identifies business issues

Using technical knowledge and professional

Understanding an organisational framework:

Planning, controlling and evaluating

Understanding the needs of customers/clients

Demonstrating an understanding of the

Using relevant content of the International

Demonstrating an understanding of the

Understanding of business entity

Recognises where business is in its life cycle

How skills are assessed

Structuring problems & solutions

Using the information given: analysing and

Identifying faults in arguments and gaps in

Demonstrating an understanding of the

Identifies and uses key information

Demonstrates technical knowledge

Uses professional experience

Uses relevant strategic analytical tools (SWOT,

Performs relevant analysis

Produces quality analysis