The Body Shop Case Study

Topics: Expense, Generally Accepted Accounting Principles, Operating expense Pages: 4 (1445 words) Published: April 6, 2011
Question 1:
By using historical percentage-of-sales accounting ratio, this paper forecasts next three-year earnings and financial needs of The Body Shop. Due to lack of information, this forecast based on some key assumptions about the relationship between sales and other accounting ratios, firstly forecast sales then forecast other ratios in financial statements. Sales: It is assumed that sales growth ratio will maintain at 11% next three years due to the need of increasing revenue of The Body Shop. This figure is the average growth rate from 1999 to 2001. COGS: The COGS ratio in 2002 is 45% and it is assumed that it would be decreased to 40.5% in the forecast. This figure comes from historical COGS ratio from 1999 to 2001 and the assumption is based on Gournay’s strategy of costs reducing. Operating Expenses: is also assumed to be decreased in order to reduce costs. However, it is assumed to increase faster than sales. Restructuring Cost Rates: are assumed to be decreased based on the reduced cost strategy because after restructuring the company has been done, these ratios will reduce because restructuring costs are one off occurrences that have low future costs. Interest rate: is assumed to remain the same at 6% for the next three years. However, in fact, interest rate increased to 8% due to the expectation of rising global interest rates, which were later realised. Tax rate: is assumed to stay at the average historical tax rate of 31.7% for the coming years. Tax rate is calculated by dividing tax expense last year to EBIT (Earning before interest and tax). Dividends: are assumed to increase to 60% of net income, which is too high in this circumstance because the firm has large debts but still pay much dividends. Excess Cash: was determined by the difference between assets and liabilities, therefore, the balance sheet is balance. Overdrafts: is strongly linked to excess cash and was the different between assets and liabilities. It is a part of debts and...
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