a)

Adjustments and Revised Financials Adjusting Entries Sales to Cinchona Ltd: GH¢700,000 (reduce revenue & receivables) Third-party inventory: GH¢100,000 (reduce inventory & cost of goods sold) Bad debt: GH¢40,000 (reduce receivables & recognize expense)

b)

Revised Income Statement GH¢

Revenue 6,300,000 Cost of Goods Sold 2,400,000 Gross Profit 3,900,000 Other Income 50,000 Salaries & Wages (1,150,000) Utilities (150,000) Medical Equipment Maintenance (50,000) Depreciation (250,000) Admin & General Expenses (550,000) Bad Debt (40,000) Interest Expense (150,000) Profit Before Tax 1,510,000 Income Tax (950,000) Net Profit After Tax 560,000 Retained Profit for the Year 560,000

Statement of Financial Position as of 31 December 2024 (Redrafted)

GH¢ Non-Current Assets

Medical Equipment 3,300,000 Intangible Assets 320,000

3,620,000 Current Assets

Inventory (650,000-100,000) 550,000 Accounts Receivable (800,000-700,000-40,000) 60,000 Bank 1,200,000 Cash 50,000

1,860,000 Total Assets 5,480,000 Equity and Liabilities

Equity

Share Capital 2,000,000 Retained Earnings 2,160,000 Total Equity 4,160,000 Non-Current Liabilities

Long-term Loans 950,000 Current Liabilities

Accounts Payable 250,000 Income Tax Payable 120,000 Total Liabilities 1,320,000 Total Equity & Liabilities 5,480,000

Comparable Ratios (Post-Adjustment)

Ratio Working Result

Gross Profit Margin Net Profit/Sales x 100% =3,900,000/6,300,000 × 100% 61.90%

Operating Profit Margin EBIT/Revenue × 100 % = 1,660,000/6,300,000 26.35%

ROCE EBIT/Capital Employed × 100%

=1,660,000/5,110,000 x 100% 32.49%

Current Ratio Current Assets/Current Liabilities =1,860,000/370,000 5.03: 1

Quick Ratio

(Current Assets-Inventory)/Current Liabilities = (1,860,000 – 550,000)/370,000

3.54: 1

Debtors Collection Period

Accounts Receivable/Sales x 365 days =60,000/6,300,000 × 365 days 3.48 days

Creditors Payment Period

Accounts Payable/Purchases x 365 days =250,000/2,500,000) × 365 days

36.5 days

Net Assets Turnover Revenue/Net Assets =6,300,000/4,160,000 1.51 times

Debt to Equity Ratio Long term debt/Equity x 100% =950,000/4,160,000 x 100% 22.84%

Capital Gearing

Long term debt/Capital Employed x 100% = 950,000/ (950,000 + 4,160,000)

18.59%

C)

Report to the Board of Kibera Ltd

To:

Board of Directors of Kibera Ltd

From:

Finance Director

Date:

Today

Subject:

Assessment of the Comparative Performance of two

Acquisition targets – Nakuru Ltd and Kisumu Ltd

Introduction This report presents a comparative analysis of two potential acquisition targets, Nakuru Ltd and Kisumu Ltd, using key financial ratios. The objective is to guide the board of Kibera Ltd in deciding which company presents a more viable investment opportunity. Ratios have been grouped into four main categories: profitability, liquidity, efficiency, and gearing. For each ratio, we define its meaning, assess Nakuru’s performance (post-adjustment), and compare it with Kisumu’s.

Profitability Ratios These ratios assess a company’s ability to generate profits relative to revenue or capital invested.

Ratio Definition Nakuru Ltd

Kisumu Ltd Interpretation

Gross Profit Margin

Measures the proportion of revenue remaining after deducting cost of goods sold. Higher values indicate strong production or pricing efficiency.

61.90% 59%

Nakuru has a slightly better margin, indicating stronger cost control.

Operating Margin

Shows how much profit is generated from core operations before interest and tax. Reflects operational efficiency.

26.35% 20%

Nakuru outperforms, signaling more efficient operations.

ROCE

Return on Capital Employed shows how effectively capital is being used to generate profit.

32.49% 31%

Both are strong, but Nakuru has a slight edge, reflecting efficient use of capital.

Liquidity Ratios These indicate the ability of the business to meet short-term obligations.

Ratio Definition Nakuru Ltd

Kisumu Ltd Interpretation

Current Ratio

Measure’s ability to cover short-term liabilities with short-term assets. A higher ratio indicates better short- term financial strength.

5.03: 1 4.5: 1

Nakuru has a stronger liquidity position.

Quick Ratio

Similar to the current ratio but excludes inventory, giving a stricter view of liquidity.

3.54: 1 3: 1

Nakuru again shows stronger short- term liquidity.

Efficiency Ratios These evaluate how well a company uses its assets and manages its liabilities.

Ratio Definition Nakuru Ltd

Kisumu Ltd Interpretation

Debtors Collection Period

Measures how quickly receivables are collected. Shorter periods suggest better credit control.

3.48 days 1.5 days

Kisumu collects debts faster, showing stronger receivables management.

Creditors Payment Period

Indicates how long it takes to pay suppliers. Longer periods may improve cash flow, but too long could strain supplier relations.

36.5 days 50 days

Kisumu takes longer to pay, improving cash retention but potentially risky.

Net Assets Turnover

Indicates how efficiently net assets are used to generate sales. Higher values mean greater efficiency.

1.51 times 1.3 times

Nakuru is using its net assets more efficiently to generate revenue.

Gearing Ratios These assess the financial risk and capital structure of a company.

Ratio Definition Nakuru Ltd

Kisumu Ltd Interpretation

Debt to Equity

Measures the proportion of debt to equity. Lower values indicate less reliance on borrowed funds.

22.84% 40%

Nakuru is less leveraged and therefore less financially risky.

Capital Gearing

Long-term debt relative to total capital employed. Indicates financial risk.

18.59% 28%

Nakuru has a more conservative capital structure, suggesting lower risk.

Conclusion Based on the analysis above, Nakuru Ltd outperforms Kisumu Ltd in profitability, liquidity, and overall financial risk. Although Kisumu is slightly more efficient in collecting receivables and managing supplier payments, Nakuru demonstrates stronger fundamentals across most areas. Given its higher profitability, stronger liquidity, and lower gearing, Nakuru Ltd appears to be the more stable and attractive acquisition target. Kibera Ltd should invest in Nakuru Ltd.