- 20 Marks
Question
a)
Garpi Industries LTD, Kotio Processing LTD and Nabiew Enterprises LTD are entities engaged in the processing of shea-nut into shea-butter for export. For the year ended 30 September 2024, the financial statements of the companies were summarised as follows (all figures are presented as percentages of total turnover) for your assessment as a prospective Group Finance Officer.
Common Size Statement of Profit or Loss and Other Comprehensive Income
for the Year Ended 30 September 2024
| Item | Garpi Industries LTD (%) | Kotio Processing LTD (%) | Nabiew Enterprises LTD (%) |
|---|---|---|---|
| Revenue | 100 | 100 | 100 |
| Cost of Sales | (67) | (57) | (62) |
| Gross Profit | 33 | 43 | 38 |
| Distribution & Administrative Expenses | (24) | (23) | (28) |
| Profit before Interest & Tax | 9 | 20 | 10 |
| Finance Cost | (5) | – | (7) |
| Profit Before Tax | 4 | 20 | 3 |
| Taxation | (1) | (10) | (1) |
| Profit After Tax | 3 | 10 | 2 |
| Dividends | (1) | (10) | – |
| Retained Earnings | 2 | – | 2 |
Statement of Financial Position as at 30 September 2024
| Item | Garpi Industries LTD (%) | Kotio Processing LTD (%) | Nabiew Enterprises LTD (%) |
|---|---|---|---|
| Property, Plant & Equipment | 110 | 125 | 100 |
| Current Assets: | |||
| Inventories | 25 | 20 | 30 |
| Trade Receivables | 20 | 15 | 32 |
| Cash | 3 | 1 | 4 |
| Total Current Assets | 48 | 36 | 66 |
| Current Liabilities: | |||
| Trade Payables | 11 | 23 | 12 |
| Bank Overdraft | 15 | – | 10 |
| Taxation | 8 | 20 | 9 |
| Total Current Liabilities | 34 | 43 | 31 |
| Net Current Assets | 10 | (7) | 35 |
| 12% Loan Notes | (20) | – | (35) |
| Total Net Assets | 100 | 100 | 100 |
| Financed by: | |||
| Stated Capital | 85 | 75 | 95 |
| Revaluation Reserve | – | 5 | – |
| Retained Earnings | 15 | 20 | 5 |
| Total Equity | 100 | 100 | 100 |
Required:
a) Evaluate the performance of the three companies by commenting on their profitability, gearing and liquidity.
b) Discuss THREE benefits of using value added statements as a measure of a company’s performance.
c) Analyse the limitations of value added statements, providing examples to illustrate your points.
Answer
a) Evaluation of Performance
Introduction
In evaluating the financial performance of Garpi Industries LTD, Kotio Processing LTD, and Nabiew Enterprises LTD, it is essential to assess their profitability, gearing, liquidity, and investment in non-current assets.
Profitability
Kotio Processing LTD exhibits the highest gross profit margin at 43%, compared to Garpi Industries LTD (33%) and Nabiew Enterprises LTD (38%).
Kotio Processing LTD also records the highest PBIT margin at 20%, indicating effective control of operating costs.
Profit after tax margins further confirm Kotio Processing LTD as the strongest performer at 10%, compared to Garpi Industries LTD (3%) and Nabiew Enterprises LTD (2%).
Gearing
Garpi Industries LTD and Nabiew Enterprises LTD are geared, with loan notes representing 20% and 35% of total assets respectively.
Kotio Processing LTD is ungeared, incurring no finance costs, thereby reducing financial risk.
Liquidity
Nabiew Enterprises LTD shows the strongest liquidity position with net current assets of 35% and a current ratio of 2.13.
Garpi Industries LTD has moderate liquidity with net current assets of 10% and a current ratio of 1.26.
Kotio Processing LTD shows weak liquidity with negative net current assets of (7%) and a current ratio of 0.84.
Conclusion
Kotio Processing LTD is the most profitable but faces liquidity concerns. Nabiew Enterprises LTD has strong liquidity but high gearing risk. Garpi Industries LTD presents a balanced but less outstanding performance.
b) Benefits of Value Added Statements
Any THREE of the following:
-
Provides a holistic view of wealth creation and its distribution among stakeholders
-
Highlights employee contribution and corporate social responsibility
-
Enhances transparency and stakeholder communication
-
Encourages focus on sustainable, long-term growth
c) Limitations of Value Added Statements
Any THREE of the following:
-
Lack of standardisation reduces comparability
-
May divert management focus away from profit maximisation
-
Additional preparation cost and confidentiality concerns
-
Focuses on historical performance rather than future prospects
- Uploader: Samuel Duah