- 20 Marks
Question
Shown below are the financial statements of Kobape Limited for its most recent two years.
Extract from the statement of profit or loss for the year ended 30 April:
| 2019 (N’000) | 2018 (N’000) | |
|---|---|---|
| Revenue | 224,000 | 195,000 |
| Cost of sales | (169,200) | (136,500) |
| Gross profit | 54,800 | 58,500 |
| Administrative costs | (32,700) | (38,040) |
| Distribution costs | (10,900) | (12,680) |
| Finance cost | (1,900) | (1,380) |
| Profit before tax | 9,300 | 6,400 |
Statement of financial position as at 30 April:
| Assets (N’000) | 2019 | 2018 |
|---|---|---|
| Non-current assets | 37,000 | 28,600 |
| Current assets: | ||
| – Inventory | 12,800 | 9,800 |
| – Trade receivables | 24,600 | 21,600 |
| – Cash balance | 1,600 | 2,400 |
| Total assets | 76,000 | 62,400 |
Equity and liabilities:
| 2019 | 2018 | |
|---|---|---|
| Ordinary share capital | 16,000 | 16,000 |
| Retained earnings | 26,200 | 18,600 |
| Non-current liabilities: | ||
| – 10% loan notes | 16,000 | 12,000 |
| Current liabilities: | ||
| – Bank overdraft | 2,200 | 1,600 |
| – Trade payables | 15,000 | 13,800 |
| – Taxation | 600 | 400 |
| Total equity and liabilities | 76,000 | 62,400 |
The following are the ratios calculated for Kobape Limited based on the financial statements of the previous year and also the latest industry average ratios:
| Ratio | Kobape Ltd (30 April 2018) | Industry Average |
|---|---|---|
| Net profit margin | 3.99% | 4.73% |
| ROCE (Capital employed = equity + loan notes) | 16.69% | 18.50% |
| Asset turnover | 4.19 times | 3.91 times |
| Current ratio | 2.14:1 | 1.90:1 |
| Quick ratio | 1.52:1 | 1.27:1 |
| Gross profit margin | 30.0% | 35.23% |
| Account receivables collection period | 40 days | 52 days |
| Account payables payment period | 37 days | 49 days |
| Inventory turnover (times) | 13.9 times | 18.3 times |
| Gearing ratio | 25.75% | 32.71% |
Required:
a. Calculate the cash operating cycle of Kobape Limited for the year ended 30 April, 2018 and 2019. (5 Marks)
b. Calculate the comparative ratio(s) (to two decimal places where appropriate) for Kobape Limited for the year ended 30 April, 2019. (5 Marks)
c. Draft a report addressed to the board of directors of Kobape Limited, analyzing the performance of the company for the year 2019 based on the result of the previous year and the industry average. (10 Marks)
Answer
a. Calculation of cash operating cycle for the year ended 30 April 2018 and 2019:
| Metric | 2019 | 2018 |
|---|---|---|
| Inventory days period | 28 days | 26 days |
| Receivable collection period | 40 days | 40 days |
| Payable payments period | (32 days) | (37 days) |
| Cash operating cycle | 36 days | 29 days |
b. Comparative ratio calculations for the year ended 30 April, 2019:
| Ratio | 2019 |
|---|---|
| Net profit margin | (9,300 + 1,900) / 224,000 = 5.00% |
| ROCE | (9,300 + 1,900) / (42,200 + 16,000) x 100 = 19.24% |
| Asset turnover | 224,000 / 58,200 = 3.85 times |
| Current ratio | 39,000 / 17,800 = 2.19:1 |
| Quick ratio | (39,000 – 12,800) / 17,800 = 1.47:1 |
| Gross profit margin | 54,800 / 224,000 x 100 = 24.46% |
| Account receivables collection period | 24,600 / 224,000 x 365 = 40 days |
| Account payables payment period | 15,000 / 169,200 x 365 = 32 days |
| Inventory turnover (times) | 169,200 / 12,800 = 13.2 times |
| Gearing ratio | 16,000 / (42,200 + 16,000) x 100 = 27.49% |
c. Report to the Board of Directors:
To: The Board of Directors of Kobape Limited
From: Accountant
Date: [Insert Date]
Subject: Analysis of Kobape Limited’s Financial Performance for the Year Ended 30 April 2019
This report provides an analysis of Kobape Limited’s financial performance for the year 2019, comparing it to the previous year and the industry average.
Trading and Profitability:
The return on capital employed (ROCE) has improved from the previous year to 19.24%, now surpassing the industry average of 18.50%. The net profit margin has also improved to 5.00%, slightly higher than the industry average of 4.73%. However, the gross profit margin has declined to 24.46%, which is significantly lower than both the previous year and the industry average of 35.23%. This may indicate changes in cost structure or inefficiencies.
Liquidity and Working Capital Management:
The current ratio and quick ratio remain strong at 2.19:1 and 1.47:1, respectively, both exceeding industry averages. This suggests Kobape Limited is in a favorable liquidity position. However, the company’s cash operating cycle has increased from 29 days to 36 days, indicating a slower conversion of resources into cash. Inventory turnover is also lower than the industry average, suggesting the potential for inventory obsolescence.
Gearing:
The gearing ratio has increased slightly to 27.49%, still below the industry average of 32.71%. The company can consider increasing its leverage slightly to take advantage of its improved ROCE.
Conclusion:
Kobape Limited has shown improvements in profitability and liquidity, though the decline in gross profit margin and slower working capital turnover need to be addressed. Management should review cost control measures and focus on optimizing inventory levels to improve the overall performance in the upcoming financial year.
Signed: Accountant
- Topic: Statement of Cash Flows (IAS 7)
- Series: MAY 2019
- Uploader: Kwame Aikins