- 20 Marks
Question
The following are the financial statements of Odot Ventures Nigeria Limited for the years ended December 31, 2023 and 2024.
### Statement of profit or loss for the year ended December 31,
| Item | 2024 N’m | 2023 N’m |
|——————-|———-|———-|
| Revenue | 44,800 | 14,400 |
| Cost of sales | (26,880)| (5,760) |
| Gross profit | 17,920 | 8,640 |
| Selling expenses | (4,320) | (2,400) |
| Bad debt -written off | (2,240) | (288) |
| Depreciation | (3,328) | (928) |
| Interest expense | (3,072) | (192) |
| Net profit before tax | 4,960 | 4,832 |
### Statement of financial position as at December 31,
| Item | 2024 N’m | 2023 N’m |
|——————————-|———-|———-|
| **Non-current assets:** | | |
| Property, plant and equipment| 35,712 | 15,040 |
| **Current assets:** | | |
| Inventory | 3,808 | 480 |
| Trade receivables | 9,328 | 1,328 |
| Cash and bank | – | 192 |
| **Subtotal (Current assets)**| 13,136 | 2,000 |
| **Total assets** | 48,848 | 17,040 |
| **Equity and liabilities:** | | |
| Share capital | 5,248 | 4,800 |
| Retained earnings | 15,024 | 10,064 |
| **Equity** | 20,272 | 14,864 |
| **Non-current liabilities:** | | |
| Borrowings | 25,600 | 1,600 |
| **Current liabilities:** | | |
| Trade payables | 2,800 | 576 |
| Bank overdraft | 176 | – |
| **Subtotal (Current liabilities)** | 2,976 | 576 |
| **Total equity and liabilities** | 48,848 | 17,040 |
The Directors of Odot Ventures Nigeria Limited appointed a new sales manager during the year ended 2024. This manager introduced a new sales policy to increase sales and profit by means of reduction in selling price and extended credit terms to the company‟s customers. This led to considerable investment in new plants and equipment early in year 2024 to meet the increased sales.
Required:
a. Calculate the following profitability and liquidity ratios for years 2023 and 2024.
Profitability:
(i) Gross profit margin
(ii) Net profit margin
(iii) Return on capital employed where capital employed is equal to equity and borrowings.
Liquidity:
(iv) Current ratio
(v) Acid test ratio
(vi) Receivables collection period (days).
(6 Marks)
b. Explain whether the financial performance and position of the company has improved for the year ended December 31, 2024 as a result of the new policies adopted by the company.
c. Calculate the amount of cash which would be realised if the company could impose a debt collection period of 45 days.
(7 Marks)
Note: All revenue are on credit.
Answer
Odot Ventures Nigeria Ltd
(a) Ratio analysis
| Ratios | 2024 | 2023 |
|---|---|---|
| Gross profit margin Gross profit × 100 Revenue | ₦17,920 × 100 ₦44,800 = 40.00% | ₦8,640 × 100 ₦14,400 = 60.00% |
| Net profit margin Net profit before tax × 100 Revenue | ₦4,960 × 100 ₦44,800 = 11.07% | ₦4,832 × 100 ₦14,400 = 33.56% |
| Return on capital employed PBIT Capital employed x 100 | ₦8,032 × 100 ₦45,872 = 17.51% | ₦5,024 × 100 ₦16,464 = 30.51% |
| Current ratio Current assets Current liabilities | ₦13,136 ₦2,976 = 4.41:1 | ₦2,000 ₦576 = 3.47:1 |
| Acid test ratio Current assets less closing Inventory Current liabilities | ₦13.136 -3,808 ₦2,976 = 3.13 :1 | ₦2,000 – ₦480 576 = 2.64 :1 |
| Receivables collection period Receivables × 365 days Revenue | ₦9,328 × 365 ₦44,800 = 76 days | ₦1,328 × 365 ₦14,400 = 34 days |
(b) Evaluation of financial performance and position of Odot Ventures Nigeria Limited for the year ended December 31, 2024
i. In 2024, Odot Ventures Nigeria Limited implemented significant strategic changes under a new sales manager, including a low-price, high-volume approach and extended credit terms to customers. These changes led to a remarkable increase in revenue from ₦14.4 billion in 2023 to ₦44.8 billion in 2024. However, the company‟s profitability weakened. The gross profit margin dropped from 60% in 2023 to 40% in 2024, indicating reduced pricing power due to lower selling prices. Similarly, the net profit margin fell from 33.56% to 11.07%, suggesting higher operating and financing costs.
ii. Return on capital employed (ROCE) also declined significantly from 30.51% to 17.51%, showing that the company became less efficient in generating profit from the capital it employed. This was largely due to a major increase in borrowings from ₦1.6 billion to ₦25.6 billion, used to finance asset expansion. Consequently, interest expense surged from ₦192 million to ₦3.072 billion, further impacting net profitability.
iii. Despite this, the company’s liquidity position improved. The current ratio increased from 3.47:1 to 4.41:1, and the acid test ratio rose from 2.64:1 to 3.13:1, indicating strong short-term solvency. However, the receivables collection period lengthened to 76 days, which could delay cash inflows and strain working capital, especially given the high levels of trade receivables.
iv. In conclusion, while the new policies increased sales and improved liquidity, they compromised profitability and introduced financial risk through increased debt and slow receivables turnover. Management must focus on improving margins, reducing debt, and tightening credit control.
c. Amount of cash to be realised if the company imposed 45 days credit period.
Method 1,
Receivable collection period in year 2024 is 76 days with total receivable of N9,328million
If the collection period is reduced to 45 days. The new receivable figure would be:
45/76 x N9,328million = N5,523million
The amount of cash that would be realised = (N9,328m – N5,523m)= N3,805m
Method 2
With imposition of 45 days
45days = y/(44,800) x 365days
45days= 365y/ 44,800
y = 45 x 44,800/365
hence y = 2,016,000/365 = N5,523million
amount of cash to be realised is (N9,328m – N5,523m) = N3,805m
where y is the amount of receivable collection period in 45days.
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