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  • 20 Marks

FR – L2 – Q99 – Presentation of Financial Statements

Calculate financial ratios for Jeck Ltd for the year ended 31 March 20X9 based on provided financial statements.

Jeck Ltd is a listed company that assembles domestic electrical goods which it then sells to both wholesale and retail customers. Jeck Ltd’s management was disappointed in the company’s results for the year ended 31 March 20X8. In an attempt to improve performance the following measures were taken early in the year ended 31 March 20X9:

  • A national advertising campaign was undertaken,
  • Rebates to all wholesale customers purchasing goods above set quantity levels were introduced,
  • The assembly of certain lines ceased and was replaced by bought-in completed products. This allowed Jeck Ltd to dispose of surplus plant.

Jeck Ltd’s summarised financial statements for the year ended 31 March 20X9 are set out below:

Statement of Financial Position as at 31 March 20X9

GH$’000 GH$’000
Non-current assets
Property, plant and equipment (note (ii)) 550
Current assets
Inventory 250
Trade receivables 360
Bank Nil
610
Total assets
Equity and liabilities
Stated capital (400m shares) 100
Income surplus 380
480
Non-current liabilities
8% loan notes 200
Current liabilities
Bank overdraft 10
Trade payables 430
Current tax payables 40
480
Total equity and liabilities

Statement of Profit or Loss and Other Comprehensive Income for the Year Ended 31 March 20X9

GH$’000
Revenue (25% cash sales)
Cost of sales
Gross profit
Operating expenses
Operating profit
Profit on disposal of plant (note (i))
Financial charges
Profit before tax
Income tax expense
Profit for the year

Below are ratios calculated for the year ended 31 March 20X8:

  • Return on year-end capital employed (profit before interest and tax over total assets less current liabilities): 17%
  • Net assets (equal to capital employed) turnover: 4 times
  • Gross profit margin: 6.3%
  • Net profit (before tax) margin: Not provided
  • Current ratio: 1.6:1
  • Closing inventory holding period: 46 days
  • Trade receivables’ collection period: 45 days
  • Trade payables’ payment period: 55 days
  • Dividend yield: 3.75%
  • Dividend cover: 2 times

Notes:
(i) Jeck Ltd received GH$120m from the sale of plant that had a carrying amount of GH$80m at the date of its sale.
(ii) The market price of Jeck Ltd’s share throughout the year averaged GH$3.75 each. There were no issues or redemption of shares or loans during the year.
(iii) Dividends paid during the year ended 31 March 20Y0 amounted to GH$90m, maintaining the same dividend paid in the year ended 31 March 20X9.

Required:
(a) Calculate ratios for the year ended 31 March 20X9 (showing your workings) for Jeck Ltd, equivalent to those provided above.

(b) Analyse the financial performance and position of Jeck Ltd for the year ended 31 March 20X9 compared to the previous year.

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  • 20 Marks

FM – L2 – Q118 – Working Capital Management

Assess if AquaPure Ltd is overtrading using financial data and compute relevant ratios.

AquaPure Ltd is a leading producer of mineral water in Zamora. The company sells all of its output to wholesalers on credit terms net 40. The company’s collection policy is somewhat relax, and so the receivables turnover days is currently 53 days. This fairly liberal credit policy has resulted in significant increases in sales revenue in recent years. However, the company has been facing cash flow problems as a significant number of customers take longer than the credit period to settle their accounts. The company typically falls on overdraft facilities from its bankers when it fails to generate adequate cash flows from operations to meet working capital requirements. The average cost of the overdraft facilities is 15% per annum.

Last week, the management team met and discussed the company’s cash flow and liquidity problems with a view to finding solutions to the problems. In that meeting, two proposals were offered to help solve the problems:
Proposal 1: Introduce early settlement discount of 1.5% on accounts that are settled within 10 days in which invoice is sent while the current credit period is maintained. It is estimated that 60% of accounts will be paid within the discount period.
Proposal 2: Switch from financing working capital requirements using the bank overdraft facilities at 15% interest to financing working capital requirements using supplier’s trade credit. Suppliers are willing to supply on credit terms 1/10, net 40. Proponents of the proposals believe that the implementation of their proposal will improve on the company’s financial situation.

Set out below are the company’s statement of profit or loss and statement of financial position for the past three years:

Statement of profit or loss for the year ended 31st December

20X5 (GH¢’000) 20X6 (GH¢’000) 20X7 (GH¢’000)
Revenue 40,000 60,000 122,000
Cost of sales (15,000) (31,000) (58,000)
Gross profit 25,000 29,000 64,000
Selling and administrative expenses (11,000) (17,500) (24,000)
Operating profit 14,000 11,500 40,000

Statement of financial position as at 31st December

20X5 (GH¢’000) 20X6 (GH¢’000) 20X7 (GH¢’000)
Noncurrent assets:
Property, plant and equipment 13,400 19,000 22,500
Current assets:
Inventory 8,000 15,500 25,500
Trade receivables 6,900 11,210 24,210
Cash 1,110 – –
Total current assets 16,010 26,710 49,710
Total assets 29,410 45,710 72,210
Equity:
Stated capital 100 100 100
Income surplus 18,510 28,110 36,810
Shareholders’ equity 18,610 28,210 36,910
Non-current liabilities:
Medium-term loan 3,000 2,500 2,000
Current liabilities:
Trade payables 2,200 3,500 8,600
Dividend payable 5,600 6,400 7,500
Bank overdraft – 5,100 17,200
Total current liabilities 7,800 15,000 33,300
Total liabilities 10,800 17,500 35,300
Total equity and liabilities 29,410 45,710 72,210

Required:
(a) Considering the background information and financial data provided above, would you conclude that AquaPure Ltd is experiencing overtrading? Explain with relevant computations.

(b) Appraise the proposal for early settlement discount (i.e. Proposal 1) and advise on whether it should be accepted for implementation or not. Your appraisal should focus on how the discount policy will influence the company’s profitability. Show all relevant computations.

(c) Appraise the proposal to switch from financing working capital needs using bank overdraft to using suppliers’ trade credit, and advise management accordingly. Show all relevant computations.

(d) Assuming AquaPure Ltd cannot raise additional funds from external sources such as borrowing and new share offer, suggest to management three steps they can take to ease the cash shortages the company is facing.

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  • 25 Marks

FM – L2 – Q116 – Management of Receivables and Payables

Evaluate the impact of a new discount policy on Atefufu Foods Limited’s annual profit and suggest an alternative receivables management policy.

Atefufu Foods Limited has annual sales revenue of GH¢8 million. It has a contribution to sales ratio of 45% and its annual fixed costs are GH¢2.5 million. These figures exclude bad debts which are currently 1.25% of sales. All sales are on credit and standard credit terms are 30 days, although customers take on average 45 days to pay. Accounts receivable are financed by a bank overdraft on which interest is payable at 8%.
The company’s management are considering whether to offer a discount of 2.5% for all customers who pay within 14 days, and to extend the credit period for other customers to 60 days. It has been estimated that if this policy is introduced, 25% of customers would take the settlement discount and the rest would take the full 60 days credit offered.
The new policy would result in higher administration costs equal to 0.5% of total gross sales. It is expected that total (gross) sales would be boosted, and would increase by 3% per year. It is also expected that bad debts would fall to 1% of gross sales.

Required:
(A) Calculate the effect that the new policy would have on annual profit and recommend whether the new policy should be introduced. Suggest an alternative policy for the management of receivables that might improve profit by a larger amount.

(B) Esuna Processing Limited is a subsidiary of Atefufu Foods Limited. It uses the Miller-Orr model to manage its cash balances and has set a minimum cash balance of GH¢12,500. The average rate received on investments is currently 5.68%. Over the past year, the standard deviation of daily cash flows has been GH¢2,800. The cost to the company of selling investments or making deposits is GH¢20 per transaction.

Required:
Calculate the spread, the upper limit and the return point for cash balances using the Miller-Orr model and explain the meaning and purpose of these amounts for the purpose of cash management.

(C) Suggest with reasons how Esuna Processing Limited might invest its short-term cash surpluses.

(D) Discuss the main factors that should be taken into consideration by a company’s management when deciding on how its working capital should be funded.

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  • 18 Marks

MA – L2 – Q57 – Performance analysis

Evaluate KINTAMPO LTD's performance using financial ratios for two divisions, Amir and Mo.

Zestco is an importer and retailer of vegetable oils. Extracts from the financial statements for this year and last are set out below.

Statements of profit or loss for the years ended 30 September

Year 7 Year 6
ZC¢’000 ZC¢’000
Revenue 2,160 1,806
Cost of sales (1,755) (1,444)
Gross profit 405 362
Distribution costs (130) (108)
Administrative expenses (260) (198)
Profit before tax 15 56
Income tax expense (6) (3)
Profit for the period 9 53

Statements of financial position as of 30 September

Year 7 Year 6
ZC¢’000 ZC¢’000
Assets
Non-current assets
Property, plant and equipment 78 72
Current assets
Inventories 106 61
Trade receivables 316 198
Cash 6
428 259
Total assets 506 331
Equity and liabilities
Equity
Ordinary shares 110 85
Preference shares 23 11
Share premium 15
Revaluation reserve 20
Retained earnings 78
Current liabilities
Bank overdraft 49
Trade payables 198
Current tax payable 7
Total equity and liabilities

Required:

Define and calculate the following ratios for each year:

(a) Gross profit percentage

(b) Net profit percentage

(c) Return on capital employed

(d) Asset turnover

(e) Current ratio

(f) Quick ratio

(g) Average receivables collection period

(h) Average payables period

(i) Inventory turnover.

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