The document discusses several financial ratios and concepts. It analyzes current and acid test ratios, debtors collection period, accounts payable period, and liquidity ratios for a company. It also covers economic order quantity, reorder points, minimum and danger stock levels. Finally, it provides an income statement, cash flow statement, and cash budget with calculations and notes.
The document discusses several financial ratios and concepts. It analyzes current and acid test ratios, debtors collection period, accounts payable period, and liquidity ratios for a company. It also covers economic order quantity, reorder points, minimum and danger stock levels. Finally, it provides an income statement, cash flow statement, and cash budget with calculations and notes.
The document discusses several financial ratios and concepts. It analyzes current and acid test ratios, debtors collection period, accounts payable period, and liquidity ratios for a company. It also covers economic order quantity, reorder points, minimum and danger stock levels. Finally, it provides an income statement, cash flow statement, and cash budget with calculations and notes.
The document discusses several financial ratios and concepts. It analyzes current and acid test ratios, debtors collection period, accounts payable period, and liquidity ratios for a company. It also covers economic order quantity, reorder points, minimum and danger stock levels. Finally, it provides an income statement, cash flow statement, and cash budget with calculations and notes.
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Question One
1.1.1
Current Ration = current assets/ current liabilities
= (450 000 + 650 000 +500 000) / 700 000
= 1 600 000/700 000
= 2.29:1
Current Ratio shows the ability of the company repayment towards short term liabilities due within one year. In the Given it is improved from 0.89 in 2021 to 2.29 in 2022 which is significant improvement.
1.1.2 Acid test ratio = (Current assets – inventory/current liabilities
= ( 1 600 000 – 500 000)/700 000
=1.57:1
Acid Test Ratio compares companies quick assets to current liabilities. In the Given it is improved from 0.56 in 2021 to 1.57 in 2022 which shows companies is focusing on improving liquidity. This shows that the company does rely too much on inventory to settle liabilities.
1.1.3 Debtors collection period = Receivables/ credits sales X 365
= 450 000/(3000 000 x50%) X 365
= 450 000/ 1500 000 X 365
=109,5days
Debtor Collection period means average time taken to collect cash from debtors. In the Given it is fallen from 81 in 2021 to 110 in 2022 which shows need for improvement. Debtors are given 60 days to meet their obligations. They are taking an additional 50 days beyond the expected terms. This is approximately 82% (49,5/60 days X 100) longer than they are allowed.
1.2 Accounts payable period = payables/credit purchases X365
= 800 000/(2000 000*80%)X360
= 800 000/1600 000 X 365
= 182.5 days
1.2.1 Accounts Payable period means average time taken to pay creditors. If no of days is greater, the company is failing to pay creditors. In the given case it is increased which shows weakening of financial performance of company. Creditors should be paid within 90 days, but the company is taking 92.5 days to pay off creditors. This indicates ineffective creditors management .
1.3 Liquidity ratio is the factor for assessing a company's basic financial health. It indicates how well the company's management is able to control costs.
So company financial health related to control stand point is better because the current ratio and quick ratio both are greater than 1 of company.
The business has a more significant margin of safety with regard to the ability to pay off debt obligations. But it’s also important to remember that if the liquidity ratio is too high, it may indicate that the company is keeping too much cash on hand and aren’t allocating the capital effectively. Instead, the company could use that cash to fund growth initiatives or investments, which will be more profitable in the long run.
Furthermore, when looked at in isolation, the accounting liquidity ratio may not be giving you the whole story. Instead, the company would need to look at the liquidity ratio as part of a trend and compare with the ratios of the industry. If a firm has a particularly volatile liquidity ratio, it may indicate that the business has a certain level of operational risk and may be experiencing financial instability.
When it come to the collection and payment period, the company slacks behind. There is a delay in the payment of creditors and the debtors’ collections period. The company takes an extra 92 days to pay of their creditors. If the business takes too long to pay its creditors, they may refuse to extend further credit. A high collection period could mean customers are taking their time to pay their bills. This could be indicative of a more relaxed credit policy. The compnay should consider being stricter in terms of their credit policies by increasing payment expectations, running credit checks or by other means. In order to rectify this and avoid problems and in the future, it's best to address high collection periods as quickly as possible.
Question Two
Brainy Ltd at present has:
Bad debts = (2 600 000 x 0.8%) = 20 800
Financing costs for credit sales of (2,600,000 x 42/365 x 14.5%) = 43 381
Total Cost = 64 181.
Factoring costs would be:
• A charge of 1.8% of R2 600 000 = 46 800
less savings in administration = (20 000)
Total = 26800
• financing costs of (2 600 000 x 75% x 30/365 x 15%) = 24 041
(This is for the advance from the factor)
For financing from own resources (2 600 000 x 25% x 30/365 x 14.5%) = 7 747 Therefore, the overall factoring cost is = 58 588
As Brainy Ltd is nearing its overdraft limit, Pinky Ltd whole package should be accepted.
2.2.1 EOQ is that size of the order which gives maximum economy in purchasing any material and ultimately contributes towards maintaining the materials at the optimum level and at the minimum cost.
In other words, EOQ is the amount of inventory to be ordered at one time for purposes of minimizing annual inventory cost.
2.2.2 EOQ = EQQ =
√ 2 DS C D = 5 750 000 tons
C = 0.40(22.50) = R9.00 per ton, pa.
S = R595 per order
EQQ = √ 2 X (5750 000)(595) 9.00 = 27 573.135 tons per Order.
2.3.1 Ordering point = Maximum daily or weekly or monthly usage x Lead time
= 800 x 30
= 24 000 units
2.3.2 Minimum limit = Re-order level – Average or normal usage X Normal re-order period
= 24,000 - (700 * 27.5)
= 24,000 - 19,250
= 4,750 units.
2.3.3 Danger level = Average daily requirement × Time required to get emergency supply
= 700 × 4
= 2,800 units
Question Three 3.1 Extract of Statement of Comprehensive Income for the year ended 30 June 2022
Sales 750 000
Dividends received 10 000 Profit on sale of asset (240 000 – 160 000) 80 000 840 000 Less: Interest Expense (5000) Depreciation (220 000) Written off machinery (60 000) Profit before tax 555 000
3.2 Cash flow Statement with notes for the year ended 30 June 2022.
Cash Generated from
Operation 668 000
Net Profit before tax 555 000
Non-Cash Flow adjustment
Depreciation 220 000 Write-off Machine 60 000 Dividneds Paid 140 000 Tax Paid 18 000 Interest Expense 5 000 Dividends received -10 000 Profit on sale of asset -80 000 Changes in working capital Decrease in receivables 40 000 Decrease in Payables -40 000 Increase in Inventory -240 000
Cash from Investing Activities -220 000
Purchase of property -160 000 Purchase of Machinery -3 000 000 Sale of Machinery 240 000
Cash from Financing Activities 50 000
Issue of Capital 120 000 Investment in Rea ltd -70 000 Net Cash 498 000 Opening 80 000 Closing Balance 418 000
1. Interest Paid
Interest in the beginning of the year 0
Interest expense 5000 Interest at the end if the year 0 Interest paid 5000
2. Dividends paid
Dividend beginning of the year 0
Dividends paid 140 000 Dividends at the end of the year 0 Dividends paid 140 000
3. Taxation Paid
Tax the beginning of the year 0
Tax expense 18000 Tax at the end of the year 0 Tax paid 18 000
Question four
Workings
Debtors Collection Schedule
Month Credit Sales April May
March 288 000 201 6000 14 400
April 304 000 60 800 212 800 May 320 000 64 000 262 400 291 200
Creditors payment schedule
Month April May
March R205,200(R 14 400 240,000*90% credit*95% after 5% discount April R 239,400(R 280,000*90%*95 %)
