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Assignment

Assignment

Uploaded by

andiswandie2
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© © All Rights Reserved
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Download as DOCX, PDF, TXT or read online on Scribd
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Assignment: Senzimali Holdings Ltd solution 30 Marks

Part A
1.
• Gross profit is the amount of sales that is remaining once the cost of sales has been
deducted. Cost of sales are the expenses that are directly related to the production of the
product or service that is sold. √
• Operating profit is the amount of sales remaining once all expenses incurred in operating
the business have been deducted. These expenses include expenses incurred directly in the
production of the service as well as indirect expenses incurred in order for the business to
operate. Gross profit − operating expenses. √
• Profit is the amount of sales remaining once all expenses have been deducted (whether
direct or indirect, operational or non-operational, ordinary or extraordinary). This profit
includes income earned from operations as well as income earned from activities entered
into other than the core operations. √
The user needs to see these different forms of profit on the face of the statement of
comprehensive income as they help the user to predict the future cash flow potential of the
company. Where non-operating and extraordinary items have significantly affected the profit,
the user will know that these cash flows cannot be attributed to the actual business
operations.
2. The management reduced the amount the business was worth during 2020 − they
destroyed shareholder value amounting to R10 754 000√. An examination of the statement
of comprehensive income identifies the reduction in worth, and seeing that there was a loss
of R10 754 000 for the year, this means that the net assets of the company were reduced
during the year (assets reduced and/or liabilities increased). √
3. The total assets of R69 143 000 were financed by:
• Capital introduced by the shareholders R73 784 000
• Accumulated losses made by the business R9 178 000
• Outside lenders (liabilities/debt) R4 537√
4. There was no dividend declared by the company during the 2020 year. This can be seen
in the statement of changes in equity. You could also see this from the statement of financial
position, as the difference in retained earnings between 2019 and 2020 is a loss of R10 754
000 (R1 576 000 + R9 178 000) √. This is the loss as shown on the statement of
comprehensive income. We can therefore see that the retained earnings have not been
reduced by a dividend declared. If a dividend had been declared, the change in retained
earnings over the year would not have been equal to the loss on the statement of
comprehensive income but would have been further reduced by the dividend declared. √
Part B
Liquidity ratios
1. Current ratio
2020
11 335/4 041 = 2.8 : 1
2019
10 382/2 959 = 3.5 : 1√
Liquidity has decreased during the year. Trade payables have grown at a faster rate than
trade receivables. However, cash balances are large enough in both years to cover current
liabilities. √
When discussing the liquidity, look at the cash from operations figure. Is it sufficient to cover
interest and tax?
2. Debt ratio
2011
Total debt/Total assets
=4
537/69 143
= 6.5%
2010
Total debt/Total assets
4 050/79 410
= 5%√
• Only 6.5% of assets are funded by debt (in 2019; 5%)
• Largest asset is goodwill − this asset would not have value in liquidation
• Bank is interested in getting money back if business is liquidated.
• Looking for cushion − amount asset value can fall from carrying amount during liquidation
and bank can still get money back.
• Could look at ratio excluding goodwill and see what cover the bank has
• Would look at type of assets − how much value would they retain during liquidation? √
Other ratios
Cash flow from operations / total debt
3251/4537
= 71.6%√
Looks at ability to cover debt from operations − will not need to rely on financing or investing
activities to generate cash to repay debt − strong ratio, bank would be more comfortable
lending to the business − shows ability to repay loans.
3. Percentage increase in revenue from 2019 to 2020:
10 817 − 4 023
4 023
= 168%√
4.
• Free cash flows − EBIT adjusted for Non Cash Flow, adjusted for WC changed and CAPEX
• Lenders and shareholders − growth will come from the ability to invest future cash flows
into the business.
• Debt repayments and interest repayments can be made from these cash flows that have
been generated by the business. √
Part C
1. Exceptional items are income or expense items that do not occur in the normal course of
business. They are separately disclosed so that users of the financial statements can
determine what the sustainable (or normal) income and expense streams (and therefore
profit) are from the business. In analysing the business (particularly if we are looking at
trends in the business) we would exclude extraordinary items from our analysis, as they
would distort the figures. If Pick ‘n Pay sold off their Namibian holdings, this would be an
exceptional item as it is not in the normal course of business. √√
2. Headline earnings are earnings that have been adjusted for exceptional items and are
meant to indicate a sustainable earnings for the business√
3. Goodwill amortised indicates that goodwill is being written off over the useful life of an
intangible asset. √
4. The carrying amount of the business is A − L (as represented on the statement of financial
position) − this represents the accounting value of the business. The carrying amount of the
business amounts to 64 606 (69 143 − 4 537). √
5. The carrying amount per share amounts to 64 606/10000 = 6.46√
6. Market capitalisation = No of shares × current share price = 10 000 × 10 = 100 000. This
indicates the markets valuation of the company. √
7. The reputation of a business, its location, management team, exclusive supplier rights,
market share etc all add value to a business BUT these items do not appear on the
Statement of financial position of the business as they do not meet the criteria for an asset.
The market (individuals and organizations who buy and sell shares) recognises the value
these items add and are prepared to pay for the ability these items have to generate future
earnings (an increase in the share price and an increase in the market capitalisation). The
carrying amount of a share (or firm) will be substantially lower that the market capitalisation if
much of its value as a firm is not represented by the assets on the statement of financial
position. √√
Part D
1. Debt has a cost − interest rate − use the funds borrowed to invest in the business to
generate returns − the returns may be larger or smaller than the cost. Interest is a fixed cost
− needs to be repaid regardless of liquidity or profitability of business. If business generates
more that the cost of the debt − additional return belongs to shareholders. √
a) Financing − choice of debt or equity. Debt increases potential return and increases
potential risk of business. √
2.
b) Investing − purchasing assets to generate a return. Look at the type of assets invested in
− what return are they able to generate? Cash earns small return, so cash-heavy firms are
not necessarily preferable. √
The dividend decision: what portion of profit is reinvested in the company and what portion is
paid out to shareholders as a dividend? Has the policy suddenly changed and what has
caused the change? √

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