QUESTION 1 (42 MARKS)
You are Professional Accountant (SA) for registered accountants. A client of yours in the SME
sector is speculating shares on listed company on the JSE. The detail and name of the listed
company is confidential at this stage and this is the information that you have been provided
with
1. The company was founded some years ago and operates as a chain of specialist stores
selling stationery, clothing and crockery and home ware on credit.
2. From January 2008 to present date, the shares have doubled in price and the market
in general appears to be most impressed with the performance of the economy.
3. The growth in the share price has been accompanied by growth in the number of
stores that have been opened or acquired through the take over of SMEs operating in
the same market.
4. Extractsfrom the annual financial statements of the are as follows:
Statement of Financial Position at 31 December
2012 2011
R'000 R'000
EQUITY AND LIABILITIES
Issued share capital 147834 147834
Retained Income 100192 82275
Equity attributable to ordinary shares 248026 230109
Name of the Examiner: Name of the Moderator:
Signature of Examiner: Signature of Moderator:
Date: Date:
Non-Current Liabilities
Long Term Loans 237652 108297
Current Liabilities 148141 56390
Creditors 130732 44784
Shareholdersfor dividends 17409 11606
Bank Overdraft 0 0
TOTAL EQUITY AND LIABILITIES 633819 394796
ASSETS
Non-Current Assets
Property, Plant and Equipment 16069 14696
Current Assets 617750 380100
Inventory 192085 149002
Trade and other receivables 425665 229633
Cash and bank balances 0 1465
TOTAL ASSETS 633819 394796
Statement of Profit and Loss and Other Comprehensive Income for the years
ended 31 December
2024 2023
R'000 R'000
Turnover 1287052 934052
Operating Profit 137342 81768
Net Finance Cost 39264 20862
Operating Profit before taxation 98078 60906
Income tax expense 7027 3048
Profit for the Year 91051 57858
3502 2237
Operating profit includes Depreciation
and loss on sale of fixed asset
Required:
a) Prepare the cash flows from operating activities for the company for 2024
using the available information (10 Marks)
b) Perform a financial review of the company based on calculating the following
financial ratios and explain how it may be interpreted.
Debt equity ratio
Timesinterest earned
Current ratio
Debtors average collection period
Inventory turnover
Your answer should include an overall assessment of the company (25 Marks
a) Cash flows from operating activities for the company for 2024:
Operating Profit before taxation: 98,078
Adjustments for:
Depreciation: 3,502
Loss on sale of fixed asset: 2,237
Changes in working capital:
Increase in Inventory: (43,083) (192,085 - 149,002)
Increase in Trade and other receivables: (196,032) (425,665 - 229,633)
Increase in Creditors: (85,948) (130,732 - 44,784)
Increase in Shareholders for dividends: (5,803) (17,409 - 11,606)
Net cash flows from operating activities: (232,290)
b) Financial ratios and interpretation:
Debt equity ratio: Non-Current Liabilities / Equity attributable to ordinary shares
= 237,652 / 248,026
= 0.957
Interpretation: A debt equity ratio of less than 1 indicates that the company has more equity than debt, which is a positive sign as it shows that the company is less reliant on debt financing.
Times interest earned: Operating Profit before taxation / Net Finance Cost
= 98,078 / 39,264
= 2.50
Interpretation: A times interest earned ratio of 2.50 means that the company's operating profit is able to cover its interest expenses 2.50 times over, which shows the company's ability to meet its interest obligations.
Current ratio: Current Assets / Current Liabilities
= 617,750 / 148,141
= 4.17
Interpretation: A current ratio of 4.17 indicates that the company has more than enough current assets to cover its current liabilities, which reflects a strong liquidity position.
Debtors average collection period: (Trade and other receivables / Turnover) * 365
= (425,665 / 1,287,052) * 365
= 121 days
Interpretation: A debtors average collection period of 121 days shows that, on average, it takes the company 121 days to collect its accounts receivable, which indicates the efficiency of the company's credit control measures.
Inventory turnover: Cost of Goods Sold / Average Inventory
= 1,287,052 / ((192,085 + 149,002) / 2)
= 8.02 times
Interpretation: An inventory turnover of 8.02 times indicates that the company is able to sell and replace its inventory 8.02 times during the year, which shows good inventory management.
Overall assessment: Based on the financial ratios calculated, the company appears to have a strong liquidity position, efficient inventory management, and is able to meet its interest obligations. However, the debt equity ratio is relatively high, indicating a significant reliance on debt financing. The company should focus on reducing its debt levels to improve its financial stability.