QUESTIONS 4 AND 5 ARE BASED ON THE FOLLOWING INFORMATION: INFORMATION Corel Ltd’
ID: 2812817 • Letter: Q
Question
QUESTIONS 4 AND 5 ARE BASED ON THE FOLLOWING INFORMATION: INFORMATION
Corel Ltd’s Statement of Comprehensive Income for the year ended 31 December 2018 and Statement of Financial Position as at 31 December 2017 and 2018 are as follows:
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2018
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER:
ASSETS 2018 2017
R R
Additional information 1. Additional plant and machinery were purchased during 2018. There were no other non-current asset acquisitions or disposals. Depreciation for the year amounted to R316 000.
2. An interim dividend of R200 000 was paid on ordinary shares during the year.
3. The return on equity for 2017 was 18%
QUESTION 5 ANALYSIS OF FINANCIAL STATEMENTS (20)
REQUIRED 5.1 Use the information provided above to calculate the following ratios for 2018. (Where applicable, express your answers to two decimal places.)
5.1.1 Profit margin (2)
5.1.2 Debtors collection period (2)
5.1.3 Inventory turnover (2)
5.1.4 Return on assets (2)
5.1.5 Acid-test ratio (2)
5.1.6 Debt to assets (2)
5.1.7 Return on equity (2)
5.2 Comment on the return on equity calculated in question 5.1.7. (4)
5.3 Refer to the appropriate ratio in question 5.1 and explain whether the company will be able to pay its short-term debts when business conditions are not favourable. (2)
Explanation / Answer
5.1.1 Profit margin = Net Profit after taxes/Sales
= 588000/2304000
= 25.52%
5.1.2 Debtors collection period = 365/Accounts Recievable Turnover
Accounts Recievable Turnover = Sales/Average Accounts Recievable
Average Accounts Recievable=(Beginning Accounts Recievable+Ending Accounts Recievables)/2
= (424000+400000)/2
= R412000
Accounts Recievables = 2304000/412000
= 5.59
Debtors Collection Period = 365/5.59
= 65.27 days
5.1.3 Inventory Turnover = Cost of Good Sold/ Average Inventory
Average Inventory for 2018 = (Begining inventory+Ending Inventory)/2
= (176000+164000)/2
=170000
Inventory Turnover = 1228000/170000
= 7.22
5.1.4 Return on Assets = Net Income after tax/Total assets
= 588000/2984000
= 19.71%
5.1.5 Acid-test ratio = (Cash and cash equivalent + Accounts Recievable)/Current liabilities
= 1.05
5.1.6 Debt to assets = Total debt /Total assets
= 1000000/2984000
= 0.34
5.1.7 Return on Equity = Net Income/Shareholder's Equity
= 588000/1452000
= 40.50%
5.2 Return on Equity in 2018 has increased significanlty on year on year basis. Based on the data provided the sharp increase in return on equity can be possibly due to a surge in the net income margin of the company.
Also, on a standalone basis for the current year the company was able to convert around 40% of the shareholder's money in to profit.
5.3 Acid test ratio measure the company's liquidity profile. A ratio of 1.05 indicates that the company is in a fair position to quickly convert its current assets exclusing inventories over a short period of time to meet its current obligations. However, the company should try to decrease its current liabilities to be in a better position when the conditions are not very favourable.
Debtors Collection period of 65.27 days indicates that it takes around 65 days for the company to recieve payments from its debtors. On a standalone basis the number is decent and in terms of liquidity it means that the company will be able to meet its short term obligations with a collection period of 65 days.