Discuss the liquidity of the company. Support your answer with the necessary calculations. Include the cash conversion cycle as one of the calculations. (40)

QUESTION 1: [60 Marks] You are preparing for a board meeting and the Financial Manager provided you with the following audited financial statements of SAC (Pty) Ltd for the year ended February 2020. Statement of comprehensive income for the period ending 28 February 2020 Feb-18 R'000 Feb-19 R'000 Feb-20 R'000 Sales (revenue) 13 580 000 12 867 000 11 480 000 Cost of Sales 9 500 342 9 250 000 8 650 000 Gross profit 4 079 658 3 617 000 2 830 000 Expenses 3 670 000 4 010 000 4 350 000 Earnings before interest 409 658 - 393 000 - 1 520 000 and tax (EBIT) (Operating profit) Interest 190 566 260 768 290 780 - 1 810 780 Profit before tax (PBT) 219 092 - 653 768 Tax 0 0 61 346 157 746 Profit after tax - 653 768 - 1 810 780 Number of ordinary shares 1 500 000 1 650 000 1 650 000 -0.40 Earnings per share (EPS) 0.11 - 1.10 cents Dividends 250 000 250 000 250 000 Statement of financial Position as at 28 February 2020 Feb-18 Feb-19 Feb-20 R'000 R'000 R'000 Assets: Non-current assets 9 150 812 9 801 280 10 265 950 Property, plant and 6 850 032 7 100 500 7 500 500 equipment Motor vehicles 1 350 780 1 650 780 1 780 450 OCTOBER/NOVEMBER 2021 Furniture & Fittings 950 000 1 050 000 985 000 Current Assets: 3 379 080 3 244 844 2 469 394 Inventory 1 171 275 1 267 123 1 303 425 Trade receivables 2 232 329 1 938 863 1 824 219 Cash And bank 24 524 38 858 -658 250 Total Assets 12 529 892 13 046 124 12 735 344 Equity and Liabilities Equity 4 529 892 3 926 124 1 865 344 Ordinary shares (1500000 3 000 000 3 300 000 3 300 000 shares @ R1 each) Retained income 1 529 892 626 124 - 1 434 656 Non-Current Liabilities: 6 050 000 6 650 000 7 900 000 Long term loan 5 200 000 7 500 000 6 000 000 650 000 Shareholders loan account 850 000 400 000 Current Liabilities: Trade Creditors 1 950 000 2 470 000 2 970 000 Total Equity and Liabilities 12 529 892 13 046 124 12 735 344 Required: (40) a. Discuss the liquidity of the company. Support your answer with the necessary calculations. Include the cash conversion cycle as one of the calculations. (Marks will be awarded as follows: Calculations 18, Observations 6, Interpretation 12, conclusion 4 = total 40) b. Discuss the solvency of the company. Support your answer with the necessary calculations. (20) (Marks will be awarded as follows: calculations 9, observations 3, interpretation 6, conclusion 2 = total 20) QUESTION 1: [60 Marks] You are preparing for a board meeting and the Financial Manager provided you with the following audited financial statements of SAC (Pty) Ltd for the year ended February 2020. Statement of comprehensive income for the period ending 28 February 2020 Feb-18 R'000 Feb-19 R'000 Feb-20 R'000 Sales (revenue) 13 580 000 12 867 000 11 480 000 Cost of Sales 9 500 342 9 250 000 8 650 000 Gross profit 4 079 658 3 617 000 2 830 000 Expenses 3 670 000 4 010 000 4 350 000 Earnings before interest 409 658 - 393 000 - 1 520 000 and tax (EBIT) (Operating profit) Interest 190 566 260 768 290 780 - 1 810 780 Profit before tax (PBT) 219 092 - 653 768 Tax 0 0 61 346 157 746 Profit after tax - 653 768 - 1 810 780 Number of ordinary shares 1 500 000 1 650 000 1 650 000 -0.40 Earnings per share (EPS) 0.11 - 1.10 cents Dividends 250 000 250 000 250 000 Statement of financial Position as at 28 February 2020 Feb-18 Feb-19 Feb-20 R'000 R'000 R'000 Assets: Non-current assets 9 150 812 9 801 280 10 265 950 Property, plant and 6 850 032 7 100 500 7 500 500 equipment Motor vehicles 1 350 780 1 650 780 1 780 450 OCTOBER/NOVEMBER 2021 Furniture & Fittings 950 000 1 050 000 985 000 Current Assets: 3 379 080 3 244 844 2 469 394 Inventory 1 171 275 1 267 123 1 303 425 Trade receivables 2 232 329 1 938 863 1 824 219 Cash And bank 24 524 38 858 -658 250 Total Assets 12 529 892 13 046 124 12 735 344 Equity and Liabilities Equity 4 529 892 3 926 124 1 865 344 Ordinary shares (1500000 3 000 000 3 300 000 3 300 000 shares @ R1 each) Retained income 1 529 892 626 124 - 1 434 656 Non-Current Liabilities: 6 050 000 6 650 000 7 900 000 Long term loan 5 200 000 7 500 000 6 000 000 650 000 Shareholders loan account 850 000 400 000 Current Liabilities: Trade Creditors 1 950 000 2 470 000 2 970 000 Total Equity and Liabilities 12 529 892 13 046 124 12 735 344 Required: (40) a. Discuss the liquidity of the company. Support your answer with the necessary calculations. Include the cash conversion cycle as one of the calculations. (Marks will be awarded as follows: Calculations 18, Observations 6, Interpretation 12, conclusion 4 = total 40) b. Discuss the solvency of the company. Support your answer with the necessary calculations. (20) (Marks will be awarded as follows: calculations 9, observations 3, interpretation 6, conclusion 2 = total 20)