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Element Sdn Bhd (Element) is a company which manufactures and sells plastic furniture. The directors have pursued a policy of rapid expansion since April 2019.

Element Sdn Bhd (Element) is a company which manufactures and sells plastic furniture. The directors have pursued a policy of rapid expansion since April 2019. A number of new products have been developed and market share has increased. Elements accounting department is finalising its accounting statements for the year ended 31 March 2021. These statements will be presented to the forthcoming meeting of the board of directors where the financial results for the year will be assessed. When reviewing the accounts, the directors will study four target ratios identified in loan covenants given to Elements bankers.

The target ratios set out in the contractual arrangements between Element and the bank are as follows:

Quick ratio

1.1:1

Current ratio

1.5:1

Interest cover

9.5 times

Debt to equity ratio

0.5:1

The draft accounts are as follows:

ELEMENT SDN BHD

Statement of Financial Position as at 31 December

2020

2021

RM'000

RM'000

Non-Current Assets:

Property, Plant & equipment

230,000

180,000

Total Non-Current Assets

230,000

180,000

Current Assets:

Inventories

19,500

15,200

Account Receivables

14,200

14,700

Cash & Cash equivalents

8,240

12,400

Total Current Assets

41,940

42,300

TOTAL ASSETS

271,940

222,300

Equity & Liabilities

Equity:

Share Capital

80,000

50,000

Share Premium

10,000

5,000

Retained earnings

65,290

63,500

Total Equity

155,290

118,500

Non-Current Liabilities:

Long Term Loan

100,000

90,000

Total Non-Current Liabilities

100,000

90,000

Current Liabilities:

Account Payables

15,900

13,300

Current Tax Payables

750

500

Total Current Liabilities

16,650

13,800

TOTAL EQUITY & LIABILITIES

271,940

222,300

Other Relevant Information:

Sales Revenue

86,400

81,100

Cost of Goods Sold

68,990

67,074

Administrative Expenses

2,460

2,146

Distribution Costs

4,750

4,080

Interest Expenses

5,300

4,600

Income Tax

710

400

Profit after Tax

4,190

2,800

  1. Compute the following ratios for both years in relation to Element Sdn Bhd:

  1. Quick Ratio.
  2. Current Ratio.
  3. Times Interest Earned.
  4. Debt to Equity.
  5. Profit Margin.
  1. marks)

b. Prepare a detailed report to the Director of Element Sdn Bhd on the company's position and performance in terms of liquidity, profitability and solvency. Use the ratios calculated at (a) above as the basis for your commentary.

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