It is the policy of Libra Ltd to retain 40% of the profit after tax. Was this policy adhered to for the financial year ended 31 December 2020? Motivate your answer. (5 marks)

1.2 Has management been efficient in the management of its accounts receivable? Use the relevant ratio to motivate your answer.

1.3 Did Libra Ltd take advantage of the credit terms offered by its trade creditors? Substantiate your answer. (4 marks)

1.4 Would the shareholders of Libra Ltd be satisfied with their return on investment? Why? (4 marks)

1.5 Suppose Libra Ltd purchases goods for R600 000. How much should it sell the goods for and still maintain the existing gross margin ratio? (4 marks)

1.6 Comment on the ability of the company to generate profits from all the capital it has employed. Support your answer with a suitable ratio. (4 marks)

INFORMATION

Libra Ltd commenced operations during January 2015. The company experienced profitability since the first year of existence and was able to pay out dividends to the shareholders over the years and retain some of the profit. The following are excerpts of the financial statements of Libra Ltd for 2020:

LIBRA LTD

STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2020

Sales (all credit) 7 000 000
Cost of sales (5 600 000)
Gross profit 1 400 000
Operating expenses (800 000)
Operating profit 600 000
Interest expense (150 000)
Profit before tax 450 000
Company tax (135 000)
Profit after tax 315 000

STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2020

Assets

Non-current assets 700 000
Inventories 1 600 000
Accounts receivable/Debtors 800 000
Cash 100 000
3 200 000
Equity and liabilities
Ordinary share capital 1 200 000
Retained earnings 500 000
Long-term loan (15%) 800 000
Accounts payable/Creditors 400 000
Dividends payable 100 000
Other current liabilities 200 000
3 200 000

NOTE:

1. Interim dividends paid during the year amounted to R114 200.

2. Inventories amounted to R1 800 000 on 31 December 2019.

3. Eight percent (80%) of all purchases of inventories is on credit.

4. Credit terms to debtors are 30 days and the creditors of Libra Ltd allow 90 days to settle accounts.