Low-Cost Housing Pty Ltd Dhanesheri had recently decided to quit the NGO sector and set up a business manufacturing low-cost prefabricated house. A French company had designed a new Citsalp compound that was extremely tough, yet light and easy to work. This had revolutionised low-cost housing manufacture throughout the world and as a contribution towards South Africas development, they had offered Dhanesheri free use of their patent and limited technical support during her first year of production. While she had no experience in manufacture, Dhanesheri saw that the production process was not terribly complex and was sure her recent Gibs PMD would enable her to handle the rest of the business issues. The first year was tough, but after some initial technical problems LCH was able to produce their housing kits to the required specifications at a reasonably competitive price. Getting into the governmental tender process had been difficult and Dhanesheri felt that although her product was good, she needed some help breaking into the market or she was never going to move the volumes necessary to make the business viable. By the end of the year she was over stressed, over worked and over drawn. She decided to close her Alberton based factory over Christmas and asked if you could help prepare her accounts for the year The accounting records showed the following for the first year (2021) of business:

1. A total of 39 housing kits had been sold for R243,000 each. The Cost of Sales for each unit was exactly half that at R121,500.

2. Dhanesheri had started LCH Ltd by investing a R10,000,000 windfall and had been issued with 1 million R10.00 shares.

3. General and Admin Expenses for the year totalled R1,127,300 and she spent 10% of turnover on sales and marketing.

4. Plant and machinery required for the business cost R12,800,000 and this had been bought and fully paid off within the first year. Depreciation charge for the year had been calculated as R2,400,000.

5. Dhanesheri had no L-T debt facility at all and her attempts to secure one had failed. Thus she had relied increasingly on overdraft and attracted interest charges of R372,000 for the year.

6. She did not know what the closing O/D figure was, but the bank manager had left several cellphone messages about it exceeding her R2,000,000 limit.

7. Due to the cash flow squeeze, creditors were only being paid on 67.4 days and this had resulted in them stopping supply on occasion. Thus stock holding at the end of the year was down to R304,400

8. A sale of 8 houses had not been settled by year end and this was LCHs only debtor.

9. Cash on hand amounted to the factory wages float of R240,000.

10. As there was no profit before tax for the year it was agreed that no tax would be liable, and no dividends paid.

Dhanesheri returned from her holiday fully refreshed and pleased that the accounts for her first year in business did not paint as bad a picture as she had expected. However, the level of overdraft worried her and she knew that she would have to find a more permanent solution to this. She had also been discussing the business with her old classmate Jeff and they found several areas of common interest. Jeff had been with government, then moved into corporate banking several years ago. He wasnt keen on corporate life and wanted to start something on his own and it was clear that his experience in government and banking where just what LCH needed. They spent hours discussing various options and eventually it was agreed that Jeff would buy half of Dhanesheris shares (for an undisclosed fee) and join LCH with immediate effect. You were asked to prepare a budget based on the following information:

1. Jeffs focus on sales and knowledge of the government processes meant that LCH expected to sell 180 units in 2022. However, to do so they would need to be more competitive on pricing so the agreed rate per unit was R214,000.

2. Cost of Sales would remain at R121,500 per unit.

3. Jeff felt that the marketing approach used had been expensive and the wrong sort for public sector sales. He was happy that he could reach his targets of 15 units a month with a total budget of R1,200,000.

4. Jeffs banking contacts and knowledge enabled LCH to secure R5,000,000 of L-T debt at a decent rate and Dhanesheri was delighted to cancel the overdraft facility altogether.

5. Admin and general expenses went up to R2,094,000 and interest amounted to R562,000 for the year.

6. No Fixed Assets were bought or sold during the year and the same value was depreciated as the previous year.

7. With Jeff pushing the top line and sorting out the bank and cash flow issues, Dhanesheri was able to focus on running the factory and managing working capital. She felt work was needed in all areas a. To ensure that there were no stock-outs and factory down time she budgeted to hold an average of 60 days stock. b. Jeff had warned that payment would be slow, so two months sales (30 units) were expected to be outstanding as debtors at yearend. c. To restore her working relationship with suppliers, Dhanesheri had met with them and promised prompt settlement on 45 days.

8. Company tax was 28% and LCH resolved to pay out half of all EAT as a dividend.

9. They hoped that the above scenario would leave them with some cash sitting in the bank but needed you to work out how much.

You have been asked to help with the following:

1. The Income Statement for the year ended 31 December 2021 and the balance Sheet as at that date. (10 Marks)

2. A pro-form Income Statement for the year ended 31December 2022 and a Balance sheet as at that date. (10 Marks )

3. A Cash Flow statement for the year ended 31 December 2022. 10 Marks

4. Extract the following ratios for both years:

a. Profit After Tax %

b. FA Turnover Rate

c. Debtor Days

d. Creditor Days

e. Levarge f. ROE% 10 Marks

5. Dhanesheri has asked you to analyse the current accounts and future projections. She has asked you to write a report specifically covering the following areas (and offering any insights and advice that may help improve the business in any way):

a. Analyse the effect of Jeffs involvement and the higher turnover on LCHs profitability? (5 Marks)

b. Comment on the effectiveness of Dhanesheris WCM plan. 5 Marks

c. Jeff has managed to eliminate overdraft and end the year with money in the bank. Therefore do you think that he has done a good job managing the cash flow? Give the reasons behind your answer and offer advice on improving it. 5 Marks

d. Comment on LCHs Capital Structure. 5 Marks