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QUESTION ONE [30]

Pauls Ice Creams (Pty) Ltd Balance Sheets for 2022 and 2021 financial years are below:

Assets 2022 2021

Non-Current/Fixed 7 000 000 6 000 000

Inventory 500 000 300 000

Receivables 450 000 420 000

Cash 650 000 80 000

8 600 000 6 800 000

Equity and Liabilities

Share Capital (R2 shares) 5 000 000 4 400 000

Share premium 200 000 100 000

Retained Income 700 000 400 000

Long term Debt 2 000 000 1 000 000

Payables 700 000 900 000

8 600 000 6 800 000

The abbreviated Income Statement for the year ended 28 February 2022:

Sales (50% on credit) 3 000 000

Cost of sales (80% on credit) 2 000 000

Depreciation 120 000

Interest Expense 80 000

Net Income before Tax 900 000

Dividends 330 000

Retained Income 300 000

Required:

1.1 Calculate the following ratios for 2022 and comment. Ratios for 2021 are given in brackets.

1.1.1. Current ratio (0,89:1) (3)

1.1.2. Acid test ratio (0,56:1) (3)

1.1.3. The debtors collection period (81 days) [all debtors are on 60 days accounts] (4)

1.2. Calculate the accounts payable period (in days), noting that Pauls Ice Cream Ltd has, after

tough negotiations secured a 90 day account with all its creditors.

Note: Use average accounts payable for this calculation. (4)

1.2.1. Is this an ideal situation? Offer constructive advice to Pauls Ice Cream Ltd. (4)

1.3. Comment in detail on the liquidity of the company. (12)