QUESTION 1 30 MARKS

You were recently appointed as the financial manager of DesignIt Limited (DesignIt). DesignIt specializes in the manufacturing of exclusive and custom furniture designs for various retail stores in Namibia. The company has been listed on the Namibian Stock Exchange (NSX) since 2006, which was six years after its inception and the company has been performing well ever since.

It has recently come to light that Namibia is in a technical recession and as a financial manager, you need to assess the impact that this can have on DesignIt in the future.

Your first task has been to review the financial statements of the company for the current financial year ended 30 September 2021.

DesignIt Limited

Statement of financial position as at 30 September 2021

	Notes	2021		2020
		N$		N$
Assets
Non-current assets		6 843 960		4 185 500
Property, plant and equipment		4 503 960		3 000 500
Investment property		2 340 000		1 185 000
Current assets		6 719 951		5 071 895
Inventories		2 741 500		2 000 000
Trade and other receivables		2 450 000		1 240 000
Cash and cash equivalents		1 528 451		1 831 895
Total assets		13 563 911		9 257 395
EQUITY AND LIABILITIES
Total equity	1	5 369 781		2 409 141
Share capital		200 000		200 000
Retained earnings		5 169 781		2 209 141
Non-current liabilities		5 000 000		3 600 000
10% Long-term borrowings		2 000 000		1 100 000
8% Redeemable debentures		2 700 000		2 500 000
12% Long-term bonds		300 000		-
Current liabilities		3 194 439		3 248 254
Trade and other payables		2 292 939		2 279 550
Shareholders for dividends	2	774 000		941 004
Current taxation payable		127 500		27 700
Total equity and liabilities		13 564 220		9 257 395

Statement of profit or loss and other comprehensive income for the year ending 30 September 2021

	Notes	2021		2020
		N$		N$
Revenue		13 100 000		12 000 000
Variable costs	3	(5 240 000)		(4 200 000)
Contribution		7 860 000		7 800 000
Other income		81 000		78 100
Fixed operating expenses		(2 145 000)		(1 950 000)
Earnings before interest and tax (EBIT)		5 796 000		5 928 100
Finance cost		(609 000)		(432 000)
Profit/(Loss) before tax		5 187 000		5 496 100
Income tax expense		(1 452 360)		(1 538 908)
Profit for the year		3 734 640		3 957 192

Notes:

1. The company has 2 000 000 issued shares at a nominal value of N$0.10 per share. As at close of business on the 30^th September 2021; the share price of DesignIt was trading at N$6.20 per share in the market, while in 2020 it was N$6.00 per share.
2. Total dividends were declared as follows (2021: N$774 000 and 2020: N$941 004).
3. The total cost of sales is made up of only variable costs.

The following information regarding the furniture manufacturing industry was also presented to you:

Industry average	2021	2020
Debt ratio	35%	33%
Current ratio	1.73:1	2.1:1
Interest cover	8	8.5

REQUIRED		Marks
1.1	Calculate the relevant ratios for 2021 and 2020 under the following headings: Debt management ratios; Liquidity ratios. Communication Correct ratios under correct headings	(9) (9) (1)
1.2	Critically comment on the overall ratios calculated in 1.1 and shortly comment on the impact of the recession under the following headings: Debt management of DesignIt; Liquidity position of DesignIt. Communication clear and logical layout	(6) (4) (1)