QUESTION 2 (20 MARKS, 36 MINUTES)

The following annual financial statements relate to Supplier A, being one of the potential suppliers for which your entity is contemplating to consider. For each year, 60% of sales are on credit and the balance is cash.

Where applicable, consider 365 days calendar year.

Statement of Financial Position as at 31 December 20212020Non-current assets Property, Plant and Equipment 650,000.00 600,000.00 Current assets Inventory 25,000.00 29,000.00Accounts Receivable 15,000.00 12,000.00Bank 300,000.00 350,000.00 TOTAL ASSETS 990,000.00 991,000.00 EQUITY AND LIABILITIES Share capital 684,875.00 682,750.00Retained earnings 55,125.00 38,250.00Non-current liabilities 250,000.00 220,000.00Trade and other payables 55,000.00 50,000.00 TOTAL EQUITY AND LIABILITIES 990,000.00 991,000.00

Statement of Comprehensive Income for the year ended 20212020Sales 750,000.00 690,000.00Cost of sales- 487,500.00- 483,000.00Gross profit 262,500.00 207,000.00Total Operating expenses- 180,000.00- 150,000.00Profit before interest and tax 82,500.00 57,000.00Interest expense- 9,000.00- 6,000.00Profit before tax 73,500.00 51,000.00Taxation at 25%- 18,375.00- 12,750.00Profit after tax 55,125.00 38,250.00

REQUIRED: Carefully, answer the following questions: MARKS (2.1.)

For each year, calculate the following ratios:

1. Current ratio
2. Quick ratio
3. Inventory turnover ratio
4. Days sales in inventory ratio
5. Debt ratio
6. Gross profit margin
7. Net profit margin

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(2.2.) Given your answers in (2.1.), briefly discuss how Supplier A performed over the two years clearly stating in which year your entity would have opted for. 7 TOTAL MARKS FOR QUESTION 2 20