QUESTION 2 (20 Marks)

REQUIRED Use the information provided below to answer the following questions: 2.1 Comment on the financial result of the company. (2 marks) 2.2 Is the company efficient in its collection of debts arising from credit sales? Motivate your answer by using an appropriate ratio. (3 marks) 2.3 Will creditors allow credit under distress business conditions to Silverstone Limited? Explain your answer with the relevant ratio. (3 marks) 2.4 Would the shareholders be happy with the profitability of the company? Use an appropriate ratio to motivate your answer. (4 marks) 2.5 Calculate the ratio for 2021 that reflects how the stock market is judging the companys earnings performance and prospects. (4 marks) 2.6 Explain the impact on the cost of sales in the statement of comprehensive income if LIFO rather than FIFO method of valuing inventories is used during periods of rising prices. (4 marks)

INFORMATION Extracts of the statement of comprehensive income and statement of financial position of Silverstone Limited for 2021 and 2020 are as follows: Statement of Comprehensive Income for the year ended 31 December:

2021 (R) 2020 (R) Sales 6 400 000 5 440 000 Cost of sales 4 000 000 3 264 000 Gross profit 2 400 000 2 176 000 Operating expenses 960 000 1 056 000 Operating profit 1 440 000 1 120 000 Profit before tax 1 280 000 1 040 000 Profit after tax 896 000 728 000

Statement of Financial Position as at 31 December: Assets 2021 (R) 2020 (R) Non-current assets 7 600 000 6 400 000 Current assets 5 240 000 4 400 000 Inventory 2 440 000 1 600 000 Accounts receivable 1 000 000 1 680 000 Cash and cash equivalents 1 800 000 1 120 000 Total assets 12 840 000 10 800 000 Equity and liabilities Shareholders equity 9 880 000 8 800 000 Non-current liabilities 1 600 000 800 000 Current liabilities (Accounts payable only) 1 360 000 1 200 000 Total equity and liabilities 12 840 000 10 800 000

Note: All purchases and sales of inventories are on credit. The credit terms to debtors are 30 days. There were 2 000 000 shares in issue during 2021. The market price per share was R5.50 on 31 December 2021.