QUESTION 2 (25 Marks)

REQUIRED

2.1 Use the information provided below to calculate the ratio for 2020 that would reflect each of the following. Where applicable, round off answers to two decimal places. 2.1.1 The extent to which the claims of short-term creditors are covered by assets that can be translated into cash in the short term (2 marks)

2.1.2 The extent to which long-term debt is covered by shareholders funds (3 marks)

2.1.3 The amount of funds available relative to sales, to pay the companys expenses other than its cost of sales (3 marks)

2.1.4 The rand amount of distributions during the period on behalf of each ordinary share issued (3 marks)

2.1.5 An indication of the profit that has been put back into the company (3 marks)

2.1.6 The amount that investors are willing to pay for each rand of the companys earnings (3 marks)

2.2 Provide TWO (2) ways of making an improvement with regard to each of the following ratios: 2.2.1 Debtors collection period (2 marks)

2.2.2 Operating margin. (2 marks)

2.3 Comment briefly on the following ratios: (2 marks) (2 marks)

2020 2019

2.3.1 Acid test ratio 4.19:1 5.53:1

2.3.2 Return on equity 24.16% 23.75%

INFORMATION The information given below was obtained from the books of Hemrock Ltd for 2020 and 2019: STATEMENT OF FINANCIAL POSITIONS AS AT 31 DECEMBER:

2020 2019

R R

ASSETS

Non-current assets 1 680 000 1 060 000

Property, plant and equipment (cost) 1 660 000 1 080 000

Accumulated depreciation (420 000) (320 000)

Long-term investments 440 000 300 000

Current assets 2 040 000 1 900 000

Inventory 700 000 860 000

Debtors/Accounts receivable 820 000 600 000

Company tax paid in advance 20 000 -

Bank 500 000 440 000

3 720 000 2 960 000

EQUITY AND LIABILITIES

Equity 2 500 000 1 772 000

Ordinary share capital 1 706 000 1 000 000

Retained income 794 000 772 000

Non-current liabilities 900 000 1 000 000

Loan 900 000 1 000 000

Current liabilities 320 000 188 000

Creditors/Accounts payable 192 000 56 000

Dividends payable 128 000 96 000

Company tax payable - 36 000

3 720 000 2 960 000

STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDING 31 DECEMBER 2020

R

Sales 5 600 000

Cost of sales (3 536 000)

Gross profit 2 064 000

Operating expenses (1 064 000)

Operating profit 1 000 000

Interest income 80 000

Interest expense (216 000)

Profit before tax 864 000

Tax (260 000)

Profit after tax 604 000

Additional information

Interim dividends paid during 2020 amounted to R454 000.

There were 170 600 shares in issue during 2020.

The market price per share was R11.50 on 31 December 2020.