QUESTION 3 [25]

Thomas Ltd is a spare parts agent for motorcycles in Tshwane, South Africa. The company commenced operations at the beginning of the 2010 year. Although being profitable, the business is experiencing cash flow problems. The financial director has approached you for advice in order to remedy this situation. The following amounts for the current (2015) and comparative years were extracted from the records of the company:

20142015 (current)

R`000

Turnover (all sales on credit)220 000250 000

Cost of sales150 000165 000

Profit before interest and tax11 00010 500

Accounts receivable25 00029 600

Accounts payable14 70017 000

Inventory26 000 30 400

Bank/ (overdraft)(1000)(2 000)

3.1 Briefly discuss the purpose of financial statement analysis (3)

3.2 Calculate the following ratios for each year: (10)

3.2.1 Accounts receivable (debtors) collection period

3.2.2 Inventory holding period

3.2.3 Accounts payable (creditors) payment period

3.2.4 Current ratio

3.2.5 Acid test ratio

3.3 Evaluate the company's working capital management in light of the above calculations. (12)