Question 5 (29 marks) Mola Mola Waves Ltd is a retailer of surfing boards and swimming wear, with stores throughout the coast of Namibia. The companys most recent summarised financial statements, together with comparative figures for the previous two years are given below: Mola Mola Waves Ltd STATEMENTS OF FINANCIAL POSITION AS OF 31 MARCH 2020 N$ 000 2019 N$ 000 2018 N$ 000 ASSETS Non-current assets Property, plant, and equipment 640 580 560 Current assets 2 520 2 200 1 800 Inventory 1 240 1 050 830 Trade and other receivables 1 270 1 100 910 Cash 10 50 60 TOTAL ASSETS 3 160 2 780 2 360 EQUITY AND LIABILITIES Equity 720 700 680 N$ 1 Ordinary share capital 200 200 200 Retained earnings 520 500 480 Non-current liabilities Long-term borrowings 640 400 400 Current liabilities 1 800 1 680 1 280 Trade and other payables 560 620 600 Tax payable 20 40 40 Bank overdraft 1 220 1 020 640 TOTAL EQUITY AND LIABILITIES 3 160 2 780 2 360 Mola Mola Waves Ltd STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 MARCH 2020 N$ 000 2019 N$ 000 2018 N$ 000 Sales 5 180 4 520 3 790 Cost of sales (3 500) (3 000) (2 500) Gross profit 1 680 1 520 1 290 Operating costs (1 400) (1 280) (1 100) Operating profit 280 240 190 Finance costs (220) (120) (50) Profit before tax 60 120 140 Taxation (20) (40) (40) Profit for the period 40 80 100 The following information is relevant: In recent years, the company has opened a number of new stores in order to achieve growth in sales. It has also tried to improve the range and quality of its product offering by broadening its supplier base. As a result of these decisions, the liability to the peoples bankers has increased substantially. The bank overdraft is unsecured and the bank has set a limit of N$ 1.4 million on the overdraft. The long-term borrowings are secured over the assets of Mola Mola Waves Ltd. Repayment is due on 31 March 2023. The corporation tax is 20% Given the steady increase in the bank overdraft which has taken place in recent years, the company has recently contacted the bank to request an increase in the overdraft limit. You are an accountant employed by Mola Mola Waves Ltds bankers. The bank is concerned at the increase in the level of the companys overdraft (and the request to increase it further) and your manager has asked you to conduct an analysis on the companys financial statements. Required: a) Calculate the following ratios for Mola Mola Waves LtdLtd for the year ended 31 March 2020. Page 24 of 24 The comparative ratios for years 2019 and 2018 have already been computed. Use the year end figures (do not use averages) 2019 2018 Gross profit percentages 33.6% 34.0% Operating profit percentages 5.3% 5.0% Return on total assets 6.5% 5.9% Interest-bearing debt to interest-bearing debt + equity 67% 60% Interest cover (times) 2.0 times 3.8 times Current ratio 1.3 1.4 Quick (Acid-test) ratio 0.7 0.8 Inventory holding period 128 days 121 days Receivables collection period 89 days 88 days Payable payment period 75 days 88 days Total asset turnover 1.6 times 1.6 times b) Write a report to the regional manager which analyses the financial performance and position of Mola Mola Waves Ltd for the period covered by the financial statements. (17 marks) (NB: your report may take any form you wish, but should specifically address the particular concern of the bank regarding the rapidly increasing overdraft. Therefore, your report should identify aspects of poor performance which could have contributed to the increase in the overdraft, and further information that might be useful to the decisions on whether or not to approve the companys request.