Question 5 (35marks)

You are the accountant at Lucky (Pty) Ltd and you have heard about the shares that the company wants to buy. You have noticed, however that there are a few operating controls that can be improved before the share acquisition and you want to discuss this with the chief financial Officer. The audited financial statements are as follows:

2020 2019

Non-Current assets

Land 15 000 000 15 000 000

Motor Vehicles 1 650 000 1 150 000

Machinery 6 780 000 4 780 000

Current Assets

Money market account (FNB acc) 1 50000 1 500 000

Trade debtors 1 980 000 1 750 000

Inventory 1 580 000 1 380 700

Total Assets 28 490 000 25 560 700

Equity and Liabilities

Equity

Share Capital 2 000 000 2 000 000

Accumulated profit 12 430 000 10 780 000

Non-current liabilities

Long term loan 7 790 200 8 480 200

Current Liabilities

Overdraft 1 200 000 750 000

Trade Payables 970 000 950 500

Other Financial loans 1 499 800 0

Short term loan 2 600 000 2 600 000

Total equity and liabilities 28 490 000 25 560 700

Statement income and operating expenses for the year ended 28 February 2020

2020 2019

Income 18 954 623 15 984 637

Cost of Sales 7 202 756 3 996 159

Gross profit 11 751 867 11 988 478

Other Income

Interest received 105 000 63 000

Operating expenses:

Accounting fees (165 000) (150 000)

Bank charges (189 780) (179 560)

Depreciation (1 686 000) (1 186 000)

Employee cost (939 600) (870 000)

Finance Cost (618 450) (408 450)

Fines and penalties (58 780) (49 850)

Rent payments (1 248 000) (960 000)

Water and Electricity (1 173 660) (978 050)

Profit before tax 5 777 597 7 269 568

Taxation (1 617 726) (2 035 478)

Profit after tax 4 159 871 5 234 090

Additional information:

Interest on the money market account is 3% per year.

Any value from 3 to 5times interest earned is accepted by the company.

Fines and penalties consist of traffic fines.

Interest on bank overdraft is 8% per year

Gross profit margins for similar listed companies are 50%

Extracts from the policy of the company:

Customers are given 30days

Creditors are paid 30days from the date of purchase.

Required:

5.1. Analyse the financial statements only for 2020 by calculating the following ratios and recommending two (2) possible improvements for each ratio. If no improvement is needed, specify the reason.

Current Ratio

Debtor's collection Period

Creditors payment period

Times interest earned

Gross Profit

Use the following format to present your answer:

Ratio Calculation Improvement

5.2. Using the income statement and additional information, name two (2) other concerns that you have and you think the Chief Financial Officer should pay attention to. (5marks)