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 (CFO).
The audited financial statements are as follows:
Statement of financial assets and liabilities for the year ended 28 February 2020
2020 2019
R R

Non-current assets
Property, plant and equipment
Land and buildings 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 savings account) 1 500 000 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
Cheque account (ABSA overdraft) 1 200 000 750 000
Trade payables 970 000 950 500
Other financial loans 1 499 800
Short-term portion of loan 2 600 000 2 600 000
Total equity and liabilities 28 490 000 25 560 700

SUMMATIVE ASSESSMENT – 2021 FIRST SEMESTER
FMA101
FINANCIAL MANAGEMENT I

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Statement of income and operating expenses for the year ended 28 February 2020
2020 2019
R R
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 5 times interest earned is accepted by the company.
• Fines and penalties consist of traffic fines.
• Interest on the bank overdraft is 8% per year.
• Gross profit margins for similar listed companies are 50%.
• Extracts from the policy of the company:
o Customers are given credit on their accounts for 30 days.
o Creditors are paid 30 days 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
• Creditor’s payment period

SUMMATIVE ASSESSMENT – 2021 FIRST SEMESTER
FMA101
FINANCIAL MANAGEMENT I

Page 11 of Summative Assessment

• Times interest earned
• Gross profit
Use the following format to present your answer:

Ratio Calculation Improvement
(30)
5.2. Using only the income statement and additional information, name two (2) other concerns that you have and that you think the CFO should pay attention to. (5)