QUESTION ONE [30]

Extracts of the Statement of Comprehensive Income for the year ended 31 December 2018 and the Statement of Financial Position as at 31 December 2018 are given below for two companies viz. Amazon Limited and Gibson

Extract of the Statement of Comprehensive Income for the year ended 31 December 2018:

Amazon Limited RGibson Limited R

Sales 6 600 0002 160 000

Cost of Sales 4 620 000864 000

Gross profit 1 980 0001 296 000

Depreciation 270 00012 000

Other expenses 240 00045 000

Operating profit 1 470 0001 239 000

Interest on loan 174 00075 000

Profit before tax1 296 000 1 164 000

Income tax 388 800 349 200

Profit after tax 907 200 814 800

Extract of the Statement of Financial Position as at 31 December 2018:

Amazon Limited R Gibson Limited R

Assets

Non-current assets 1 980 000 1 260 000

Inventories 695 000190 000

Accounts receivable1 000 000180 000

Bank 020 000

3 675 000 1 650 000

Equity and Liabilities

Ordinary share capital 2 000 000 1 000 000

Retained earnings 250 00080 000

Non-current liabilities (18%p.a) 1 020 000480 000

Accounts payable360 00090 000

Bank overdraft45 000 0

3 675 000 1 650 000

Additional Information:

Inventories as at 31 December 2017 are as follows:

Amazon Limited R800 000

Gibson LimitedR230 000

All sales and purchases of inventories are on credit.

Required:

Compare the performance of Amazon Limited and Gibson Limited (both in same Industry) with regard to the following ratios and in each case state your observations:

1. The ability of each company to repay its short term debts without relying on sale of its inventories. (6)

2. The return earned by shareholders on their investment. (6)

3. The operational effectiveness of each company before considering interest income, interest expense and income tax. (6)

4. The effectiveness with which the goods for sale have been managed. (6)

5. An evaluation of each company's performance with regard to the management of its trade creditors.(6)