QUESTION ONE [30]

You are an investment adviser at Peoples Investments and you are given the task of evaluating a new national frozen yogurt company that many clients are inquisitive about investing in. There is fierce competition within the frozen yogurt industry and not many barriers to entry. The company, Fro YoToGo is offering investors the opportunity to invest in the company as the company wants to expand. The following financial items from Fro YoToGo and the corresponding industry average are as follows:

	Fro YoToGo 31 December 2018	Industry average 31 December 2018
	R	R
Bank	200 000	300 000
Short term investments	100 000	200 00
Accounts Receivable - Closing Balance	25 000	30 000
Accounts Receivable - Opening Balance	20 000	15 000
Expenses paid in Advance	20 000	30 000
Closing Inventory	20 000	30 000
Opening Inventory	10 000	20 000
Accounts Payable - opening balance	120 000	150 000
Accounts Payable - closing balance	100 000	120 000
Expenses payable	50 000	70 000
Sales - credit	3 200 000	4 000 000
Sales - cash	1 200 000	2 200 000
Cost of sales	1 400 000	3 000 000

Required:

1.1. Calculate the following ratios for both Fro YoToGo and for the industry average:

1.1.1. Current ratio (4)

1.1.2. Acid test ratio (4)

1.1.3. Debtors collection period (4)

1.1.4. Creditors payment period (4)

1.1.5. Inventory period (4)

1.2. Consider the information provided and your calculations in 1.1 above and prepare a letter to assist one of your clients, Ms Tulip in making a decision on whether to invest in Fro YoToGo. (10)