QUESTION TWO [25] Extracts of the Statement of Comprehensive Income for the year ended 31 December 2019 and the Statement of Financial Position as at 31 December 2019 are given below for two companies viz. Leo Limited and Virgo Limited Extract of Statement of Comprehensive Income for the year ended 31 December 2019: Leo Limited Virgo Limited R R Sales 6 600 000 2 160 000 Cost of sales 4 620 000 864 000 Gross profit 1 980 000 1 296 000 Depreciation 270 000 12 000 Other expenses 240 000 45 000 Operating profit 1 470 000 1 239 000 Interest on loan 174 000 75 000 Profit before tax 1 296 000 1 164 000 Income tax 388 800 349 200 Profit after tax 907 200 814 800 R Extract of Statement of Financial Position as at 31 December 2019: Leo Limited Virgo Limited R R Assets Non-current assets 1 980 000 1 260 000 Inventories 695 000 190 000 Accounts receivable 1 000 000 180 000 Bank 0 20 000 3 675 000 1 650 000 Equity and Liabilities Ordinary share capital 2 000 000 Retained earnings 250 000 Non-current liabilities (18% p.a.) 1 020 000 Accounts payable 360 000 Bank overdraft 45 000 3 675 000 Additional Information: Inventories as at 31 December 2018 are as follows: Leo Limited R800 000 Virgo Limited R230 000 All sales and purchases of inventories are on credit. 1 000 000 80 000 480 000 90 000 0 1 650 000 Required: Compare the performance of Leo Limited and Virgo Limited (both in same industry) with regard to the following ratios and in each case state your observations: 2.1 The ability of each company to repay its short term debts without relying on sale of its inventories. (5) 2.2 The return earned by shareholders on their investment. (5) 2.3 The operational effectiveness of each company before considering interest income, interest expense and income tax. (5) 2.4 The effectiveness with which the goods for sale have been managed. 2.5 An evaluation of each company's performance with regard to the management of its trade creditors