QUESTION TWO Abrantsie Company Ltd has supermarkets located in the major cities in Ghana. Recently the company has been experiencing declining profitability and the board is wondering if this development is peculiar to the company or related to the sector as a whole. It is also not clear as regards the company's solvency. As such it has engaged a consulting firm that specializes in analyzing corporate reports producing average ratios across many businesses to rate performance. Below are the ratios that have been provided by the consulting firm for Abrantsie Company Ltd's business sector based on the year end of June 30, 2018. Debt to equity 38% Gross profit margin Operating profit margin 12% Return on year-end capital employed (ROCE) 16-8% Net asset turnover 1-4 times Current ratio 1-25:1 Average inventory turnover 3 times Trade payables' payment period 64 days The financial statements of Abrantsie Company Ltd for the year ended September 30, 2018 are: Profit and loss and other comprehensive income GH&'000 Revenue Opening inventory 33,200 Purchases 175,600 GH000 224,000 208.800 (40.800) Closing inventory Gross profit Operating costs Finance costs Profit before tax Income tax expense Profit for the year (168,000) 56,000 (39,200) (3.200) 13,600 (4.000) 2.000 Statement of financial position GH&000 GH'000 102,400 20,000 122,400 Non-current assets Property and shop fittings Deferred development expenditure Current assets Inventory Bank Total assets 40,800 4.000 44,800 167,200 Equity and liabilities Equity Equity shares of GH Ieach 60,000 Property revaluation reserve 12,000 Retained camnings 34.000 106,400 Non-current liabilities 10% loan notes 32,000 Current liabilities Trade payables 21,600 Current tax payable 7.200 28.800 Total equity and liabilities 167,200 Additional Information 0 Net asset is defined by the consulting firm as total assets less current liabilities. (ii) The deferred development expenditure relates to one off payment for a franchise as a sole distributor of a particular product under negotiation but not yet concluded as at September 30, 2018 although payment has already been made. Required: a. Compute the equivalent ratios for Abrantsie Company Ltd that have been provided by the consulting firm for the business sector. (4 marks) b. Write a report to the board which assesses the profitability and solvency performance of Abrantsie Company Ltd in comparison to its business sector averages. (8 marks) c. Explain the term cash operating cycle and suggest two steps that should be taken by the directors of Abrantsie Company Ltd to improve the cash operating cycle of the company (3 marks) (Total: 15 marks)
