The information below relates to KC Investments Ltd., a company that sells computer accessories for the years ended 31 October 2021 and 31 October 2022. The industry average has also been provided.

As at 31 October

2021

2022 Industry average 2022

Return on capital employed (before tax) 19% 19% 19%

Return on owners equity (before tax) 24% 21% 16%

Gross profit margin 23% 25% 20%

Net profit margin 14% 12% 9%

Leverage 45% 51% 65%

Accounts receivable collection period 32 days 26 days 29 days

Accounts payable payment period 63 days 42 days 42 days

Inventory turnover 68 days 72 days 72 days

Required: From the shareholders perspective, comment on the ratios for KC Investments Ltd. in relation to the industry average ratios. (10 marks)

QUESTION TWO

The summarized financial statements of Baraka Enterprises Ltd. are as follows:

Income statements for the year ended 30 September:

2022 Sh.000 2023 Sh.000

Sales Cost of sales Gross profit Administrative expenses Debenture interest Net profit 20,000 (15,000) 5,000 (3,800) - 1,200 28,000 (21,000) 7,000 (4,600) (400) 2,000

Statement of Financial Person as at 30 September:

2022 Sh.000 2023 Sh.000

Assets: Non-current assets (net book value) Current assets: Inventories Trade and other receivables Balance at bank

Total assets

11,000

2,000 2,500 - 4,500 15,500

14,000

3,000 2,800 500 6,300 20,300

Equity and liabilities: Capital and reserves: Issued and fully paid 1,000,000 ordinary shares of Sh.10 each revenue reserves

Non-current liabilities: 8% debentures Current liabilities: Trade and other payables Bank overdraft

Total equity and liabilities

Stock as at 1 October 2021 was Sh.5,000,000

10,000 3,000 13,000

-

1,500 1,000 2,500 15,500

10,000 4,100 14,100

5,000

1,200 - 1,200 20,300

Required: For each year, calculate the following:

Gross profit margin (2 marks) Inventory turnover (2 marks) Return on equity (2 marks) Return on assets (2 marks) Acid test ratio (2 marks) Current ratio (2 marks) (c) Comment on the liquidity position of the company giving a possible reason for the change. (3 marks)