Instructions: This paper consists of TWO (2) compulsory questions. Answer BOTH compulsory questions in the answer booklet provided. Question 1 Morrison and McLaren Berhad produces dairy products, and has seasonal working capital requirements. These have been financed mainly by bank loans and overdraft facilities, now totalling RM 120,000. A limit on dairy product prices, and a new contract with the unions which increased wages, caused a full in the company's profit during the second half of 2015 and most of 2016. Sales increased over both these years due to an aggressive marketing strategy. In early 2017 the company's bank manager became aware of the deteriorating financial position of the company by studying a ratio analysis from the bank's computer system. This showed that certain key ratios, taken from the quarterly management accounts, were falling below the average for the industry, and were moving downwards. The manager sent a copy of the analysis to the company's managing director, together with a letter expressing his concern, although none of the ratios had fallen below the level specified in the loan agreement. Three months later, the next analysis showed that the current ratio had fallen below 2.0. the limit specified in the agreement. Legally, the bank could call in a receiver if the loan was not repaid in full within one month. The bank manager again forwarded the analysis to the managing director. However, this time the accompanying letter said that the bank would insist on immediate repayment of the loan unless the company could show how the financial position could be improved. The managing director said that the present level of sales could not be continued without spending RM50,000 on extra plant and machinery in July 2017. This would need an increase in the loan and overdrafts from RM 120,000 to RM170,000. It is now July 2017. The accounts for the year ended 31 December 2016 are as follows: Morrison and McLaren Berhad balance sheets at 31 December 2016 2015 2014 2013 RM000 RM000 RM000 RM000 Assets Tangible fixed assets Land and buildings Plant and machinery Fixtures and fittings 51 43 2 96 54 49 3 106 20 63 12 95 26 74 20 120 Current assets Inventory Trade Debtors Cash at bank 344 162 8 514 610 213 116 12 341 447 128 102 26 256 351 85 68 17 170 290 Total Assets Liabilities Creditors: amounts falling due within one year Trade creditors 175 105 Bank overdraft 59 234 118 Creditors: amounts falling due after more than one year Bank loan 60 30 Total Liabilities 294 148 80 0 80 62 0 62 0 80 62 Shareholder's Equity Capital and reserves Called-up share capital Profit and loss account Other reserves Total equity Total Liabilities & Equity 85 163 68 316 610 85 146 68 85 118 68 271 351 85 75 68 228 290 299 Morrison and McLaren Berhad profit and loss accounts for the years ended 31 December 2016 2015 2014 RM000 RM000 RM000 Sales 1,190 1.147 1,105 Cost of sales 952 918 884 Gross profit 238 229 221 Distribution costs 14 13 11 Administration expenses 178 125 Operating profit 46 60 85 Interest payable 12 Profit on ordinary activities before taxation 34 Tax on profit on ordinary activities 17 42 Profit retained 17 43 Note: depreciation 51 34 156 85 a) State the formula and calculate the key ratios (to the nearest one decimal) for the company Required: from 2014 - 2016. Use 2014 - 2016 industry averages below as guideline: Gearing (debt: equity) 0.5 Quick ratio 10:1 Current ratio 2.5:1 Stock turnover 6 times Debtor asset turnover Fixed asset turnover Total asset turnover Return on total assets Profit margin on sales . Based on year-end balance sheet figures 33 days 13 times 2.6 times 9.0% 3.5% (18 marks) (b) Based on the ratios calculated above, identify SIX (6) strengths or weaknesses revealed by these ratios in terms of liquidity, inventory, debtors, asset turnover, profitability and gearing. (12 marks) (c) What sources of internal funds would be available to pay off the bank loan? Identify and explain in detail THREE (3) sources of internal funds. If the bank granted the additional loan, could the company pay the loan off by 31 December 2017? (10 marks) (d) Do you think that the bank should grant the additional loan? Why? State FIVE (5) reasons and elaborate your answer. (10 marks) (Total 50 marks) Instructions: This paper consists of TWO (2) compulsory questions. Answer BOTH compulsory questions in the answer booklet provided. Question 1 Morrison and McLaren Berhad produces dairy products, and has seasonal working capital requirements. These have been financed mainly by bank loans and overdraft facilities, now totalling RM 120,000. A limit on dairy product prices, and a new contract with the unions which increased wages, caused a full in the company's profit during the second half of 2015 and most of 2016. Sales increased over both these years due to an aggressive marketing strategy. In early 2017 the company's bank manager became aware of the deteriorating financial position of the company by studying a ratio analysis from the bank's computer system. This showed that certain key ratios, taken from the quarterly management accounts, were falling below the average for the industry, and were moving downwards. The manager sent a copy of the analysis to the company's managing director, together with a letter expressing his concern, although none of the ratios had fallen below the level specified in the loan agreement. Three months later, the next analysis showed that the current ratio had fallen below 2.0. the limit specified in the agreement. Legally, the bank could call in a receiver if the loan was not repaid in full within one month. The bank manager again forwarded the analysis to the managing director. However, this time the accompanying letter said that the bank would insist on immediate repayment of the loan unless the company could show how the financial position could be improved. The managing director said that the present level of sales could not be continued without spending RM50,000 on extra plant and machinery in July 2017. This would need an increase in the loan and overdrafts from RM 120,000 to RM170,000. It is now July 2017. The accounts for the year ended 31 December 2016 are as follows: Morrison and McLaren Berhad balance sheets at 31 December 2016 2015 2014 2013 RM000 RM000 RM000 RM000 Assets Tangible fixed assets Land and buildings Plant and machinery Fixtures and fittings 51 43 2 96 54 49 3 106 20 63 12 95 26 74 20 120 Current assets Inventory Trade Debtors Cash at bank 344 162 8 514 610 213 116 12 341 447 128 102 26 256 351 85 68 17 170 290 Total Assets Liabilities Creditors: amounts falling due within one year Trade creditors 175 105 Bank overdraft 59 234 118 Creditors: amounts falling due after more than one year Bank loan 60 30 Total Liabilities 294 148 80 0 80 62 0 62 0 80 62 Shareholder's Equity Capital and reserves Called-up share capital Profit and loss account Other reserves Total equity Total Liabilities & Equity 85 163 68 316 610 85 146 68 85 118 68 271 351 85 75 68 228 290 299 Morrison and McLaren Berhad profit and loss accounts for the years ended 31 December 2016 2015 2014 RM000 RM000 RM000 Sales 1,190 1.147 1,105 Cost of sales 952 918 884 Gross profit 238 229 221 Distribution costs 14 13 11 Administration expenses 178 125 Operating profit 46 60 85 Interest payable 12 Profit on ordinary activities before taxation 34 Tax on profit on ordinary activities 17 42 Profit retained 17 43 Note: depreciation 51 34 156 85 a) State the formula and calculate the key ratios (to the nearest one decimal) for the company Required: from 2014 - 2016. Use 2014 - 2016 industry averages below as guideline: Gearing (debt: equity) 0.5 Quick ratio 10:1 Current ratio 2.5:1 Stock turnover 6 times Debtor asset turnover Fixed asset turnover Total asset turnover Return on total assets Profit margin on sales . Based on year-end balance sheet figures 33 days 13 times 2.6 times 9.0% 3.5% (18 marks) (b) Based on the ratios calculated above, identify SIX (6) strengths or weaknesses revealed by these ratios in terms of liquidity, inventory, debtors, asset turnover, profitability and gearing. (12 marks) (c) What sources of internal funds would be available to pay off the bank loan? Identify and explain in detail THREE (3) sources of internal funds. If the bank granted the additional loan, could the company pay the loan off by 31 December 2017? (10 marks) (d) Do you think that the bank should grant the additional loan? Why? State FIVE (5) reasons and elaborate your answer. (10 marks) (Total 50 marks)