www.washa (Pty) Ltd is a company that sells high-pressure industrial cleaning machines, and is one of a number of resellers selling this type of machine in South Africa. They have been operating since 2005, and have focused their business on one particular model of machine, the Washa 2000. Below is a list of their ending balances at 29 February 2016. They are subject to the standard tax rate for companies Building Beginning inventory Mortgage bond Advertising Inventory Ordinary shares Sales Interest expense Interest received Fuel Long-term business loan Stationery Retained earnings Electricity and water Purchases Depreciation Ending inventory Accounts receivable Maintenance Telephone Cash Salaries and wages Insurance Vehicles Accounts payable 5,400,000 300,000 3,600,000 420,000 900,000 1,350,000 4,500,000 210,000 13,000 78,000 1,500,000 15,600 1,400,000 191,000 2,250,000 150,000 900,000 1,800,000 65,000 35,500 168,000 900,000 88,000 380,000 798,000 Now, using the given set of figures, draw up a balance sheet and income statement for the company, where you see "start writing here: insert the account/line item in that block as well. Use the modern format for the balance sheet, and general format of the income statement. Note that marks for layout do apply Balance sheet at 29 February 2018 Capital employed Shareholders' interest Ordinary share capital Start writing here: Liabilities Start writing here: Long-term loan Total capital employed Employment of capital Fixed assets Buildings Start writing here: Current assets Cash Accounts receivable Start writing here: Current liabilities Accounts payable Net working capital Total employment of capital Income statement for the period ended 29 February 2018 Sales Less cost of goods sold Beginning inventory Start writing here: Ending inventory Gross profit Operating expenses Advertising Start writing here: Stationary Maintenance Electricity and water Start writing here: Telephone Salaries and wages Insurance Profit from operations Add interest received Less interest expense Profit before taxation Less tax Net profit Question 3 The directors of Vuruwasha (Pty) Ltd, having heard about your financial prowess, have approached you to assist them with some analysis of their financials. The following questions relate to the same set of accounts as used in Question 2. Please show the equations used for calculations, and keep your answers brief, in point form where applicable. 3.1 The directors are happy to hear from the accountants that they have made a profit for the year, but they would like to look into it a bit more. 3.1.1 What was their gross profit margin and net profit margin? 3.1.2 How do these compare with the previous year's figures of 50% gross profit margin and 24% net profit margin? (Max. 3 lines) 3.1.3 Looking at this comparison, are there any reasons for the directors to be concerned? (Max. 3 lines) 3.2 The shareholders have been pressuring the directors to find out what their return has been. They have heard that there are two ways to calculate return on equity, one condensed way and one expanded way. 3.2.1 What was the company's ROE? (Max. 4 lines) 3.2.2 As a rule, the shareholders aim for a return of 20%. Would they be happy with this year's performance? (Max. 1 line) 3.2.3 What are the three variables that make up the expanded version of the ROE? (Max. 2 lines) 3.2.4 If the directors wished to improve the company's ROE, which of the three variables do you think they should concentrate on primarily? Give an example of how they could improve that particular variable. (Max. 4 lines) 3.3 The directors have taken your advice, and would now like you to look at some other aspects of the financials. 3.3.1 Is the firm solvent? Explain why or why not. (Max. 4 lines) 3.3.2 is the firm liquid? Explain why or why not. What is the current ratio for the firm? Is this an acceptable value? (Max. 4 lines) 3.4 You have overheard some talk that the sales people are struggling to sell as many machines as in the past, and are pushing for the directors to shift to a newer model of cleaning machine. 3.4.1 The firm's historical inventory turnover has been around six times per annum. What is the figure for the year under review? (Max. 6 lines) 3.4.2 Does this mean that the salespeople are selling machines faster or slower than usual? (Max. 2 lines) 3.4.3 Is there any other evidence that would support the sales peoples' push to bring in newer machines as sales stock instead? (Max. 2 lines) 3.5 with the market having just come out of a recession, the directors are keen to see how well their customers are holding up. They would normally give their customers 60 days to pay for their purchases. 3.5.1 Assuming that all sales are credit sales, and working off a 365-day year, what is the average collection period for the year under review? (Max. 6 lines) 3.5.2 What deductions can be drawn from this? Also list some possible reasons for this situation developing, as well as the possible implications of this. (Max. 4 lines) 3.5.3 List three actions the company can take in order to improve the number calculated in 3.5.1. (Max. 3 lines per action) 3.6 Some potential investors have approached you for your insight on the company. The directors have explained to you that the share capital is made up of 135,000 shares issued at R10 each. 3.6.1 What is the earnings per share figure? Max. 5 lines) 3.6.2 The investors have said that their primary criterion for buying shares in a business is the earnings yield on offer. They have a target earnings yield of 15% and have been offered www.wasba shares at R25 a share. Based solely on the year's financials that you have seen would you recommend that they buy the shares? (Max. Blines)