You are an analyst for an investment company, and your job is to identify quality businesses and to make recommendations on those businesses you consider to be worthwhile investment decisions. You have just been provided with the financial statements for Nella's Ltd, a large Australian based confectionery company. Nella's shares are currently trading at $5.00 per share. 30 June 2020 financial statements, along with calculated key ratios, are provided below. Nella's Ltd - Balance Sheet as at 30 June 2020 2020 ($ 000's) 2019 ($ 000's) Assets Current Assets Cash Accounts Receivable Inventory Prepaid Insurance Total Current Assets Property, Plant and Equipment Intangibles 20 000 60,000 210,000 10,000 300,000 440,000 200,000 40,000 90,000 150,000 30,000 310,000 400,000 170,000 940,000 880,000 Total Assets Liabilities Current Liabilities Accounts Payable Notes Payable Total Current Liabilities Bonds Payable Total Liabilities 120,000 50,000 170,000 560,000 730,000 100,000 50,000 150,000 560,000 710,000 Shareholder's Equity Issued Equity (Average #200,000 shares) Retained Earnings Total Shareholder's Equity 150,000 60,000 210,000 150,000 20,000 170,000 940,000 880,000 Total Liabilities and Shareholder's Equity Nella's Ltd - Income Statement for the Financial Year ending 30 June 2020 (5 000's) Sales Cost of Goods Sold Gross Profit Administrative Expenses Depreciation Expense Total Operating Expenses Operating Income Interest Expense Net Profit Before Tax Income Tax Expense Net Profit After Tax 500,000 300,000 200,000 50,000 30,000 80,000 120,000 20,000 100,000 50,000 50,000 Nella's Ltd - Summary of Key Financial Ratios 2020 Key Ratio Formula Profit Margin Return on Equity Return on Assets Earnings per Share Price to Earnings Current Quick Receivables Turnover Inventory Turnover Debt to Assets Debt to Equity Times Interest Earned Net Profit After Tax (NPAT) / Net Sales NPAT/Average Shareholder's Equity NPAT/ Average Total Assets NPAT / Average No. Ordinary Shares Current Share Price / Earnings per Share Current Assets / Current Liabilities (Cash + AR)/Current Liabilities Net Credit Sales / Average Accounts Receivable Cost of Goods Sold / Average Inventory Total Liabilities / Total Assets Total Liabilities / Total Shareholder's Equity (NPAT + Income Tax Expense + Interest Expense) / Interest Expense Ratio Calculation for Nella's 10.0% 26.3% 5.5% $0.25 20.0 1.76 0.47 6.67 1.67 0.78 3.48 6.0 REQUIRED 1 Undertake an analysis of Nella's financial statements using the information provided. Your analysis should include commentary on Nella's profitability, liquidity and solvency. Based on your findings, make a recommendation on whether your employer should invest in Nella's including reasons for your recommendation. (20 marks) th REQUIRED: 1. In your own words, and using the information provided in the above Statement of Cash Flows, outline what you have learnt about Danica's activities throughout the year and how they led to Danica's current cash position. (10 marks) 2. Explain what is meant by the term "Cash or Cash Equivalents" as required in a Statement of Cash Flows. (5 marks) Section 1 - Financial Statement Analysis (25 marks) You are an analyst for an investment company, and your job is to identify quality businesses and to make recommendations on those businesses you consider to be worthwhile investment decisions. You have just been provided with the financial statements for Nella's Ltd, a large Australian based confectionery company. Nella's shares are currently trading at $5.00 per share. 30 June 2020 financial statements, along with calculated key ratios, are provided below: Nella's Ltd - Balance Sheet as at 30 June 2020 2020 ($ 000's) 2019 ($ 000's) Assets Current Assets Cash Accounts Receivable Inventory Prepaid Insurance Total Current Assets Property, Plant and Equipment Intangibles 20,000 60,000 210,000 10,000 300,000 440,000 200,000 40,000 90,000 150,000 30,000 310,000 400,000 170,000 Total Assets 940,000 880,000 Liabilities Current Liabilities Accounts Payable Notes Payable Total Current Liabilities Bonds Payable Total Liabilities 120,000 50,000 170,000 560,000 730,000 100,000 50,000 150,000 560,000 710,000 Shareholder's Equity Issued Equity (Average # 200,000 shares) Retained Earnings Total Shareholder's Equity 150,000 60,000 210,000 150,000 20,000 170,000 Total Liabilities and Sha older's Equity 940,000 880,000 Nella's Ltd - Income Statement for the Financial Year ending 30 June 2020 ($ 000's) Sales Cost of Goods Sold Gross Profit Administrative Expenses Depreciation Expense Total Operating Expenses Operating Income Interest Expense Net Profit Before Tax Income Tax Expense Net Profit After Tax 500,000 300,000 200,000 50,000 30,000 80,000 120,000 20,000 100,000 50,000 50,000 Nella's Ltd - Summary of Key Financial Ratios 2020 Formula Key Ratio Profit Margin Return on Equity Return on Assets Earnings per Share Price to Earnings Current Quick Receivables Turnover Inventory Turnover Debt to Assets Debt to Equity Times Interest Earned Net Profit After Tax (NPAT) / Net Sales NPAT / Average Shareholder's Equity NPAT / Average Total Assets NPAT / Average No Ordinary Shares Current Share Price / Earnings per Share Current Assets / Current Liabilities (Cash + AR) / Current Liabilities Net Credit Sales / Average Accounts Receivable Cost of Goods Sold / Average Inventory Total Liabilities / Total Assets Total Liabilities/Total Shareholder's Equity (NPAT + Income Tax Expense + Interest Expense) / Interest Expense Ratio Calculation for Nella's 10.0% 26.3% 5.5% $0.25 20.0 1.76 0.47 6.67 1.67 0.78 3.48 6.0 REQUIRED: 1. Undertake an analysis of Nella's financial statements using the information provided. Your analysis should include commentary on Nella's profitability, liquidity and solvency. Based on your findings, make a recommendation on whether your employer should invest in Nella's, including reasons for your recommendation. (20 marks) 2. Comment on the adequacy (or otherwise) of the information supplied to conduct your analysis. What additional information (if any) do you consider might have improved the quality of your analysis, and if so, how. (5 marks) Section 2 - Cash Flow Statements (25 marks) Part A (10 marks) Selected data and additional information from the records of Hogwarts Pty Ltd are presented below: Balance Sheet data 2020 2019 $ $ Cash 90,000 20,000 Accounts receivable 240,000 300,000 Inventories 112,000 100,000 Accounts payable 76,000 140,000 Salaries payable 20,000 10,000 Equipment 220,000 140,000 Accumulated depreciation 48,000 32,000 Bonds payable (borrowings) 198,000 98,000 Contributed capital (ordinary shares) 200,000 200,000 Retained earnings 120,000 80,000 Income statement data 2020 Net sales 1,840,000 Cost of goods sold 1,400,000 Operating expenses (includes wages) 320,000 Depreciation Total Expenses 336,000 Net Profit (Includes depreciation expense) 104,000 All sales and purchases of inventory were on credit. The only items affecting retained earnings in 2019/20 were income (profits) and dividends declared and paid. Ignore Tax $ 16,000 REQUIRED: 1. Using the direct method, prepare the Operating Activities section of the Statement of Cash Flows for Hogwarts for the year ending 30 June 2020. (10 marks) Part B (15 marks) Below is the Statement of Cash Flows for Danica Ltd for the financial year ending 30 June 2022 (prepared using the Direct method): $ 000's Cash flows from operating activities Receipts from customers 676 000 Payments to suppliers and employees (605000) Cash generated from operations 71 000 Interest paid (4000) Income tax paid (21 000) Net cash from operating activities 46 000 Cash flows from investing activities Cash paid for plant Net cash used in investing activities (25 000) (25000) 40 000 Cash flows from financing activities Proceeds from borrowings Dividend paid Net cash from financing activities (23 000) 17 000 Net increase in cash and cash equivalents 38 000 30 000 Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 68 000