Question One

1.1.1

Current Ration = current assets/ current liabilities

= (450 000 + 650 000 +500 000) / 700 000

= 1 600 000/700 000

= 2.29:1

Current Ratio shows the ability of the company repayment towards short term liabilities due within
one year. In the Given it is improved from 0.89 in 2021 to 2.29 in 2022 which is significant
improvement.

1.1.2 Acid test ratio = (Current assets – inventory/current liabilities

= ( 1 600 000 – 500 000)/700 000

=1.57:1

Acid Test Ratio compares companies quick assets to current liabilities. In the Given it is improved
from 0.56 in 2021 to 1.57 in 2022 which shows companies is focusing on improving liquidity. This
shows that the company does rely too much on inventory to settle liabilities.

1.1.3 Debtors collection period = Receivables/ credits sales X 365

= 450 000/(3000 000 x50%) X 365

= 450 000/ 1500 000 X 365

=109,5days

Debtor Collection period means average time taken to collect cash from debtors. In the Given it is
fallen from 81 in 2021 to 110 in 2022 which shows need for improvement. Debtors are given 60 days
to meet their obligations. They are taking an additional 50 days beyond the expected terms. This is
approximately 82% (49,5/60 days X 100) longer than they are allowed.

1.2 Accounts payable period = payables/credit purchases X365

= 800 000/(2000 000*80%)X360

= 800 000/1600 000 X 365

= 182.5 days

1.2.1 Accounts Payable period means average time taken to pay creditors. If no of days is greater, the
company is failing to pay creditors. In the given case it is increased which shows weakening of
financial performance of company. Creditors should be paid within 90 days, but the company is
taking 92.5 days to pay off creditors. This indicates ineffective creditors management .

1.3 Liquidity ratio is the factor for assessing a company's basic financial health. It indicates how well
the company's management is able to control costs.

So company financial health related to control stand point is better because the current ratio and
quick ratio both are greater than 1 of company.

The business has a more significant margin of safety with regard to the ability to pay off debt
obligations. But it’s also important to remember that if the liquidity ratio is too high, it may indicate
that the company is keeping too much cash on hand and aren’t allocating the capital effectively.
Instead, the company could use that cash to fund growth initiatives or investments, which will be
more profitable in the long run.

Furthermore, when looked at in isolation, the accounting liquidity ratio may not be giving you the
whole story. Instead, the company would need to look at the liquidity ratio as part of a trend and
compare with the ratios of the industry. If a firm has a particularly volatile liquidity ratio, it may
indicate that the business has a certain level of operational risk and may be experiencing financial
instability.

When it come to the collection and payment period, the company slacks behind. There is a delay in
the payment of creditors and the debtors’ collections period. The company takes an extra 92 days to
pay of their creditors. If the business takes too long to pay its creditors, they may refuse to extend
further credit. A high collection period could mean customers are taking their time to pay their bills.
This could be indicative of a more relaxed credit policy. The compnay should consider being stricter in
terms of their credit policies by increasing payment expectations, running credit checks or by other
means. In order to rectify this and avoid problems and in the future, it's best to address high
collection periods as quickly as possible.

Question Two

Brainy Ltd at present has:

Bad debts = (2 600 000 x 0.8%) = 20 800

Financing costs for credit sales of (2,600,000 x 42/365 x 14.5%) = 43 381

Total Cost = 64 181.

Factoring costs would be:

• A charge of 1.8% of R2 600 000 = 46 800

less savings in administration = (20 000)

Total = 26800

• financing costs of (2 600 000 x 75% x 30/365 x 15%) = 24 041

(This is for the advance from the factor)

For financing from own resources (2 600 000 x 25% x 30/365 x 14.5%) = 7 747
Therefore, the overall factoring cost is = 58 588

As Brainy Ltd is nearing its overdraft limit, Pinky Ltd whole package should be accepted.

2.2.1 EOQ is that size of the order which gives maximum economy in purchasing any material and
ultimately contributes towards maintaining the materials at the optimum level and at the minimum
cost.

In other words, EOQ is the amount of inventory to be ordered at one time for purposes of minimizing
annual inventory cost.

2.2.2 EOQ = EQQ =

√ 2 DS
C
D = 5 750 000 tons

C = 0.40(22.50) = R9.00 per ton, pa.

S = R595 per order

EQQ =
√ 2 X (5750 000)(595)
9.00
= 27 573.135 tons per Order.

2.3.1 Ordering point = Maximum daily or weekly or monthly usage x Lead time

= 800 x 30

= 24 000 units

2.3.2 Minimum limit = Re-order level – Average or normal usage X Normal re-order period

= 24,000 - (700 * 27.5)

= 24,000 - 19,250

= 4,750 units.

2.3.3 Danger level = Average daily requirement × Time required to get emergency supply

= 700 × 4

= 2,800 units

Question Three
 3.1 Extract of Statement of Comprehensive Income for the year ended 30 June 2022

Sales 750 000

Dividends received 10 000
Profit on sale of asset (240 000 – 160 000) 80 000
840 000
Less: Interest Expense (5000)
Depreciation (220 000)
Written off machinery (60 000)
Profit before tax 555 000

3.2 Cash flow Statement with notes for the year ended 30 June 2022.

Cash Generated from

Operation 668 000

Net Profit before tax 555 000

Non-Cash Flow adjustment

Depreciation 220 000
Write-off Machine 60 000
Dividneds Paid 140 000
Tax Paid 18 000
Interest Expense 5 000
Dividends received -10 000
Profit on sale of asset -80 000
Changes in working capital
Decrease in receivables 40 000
Decrease in Payables -40 000
Increase in Inventory -240 000

Cash from Investing Activities -220 000

Purchase of property -160 000
 Purchase of Machinery -3 000 000
Sale of Machinery 240 000

Cash from Financing Activities 50 000

Issue of Capital 120 000
Investment in Rea ltd -70 000
Net Cash 498 000
Opening 80 000
Closing Balance 418 000

1. Interest Paid

Interest in the beginning of the year 0

Interest expense 5000
Interest at the end if the year 0
Interest paid 5000

2. Dividends paid

Dividend beginning of the year 0

Dividends paid 140 000
Dividends at the end of the year 0
Dividends paid 140 000

3. Taxation Paid

Tax the beginning of the year 0

Tax expense 18000
Tax at the end of the year 0
Tax paid 18 000

Question four

Workings

Debtors Collection Schedule

Month Credit Sales April May

March 288 000 201 6000 14 400

April 304 000 60 800 212 800
May 320 000 64 000
262 400 291 200

Creditors payment schedule

Month April May

 March R205,200(R 14 400
240,000*90%
credit*95% after 5%
discount
April R 239,400(R
280,000*90%*95
%)

Cash Budget

April May
Cash Sales 76 000 80 000
Cash from debtors 262 400 290 400
Cash receipts 338 400 371 200
Less: Cash Payment (322 200) (363 400)
Cash Purchases 28 000 32 000
Collected from Creditors 205 200 239 400
Salaries and wages 61 000 60 000
Cash expenses 28 000 32 000
Net cash surplus 16 200 7 800
Opening cash balance 21 000 37 200
Closing cash balance 37 200 45000