- 20 Marks
FR – Nov 2015 – L2 – Q2 – Financial Statement Analysis
This question requires calculating financial ratios and analyzing Kack Ltd's financial performance and position for the year ended 31 March 2015 compared to the previous year.
Question
Kack Ltd is a listed company that assembles domestic electrical goods which it then sells to both wholesale and retail customers. Kack Ltd’s management was disappointed in the company’s results for the year ended 31 March 2014. In an attempt to improve performance, the following measures were taken early in the year ended 31 March 2015:
- A national advertising campaign was undertaken.
- Rebates to all wholesale customers purchasing goods above set quantity levels were introduced.
- The assembly of certain lines ceased and was replaced by bought-in completed products. This allowed Kack Ltd to dispose of surplus plant.
Kack Ltd’s summarised financial statements for the year ended 31 March 2015 are set out below:
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 2015
| Description | GHSm |
|---|---|
| Revenue (25% cash sales) | 4,000 |
| Cost of sales | (3,450) |
| Gross profit | 550 |
| Operating expenses | (370) |
| Operating profit | 180 |
| Profit on disposal of plant (note (i)) | 40 |
| Financial charges | (20) |
| Profit before tax | 200 |
| Income tax expense | (50) |
| Profit for the year | 150 |
STATEMENT OF FINANCIAL POSITION
AS AT 31 MARCH 2015
| Description | GHSm | GHSm |
|---|---|---|
| Non-current assets | ||
| Property, plant, and equipment (note (ii)) | 550 | |
| Current assets | ||
| Inventory | 250 | |
| Trade receivables | 360 | |
| Bank | nil | |
| Total current assets | 610 | |
| Total assets | 1,160 | |
| Equity and liabilities | ||
| Equity | ||
| Stated capital (400m shares) | 100 | |
| Income surplus | 380 | |
| Total equity | 480 | |
| Non-current liabilities | ||
| 8% loan notes | 200 | |
| Current liabilities | ||
| Bank overdraft | 10 | |
| Trade payables | 430 | |
| Current tax payables | 40 | |
| Total current liabilities | 480 | |
| Total equity and liabilities | 1,160 |
Below are ratios calculated for the year ended 31 March 2014:
- Return on year-end capital employed (profit before interest and tax over total assets less current liabilities): 28.1%
- Net assets (equal to capital employed) turnover: 4 times
- Gross profit margin: 17%
- Net profit (before tax) margin: 6.3%
- Current ratio: 1.6:1
- Closing inventory holding period: 46 days
- Trade receivables’ collection period: 45 days
- Trade payables’ payment period: 55 days
- Dividend yield: 3.75%
- Dividend cover: 2 times
Notes:
- Kack Ltd received GHS 120 million from the sale of plant that had a carrying amount of GHS 80 million at the date of its sale.
- The market price of Kack Ltd’s share throughout the year averaged GHS 3.75 each.
- There were no issues or redemption of shares or loans during the year.
- Dividends paid during the year ended 31 March 2015 amounted to GHS 90 million, maintaining the same dividend paid in the year ended 31 March 2014.
Required:
a) Calculate ratios for the year ended 31 March 2015 (showing your workings) for Kack Ltd, equivalent to those provided above.
(10 marks)
b) Analyse the financial performance and position of Kack Ltd for the year ended 31 March 2015 compared to the previous year.
(10 marks)
(Total: 20 marks)
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