Question

In: Accounting

The following 2009 standardised financial statements of Dynamic Trading Ltd are provided to you:    Statement...

  1. The following 2009 standardised financial statements of Dynamic Trading Ltd are provided to you:   

Statement of financial position

Assets

2009

Property, plant and equipment (PPE) at cost price

192 000

Accumulated depreciation

(22 000)

PPE at carrying value

170 000

Investment in shares

3 000

Non-current assets

173 000

Inventories

30 000

Trade receivables

45 000

Cash and cash equivalents

24 000

Current assets

99 000

Total assets

272 000

Equity and liabilities

Share capital

50 000

Reserves

4 000

Retained earnings

28 000

Ordinary shareholders’ equity

82 000

Preference shares

28 000

Shareholders’ equity

110 000

Total equity

110 000

Long-term debt

80 000

Non-current liabilities

80 000

Trade payables

25 000

Bank overdraft

1 000

Tax payable

1 000

Dividends payable

5 000

Short-term loans

50 000

Current liabilities

82 000

Total equity and liabilities

272 000

Statement of comprehensive income

2009

Turnover

150 000

Cost of sales and services rendered

(70 000)

Gross profit

80 000

Operating expenses

(40 000)

Operating income

4 000

Operating profit

44 000

Investment income

2 000

Finance cost

(14 660)

Profit before tax

31 340

Tax

(9 400)

Profit after tax

21 940

Preference share dividends

(2 800)

Attributable earnings

19 140

Ordinary dividends

(10 000)

Retained earnings (for the year)

9 140

Additional information:

  • Purchases on credit for the year amount to R50 000.
  • Lease payments of R10 000 were made during the year.

You are required to:

Calculate the following ratios and present them in the correct units of measurement:

  1. Cash conversion cycle
  2. Debt: assets ratio   
  3. Debt: equity ratio
  4. Financial leverage ratio                          (3 Marks each)

Solutions

Expert Solution

a) calculation of cash conversion cycle

  1. CCC = Days of Sales Outstanding PLUS Days of Inventory Outstanding MINUS Days of Payables Outstanding.
  2. CCC = DSO + DIO – DPO.
  3. DSO = [(BegAR + EndAR) / 2] / (Revenue / 365)
  4. Days of Inventory Outstanding.
  5. DIO = [(BegInv + EndInv / 2)] / (COGS / 365)
  6. Operating Cycle = DSO + DIO.
  7. DPO = [(BegAP+EndAP) / 2] / (COGS / 365)

Calculation of DSO=(45000/2)/(44000/365days)

=22500/120.5

=187days

Calculation of DIO=[(30000+50000)/2]/(70000/365)

=40000/192

=208 days

Calculation of DPO=(25000/2)/(70000/365)

=12500/192

=65 days

Cash conversion cycle = DSO+DIO–DPO

=187days+208days –65days

=330days

b)calculation of debt assets ratio

debt assets ratio

=long term debt /total assets

=80000/272000

=0.294

c) calculation of debt equity ratio

debt equity ratio

=long term debt /shareholders equity

=80000/50000

=1.6

d) calculation of financial leverage.

financial leverage

=earnings before interest and tax (EBIT) /earnings after tax (EAT)

=44000/21940

=2.005


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