Question

The Sofa Ltd manufactures luxurious indoor furniture. The company requires analysis of its financial position and, in particular, to assess the management of current assets and the use of debts.

The draft financial statements for 2018 and 2017 are presented below:

The Sofa Ltd

Statement of profit and loss and other comprehensive income for the year ended 31 August 2018

2018 2017

Sales(all sales are on credit) 8 532 000 7 425 000

Cost of sales (6 399 000) (5 494 500)

Gross profit 2 133 000 1 930 500

Operating expenses (1 344 600) (1 174 500)

Operating profit before interest expenses and taxation 788 400 756 000

Interest expense (243 000) (148 500)

Net profit before taxation 545 400 607 500

Taxation (243 000) (216 000)

Net profit before extraordinary loss 302 400 391 500

Extraordinary loss (108 000) 0

Net profit attributable to ordinary shareholders 194 400 391 500

Preference dividend paid (32 400) (32 400)

Ordinary dividend paid (40 500) (40 500)

Retained profit (loss) for the year 121 500 318 600

Retained profit-beginning of the year 837 000 518 400

Retained profit-end of year 958 500 837 000

THE SOFA LTD

Statement of financial position

2018 2017

Non current assets 945 000 864 000

Property, plant and equipment 945 000 864 000

Current assets 3 604 500 2 963 250

Inventories 2 092 500 1 485 000

Accounts receivable 1 215 000 999 000

Cash and cash equivalents 297 000 479 250

TOTAL ASSETS 4 549 500 3 827 250

EQUITY AND LIABILITIES

Capital and reserves 1 903 500 1 782 000

Ordinary share capital 675 000 675 000

Retained profit 958 500 837 000

Redeemable preference share capital 270 000 270 000

Non current liabilities 742 500 742 500

Long-term borrowings 742 500 742 500

Current liabilities 1 903 500 1 302 750

Short-term borrowings 1 417 500 870 750

Accounts payable 486 000 432 000

TOTAL EQUITY AND LIABILITIES 4 549 500 3 827 250

Additional Information:

The company's share capital consists of 675 000 shares of N$1 each (market value N$4.70).
The preference shares are redeemable on 1 September 2019.
Industry ratios for 2018:
Current ratio 2:1
Acid test (quick) ratio 1:1
Inventory turnover (sales/inventory) 6 times
Accounts receivable collection period 40 days
Debt ratio 59%
Time interest earned 6 times

A) Calculate and explain the relevant ratios for 2018 and 2017 to analyze the company's liquidity position and management of current assets.

B) Calculate and explain the relevant ratios for 2018 and 2017 to analyze the company's use of debt to finance its operations.

C) Calculate the company's earnings and dividend yields for 2018.

Answer 1

Answer with working is given below