Question

Cain Ltd is a furniture manufacturer and is listed on the Johannesburg Stock Exchange (JSE). Cain Ltd manufactures affordable furniture from good-quality wood that it acquires from a variety of suppliers. Cain Ltd does not sell its furniture directly to the public, but distributes its products to furniture wholesalers around South Africa.

Ebel (Pty) Ltd is a small, unlisted supplier of exclusive furniture. It manufactures customised furniture and sells directly to the public. Other wholesalers and retailers occasionally buy furniture from Ebel (Pty) Ltd.

Duke Ltd is a wholesaler and retailer of all types of furniture, both affordable and exclusive. Duke Ltd buys some of its inventory from Cain Ltd and is also listed on the JSE.

The board of directors of Cain Ltd wants to evaluate its profitability and working capital management. The directors have extracted relevant financial information from its annual report as well as relevant published financial information from the websites of Ebel (Pty) Ltd and Duke Ltd. You are provided with the following financial information on Cain Ltd, Ebel (Pty) Ltd and Duke Ltd for the period ended 31 December 2019:

Revenue
Gross profit margin Current ratio
Quick ratio Inventory days Receivables days

Cain Ltd

R720 million 35% 2,07:1 1:1 62,39 days 30,42 days

Ebel (Pty) Ltd

R80 million 50% 2:1 1.5:1 (A)
(C)

Duke Ltd

R400 million 40% 2,03:1 1,09:1 (B)
(D)

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SPECIFIC INSTRUCTIONS:

Answer ALL the questions.

The use of calculators is permitted.

Read all questions carefully to determine exactly what is required before attempting to answer.

IMM Graduate School uses the South African convention for decimals and thousands, being a decimal comma and a space for the thousands delimiter, as required by the Department of Higher Education and Training. Students may use other conventions, provided these are used consistently.

Unless otherwise required, round off all calculations to the nearest two (2) decimal places.

For each question below, select the MOST APPROPRIATE answer from the choices given.

Use the following information to answer questions 1–5

Cain Ltd is a furniture manufacturer and is listed on the Johannesburg Stock Exchange (JSE). Cain Ltd manufactures affordable furniture from good-quality wood that it acquires from a variety of suppliers. Cain Ltd does not sell its furniture directly to the public, but distributes its products to furniture wholesalers around South Africa.

Ebel (Pty) Ltd is a small, unlisted supplier of exclusive furniture. It manufactures customised furniture and sells directly to the public. Other wholesalers and retailers occasionally buy furniture from Ebel (Pty) Ltd.

Duke Ltd is a wholesaler and retailer of all types of furniture, both affordable and exclusive. Duke Ltd buys some of its inventory from Cain Ltd and is also listed on the JSE.

The board of directors of Cain Ltd wants to evaluate its profitability and working capital management. The directors have extracted relevant financial information from its annual report as well as relevant published financial information from the websites of Ebel (Pty) Ltd and Duke Ltd. You are provided with the following financial information on Cain Ltd, Ebel (Pty) Ltd and Duke Ltd for the period ended 31 December 2019:

Payables days 58,49 days 27,38 days 36,50 days

Additional information

•  Assume 365 days in a year for all calculations.

•  Assume all revenue is on credit.

•  Averages are not used when calculating ratios.

•  The directors of Cain Ltd were unable to obtain the inventory and receivables

  days from the websites of Ebel (Pty) Ltd and Duke Ltd.

•  However, Cain Ltd has been able to establish that Ebel (Pty) Ltd has R1,5 million

  in inventory and R2,5 million in receivables as at 31 December 2019.

•  Cain Ltd has also been able to establish that Ltd has R60 million in inventory

  and R70 million in receivables as at 31 December 2019.

1. 1 Calculate the missing figure represented by A in the above table. (2)

   1. a) 13,69 times

   2. b) 13 days

   3. c) 13,69 days

   4. d) 14 days

2. 2 Calculate the missing figure represented by B in the above table. (2)

   1. a) 91,25 times

   2. b) 17,36 days

   3. c) 91,25 days

   4. d) 17,36 times

3. 3 Calculate the missing figure represented by C in the above table. (2)

   1. a) 91,25 days

   2. b) 11,41 days

   3. c) 13,69 days

   4. d) 63,88 days

4. 4 Calculate the missing figure represented by D in the above table. (2)

   1. a) 66 days

   2. b) 63,88 days

   3. c) 13,69 days

   4. d) 92 days

5. 5 Using the information provided and your answers to Question 1–4, calculate the cash conversion cycle for Cain Ltd, Abel (Pty) Ltd Ltd for the period ended 31 December 2019. (3)

   1. a) (34,32 days); 2,28 days; (118,63 days)

   2. b) 32,34 days; 2,28 days; 118,63 days

   3. c) 34,32 days; (2,28 days); 118,63 days

   4. d) 2,28 days; 32,34 days; (118,63 days)

Answer 1

1. Ebel (pty) Ltd's Inventory days

Inventory days=(inventory/Cost fo goods sold)*365

Cost of goods sold=Revenue*(1-gross margin)=(R80 million)*(1-50%)=R40 million

Inventory=R1.5 million

Inventory days=(1.5/40)*365=13.69 days

Option C is correct

2. Duke Ltd Inventory days

Cost of goods sold=Revenue*(1-gross margin)=(R400 million)*(1-40%)=R240 million

Inventory=R60 million

Inventory days=60/240*365=91.25 days

Option c is correct

3.Ebel (pty) Ltd's receviable days

receivable days=receivables/Revenue*365

receivables=2.5 million

Revenue=80 million

Receivable days=2.5/80*365=11.41 days

Option b is correct

4. Duke Ltd recievable days

receivables=70 million

Revenue=400 million

Receivable days=70/400*365=63.88 days

option b is correct

5. Cash conversion cycle=Recievable days+Inventory days-Payable days

Cain Ltd cash conversion cycle=30.42+62.39-58.49=34.32 days

Ebel (pty) Ltd cash conversion cycle=11.41+13.69-27.38=-2.28 days

Duke Ltd cash conversion cycle=63.88+91.25-36.50=118.63 days

Option c is correct