Malvern bought the Fourways Fish Farm a while ago and has been running it successfully for over ten years. Although he picked up the land fairly cheaply, the equipment associated with running a successful fish farm was larger than he had expected. It also seemed to be becoming more sophisticated and expensive every year. This, together with his rapid growth had caused FFF to take on a worrying amount of debt. Malvern thought they were still profitable, but was unsure about the details as his accountant had left him a few weeks back. The bookkeeper was able to give him the following information from which Malvern asked you to prepare a set of finstats for the year ended 30 April 2006.

• Sales for the year amounted to 542 000 (all on credit) and cost of sales worked out to be 34% of that
• Malvern had opened FFF buy issuing himself 40 000 R1.00 shares at inception. There had been no subsequent share issues
• Malvern always aimed to spend 5% of turnover on Marketing and Distribution expenses
• Depreciation for the year amounted to 78 971 and the NBV of fixed assets at year end was 914 300. Land was not depreciated at all and all other assets were depreciated at a flat rate over five years.
• Last year’s Balance Sheet showed a figure of 224 180 under retained earnings and 34 276 worth of overdraft
• General & Admin expenses for the year were 51 540
• Stock on hand at year end represented a stock turnover rate of exactly 6.0
• The L-T debt outstanding at year end was 680 000 and the interest expense for the year came to a huge 87 650
• Malvern supplied many of the big grocery chains in Gauteng and found them to be extremely bad payers. Debtors outstanding at year end represented 79.7days
• Supplier payments due at year end came to 24 530
• The company tax rate is 29% and the dividend policy is to pay out half of all EAT
• Malvern had kept R4 000 in cash to pay casual wages, but knew that his bank account was heavily overdrawn.

Malvern has got a plan to enable FFF to free itself from debt and has asked you to please help him build forecasts to see how this plan would impact the numbers. Sean has shown an interest in his classmate’s business and is willing to buy some shares in FFF if Malvern is selling. Malvern feels that the debt can be eliminated by issuing new shares to Sean as well as selling the land to a property company who is happy to buy it then lease it back to Malvern on a 15 year lease. After many rounds of discussion and calculations, Malvern has asked you to use the following information to prepare projected accounts for the year ended 30 April 2007 : -

• Sales will remain static at R542 000 for the year (still all on credit) and operational inefficiencies were expected to push cost of sales up to 36% this year
• Funds were to be raised by issuing Sean 20 000 R1.00 shares. He had agreed to pay a total of R172 000 for this effective ⅓ ownership stake.
• The land that the farm was on was to be sold to a property company at its book value of R500 000 (thus no profit or loss on disposal).
• These two transactions would be sufficient to pay back the entire 680 000 Long-term debt and eliminate the overdraft completely
• This would be done immediately, so that interest expense for the year amounted to zero!
• As the land was not being depreciated, selling it will have very little impact on the depreciation figure for the year. It was projected to come down slightly to 72 260
• However, as the property company was now charging us rent for the farm, General & Admin costs are forecast to jump by 40% over last year
• Malvern was planning to keep stocks at a level that represented exactly 6 stock turns
• Sean’s dedicated interaction with the customers was hoped to bring the debtor days down to 70 and amounts owing to suppliers at year end was expected to be 20 357
• Marketing and distribution costs are to remain as 5% of turnover.
• Neither the corporate tax rate nor the company dividend policy are going to change.

As the overdraft has been eliminated, Malvern hoped the proposed plan for next year would leave him with money in the bank

Question:

• Finalise the Income Statement for the year ended 30^th April 2006 and the Balance Sheet as at that date.
• Based on the assumptions outlined above, prepare a projected income statement for the year ended 30^th April 2007 and the balance sheet as at that date

Answer rating: 100% (QA)

Income statement as of 30 April 2006 Sales 542000 Cost of sales 184280 Gross Profit 357720 Less Expe... View the full answer