QUESTION 2 (20 Marks)

REQUIRED Use the information provided below to answer the following questions:

2.1 Comment on the financial result of the company. (2 marks)

2.2 Is the company efficient in its collection of debts arising from credit sales? Motivate your answer by using an appropriate ratio. (3 marks)

2.3 Will creditors allow credit under distress business conditions to Silverstone Limited? Explain your answer with the relevant ratio. (3 marks)

2.4 Would the shareholders be happy with the profitability of the company? Use an appropriate ratio to motivate your answer. (4 marks)

2.5 Calculate the ratio for 2021 that reflects how the stock market is judging the companys earnings performance and prospects. (4 marks)

2.6 Explain the impact on the cost of sales in the statement of comprehensive income if LIFO rather than FIFO method of valuing inventories is used during periods of rising prices. (4 marks)

INFORMATION Extracts of the statement of comprehensive income and statement of financial position of Silverstone Limited for 2021 and 2020 are as follows:

Statement of Comprehensive Income for the year ended 31 December:

	2021 (R)	2020 (R)
Sales	6 400 000	5 440 000
Cost of Sales	4 000 000	3 264 000
Gross profit	2 400 000	2 176 000
Operating expenses	960 000	1 056 000
Operating profit	1 440 000	1 120 000
Profit before tax	1 280 000	1 040 000
Profit after tax	896 000	728 000
Statement of Financial Position as at 31 December
ASSETS	2021 (R)	2020 (R)
Non-current assets	7 600 000	6 400 000
Current assets	5 240 000	4 400 000
Inventory	2 440 000	1 600 000
Accounts receivable	1 000 000	1 680 000
Cash and cash equivalents	1 800 000	1 120 000
Total assets	12 840 000	10 800 000
Equity and liabilities Shareholders equity	9 880 000	8 800 000
Non-current liabilities	1 600 000	800 000
Current liabilities (Accounts payable only)	1 360 000	1 200 000
Total equity and liabilities	12 840 000	10 800 000

Note:

All purchases and sales of inventories are on credit.

The credit terms to debtors are 30 days.

There were 2 000 000 shares in issue during 2021.

The market price per share was R5.50 on 31 December 2021.