QUESTION $4(25$ MARKS$)$

Use the information provided below to answer the following questions.

$4\mathrm{.}1.$ Explain the use of the accounting concept of conservatism when the financial statements of Mayfair

Limited are prepared. $(4$ Marks$)$

The following questions apply to the financial year ended $31$ December $2023$

$4\mathrm{.}2.$ Comment on the financial result of the company $(4$ Marks$)$

$4\mathrm{.}3.$ Was the company efficient in its collection of debts arising from credit sales? Motivate your answer by

using and appropriate ratio. $(6$ Marks$)$

$4\mathrm{.}4.$ Will creditors allow credit to Mayfair limited under distress business conditions? Explain your answer with

the relevant ratio. $(6$ Marks$)$

$4\mathrm{.}5.$ From the point of view of the shareholders, would they be happy with the profitability of the company?

Use an appropriate ratio to motivate your answer. $(5$ Marks$)$

INFORMATION

Extracts from the Income Statement and Balance Sheet of Mayfair Limited for $2023$ and $2022$ are as follows:

Extracts of Income Statement for the year ended $31$ December:

$2023($R$)2022($R $)$

Sales $64000005440000$

Cost of sales $40000003264000$

Gross profit $24000002176000$

Operating expenses $9600001056000$

Operating profit $14400001120000$

Profit before tax $12800001040000$

Net profit after tax $896000728000$Extracts of Balance Sheets as at December $2023$:

Assets $2023($R $)2022($R $)$

Non$-$ current assets $76000006400000$

Current assets: $52400004400000$

Inventory $24400001600000$

Accounts receivable $10000001660000$

Cash and cash equivalents $18000001120000$

Total assets $1284000010800000$

Owners$$ equity and liabilities

Shareholders$$ equity $98800008800000$

Non$-$ current liabilities $1600000800000$

Current liabilities $($Accounts payable$)13600001200000$

Total owners$$ equity and liabilities $1284000010800000$

Note:

$$ All purchases and sales of inventories are on credit

$$ The credit terms to debtors are $30$ days.