QUESTION 4 (20 Marks)

REQUIRED

Use the information provided below to answer the following questions:

4.1 Calculate the following ratios for 2020 only. Where applicable, round off answers to two decimal places.

4.1.1 Gross margin (2 marks)

4.1.2 Inventory turnover (2 marks)

4.1.3 Debtors collection period (2 marks)

4.1.4 Creditors payment period (2 marks)

4.1.5 Return on equity (2 marks)

4.1.6 Debt to assets (2 marks)

4.1.7 Acid test ratio (2 marks)

4.2 Use your answers from question 4.1 to comment on the following:

4.2.1 The profitability of the company from the shareholders point of view. (2 marks)

4.2.2 The ability of the company to pay its short-term debts under distress business conditions. (2 marks)

4.2.3 The ability of the company to collect debts when they fall due. (2 marks)

INFORMATION

The extracts of the financial statements of Ashton Limited for 2019 and 2020 are provided below.

Ashton LimitedStatement of Comprehensive Income for the year ended 31 December 2020
	R
Cost of sales	1 200 000
Operating profit	440 000
Profit before tax	380 000

Note:

Goods were sold at cost plus 60%.

The tax rate is 28%.

Statement of Financial Position as at 31 December:
	2020		2019
	R		R
Non-current assets	?		1 940 000
Inventories	?		400 000
Accounts receivable	440 000		600 000
Cash and cash equivalents	400 000		320 000
	?		3 260 000
Equity	2 920 000		2 660 000
Non-current liabilities: Loan from Fed Bank	?		220 000
Accounts payable	360 000		380 000
	?		3 260 000

Additional information

Non-current assets comprised equipment as well as land and buildings. Depreciation for the year ended 31 December 2020 amounted to R200 000. Extensions to the buildings during 2020 amounted to R520 000.

Inventories on 31 December 2020 represented 37.5% of sales.

Loan repayments to Fed Bank during 2020 amounted to R50 000. An additional R370 000 was borrowed from Fed Bank on 01 July 2020.

All sales and purchases are on credit.

Credit terms to debtors are 30 days.