Reference no: EM132360601

Question

Thomas Ltd is a spare parts agent for motorcycles in Tshwane, South Africa. The company commenced operations at the beginning of the 2010 year. Although being profitable, the business is experiencing cash flow problems. The financial director has approached you for advice in order to remedy this situation. The following amounts for the current (2015) and comparative years were extracted from the records of the company:

2014 2015 (current)

R`000

Turnover (all sales on credit) 220 000 250 000

Cost of sales 150 000 165 000

Profit before interest and tax 11 000 10 500

Accounts receivable 25 000 29 600

Accounts payable 14 700 17 000

Inventory 26 000 30 400

Bank/ (overdraft) (1000) (2 000)

1. Briefly discuss the purpose of financial statement analysis.

2 Calculate the following ratios for each year:

2.1 Accounts receivable (debtors) collection period

2.2 Inventory holding period

2.3 Accounts payable (creditors) payment period

2.4 Current ratio

2.5 Acid test ratio

3.3 Evaluate the company's working capital management in light of the above calculations.