Why creditors are users of the financial information

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Reference no: EM133504623

Question: School furnishers (Pty) Ltd manufacture and supply quality desks to schools. The following financial statements of School furnishers (Pty) Ltd are provided to you: Statement of profit or loss and other comprehensive income for the year ended 28 February 2022. 2022 2021 R'000 R'000 Revenue 11 225 6 558 Cost of sales (7 844) (4 023) Gross profit 3 381 2 535 Operating costs (998) (596) Distribution costs (450) (155) Administrative expenses (20) (174) Other expenses (121) (150) Net operating profit /(loss) 1 792 1 460 Interest and other income 477 398 Earnings before interest and tax (EBIT) 2 069 1 858 Interest expense (952) (458) Profit before tax 1 117 1 400 Income tax expense (313) (392) Net profit 804 1 008 6 Statement of financial position as at 28 February 2022. 2022 2021 ASSETS R'000 R'000 Non-current assets Property, plant and equipment 6 556 2 665 Other investments 295 195 Total non-current assets 6 851 2 860 Current assets Inventories 302 105 Trade and other receivables 1 133 654 Cash and cash equivalents 756 90 Total current assets 2 191 849 TOTAL ASSETS 9 042 3 709 EQUITY AND LIABILITIES Capital and reserves Share capital 2 000 2 000 Retained earnings 1 454 650 Total equity 3 454 2 650 Non-current liabilities Interest-bearing borrowings 3 948 190 Deferred tax 256 102 Total non-current liabilities 4 204 292 Current liabilities Trade and other payables 1 086 523 Current tax payable 42 56 Current provisions 256 188 Total current liabilities 1 384 767 TOTAL EQUITY AND LIABILITIES 9 042 3 709 6 Additional information: 1. School furnishers (Pty) Ltd have 2 million issued shares. 2. The opening balance of inventory as at 01/03/2020 was R102 000. 3. The amount of sales on credit is 70% of revenue for both years. 4. The profitability and performance ratios (based on book values) were correctly calculated as follows: ROE 23,28% (2021: 38,04%) and ROA 22,88% (2021: 50,09%) 5. Actual credit purchases amounted to R9 167 000 (2021: R4 590 000). Assume 365 days per year. 6. The credit terms of the supplier is 2/10 net 40 and is strictly enforced. 7. The cost of normalshort-term funding (e.g., a bank overdraft) is 20%. 8. Value added tax (VAT) is calculated at 15% and must be taken into account where relevant.

REQUIRED: a) Name and explain the main reason why creditors are users of the financial information of a company. (2)

b) Show the formulas and detailed calculations of the following ratios for School furnishers (Pty) Ltd for both financial years 2021 and 2022:

(i) Operating profit margin (3) (ii) Asset turnover rate (3) (iii) Payable (creditor) days (3) (iv) Cash ratio (and explain what the ratio for 2022 implies) (4)

c) Under separate headings, list ONE advantage and ONE disadvantage of using trade accountspayable (trade creditors) as a type of finance (short-term credit). (2)

d) Calculate the nominal annual cost of credit if School furnishers (Pty) Ltd follows the policy of paying for the purchases on the latest date allowed and advise School furnishers (Pty) Ltd on why they should or should not forfeit discounts by postponing payments. 5. Discuss the Factors influencing a firm's dividend policy

Reference no: EM133504623

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