Question

QUESTION 3
You are the management accountant of MSC Company Ltd. MBA Limited is a major competitor in the same industry and it has been operating for 20 years.
Summary of MBA Limited’s statements of profit or loss and financial position for the previous three years are given below.

SUMMARISED STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DEC.
                                                              2016        2017                2018
                                                                             GHSm           GHSm         GHSm
Revenue                                                                840                   981                913
Cost of sales                                                         554                   645                 590
Gross profit                                                          286                   336                 323
Selling, distribution and admin. expenses         186                   214                 219
Profit before interest                                         100                   122                 104
Interest                                                                6                        15                 19
Profit before taxation                                          94                    107                 85
Taxation                                                             45                 52                  45
Profit after taxation                                           49                 55                  40
Dividends                                                             24                 24                  24

SUMMARISED STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER
                                                                        2016                 2007                2008
                                                                              GHSm              GHSm           GHSm
ASSETS
Non- current assets:
     Intangible assets                                           36                     40                   48
     Tangible assets at net book value                176                  206                  216
                                                                          212                 246                 264
Current assets:
Inventories                                                            237                 303                 294
Receivables                                                           105                 141                160
Bank                                                                   52                  58                  52
                                                                           606                 748                  770     
EQUITY AND LIABILITIES 2016 2017 2018
Equity:
Stated capital                                                     100                  100                 100
Income surplus                                                 299                  330                 346
                                                                           399                  430                 446
Non- current liabilities:
Long Term Loans 174 138 138
Current Liabilities:
Trade Payables 53                  75                    75
Other Payables 80    105         111 606                 748                  770

Required:
Write a report to the finance director of MSC Company Limited analyzing the performance of MBA Company Limited and showing any calculations in an appendix to this report.
KINDLY ANSWER ASAP
VERY URGENT

Answer 1

First of all, the balance sheet as per the question given is not balanced. The liabilities exceed the assets in 2016 by an amount of 100. Therefore for this question, the long term balance in 2016 has been assumed to be 74 instead of 174.

1. Liquidity Ratios Particulars 2016 2017 2018 Current Assets $ 606 $ 748$ 770 Current Assets (except inventories and prepaid assets) $ 157 $ 199 $ 212 Current Liabilities $ 133 $ 180$ 186 Current Ratio 4.56 4.16 4.14 Quick Ratio 1.18 1.11 1.14 From the above liquidity ratios, it is clear that the entity has will have no problems should it encounter a situation of short-term liquidity crunch. As it has maintained more than the ideal 2:1 current ratio and 1:1 quick ratio. This implies that the company's current assts are more than enough to meet the settlements of short term liabilities if needed. 2. Debt Equity Ratio Particulars 2016 2017 2018 Debt (Long term debt) $ 74 | $ 138$ 138 Equity $ 399 $ 430$ 446 Debt Equity Ratio 0.19 0.32 0.31 Debt Equity Ratio of the company is relatively low. This can help the entity leverage the more funds from lenders such as banks and financial institutions if needed, since it indicates a wider safety cushion. i. e Lenders feel that the owner's funds can help absorb possible losses of income and capital. Maintaing this capital structure has also helped reduce interest costs on borrowed capital thereby allowing the company to declare and pay consistent dividends to its equity shareholders 3. Profitability Ratios Particulars 2016 2017 2018 Gross Profit $ 286 $ 336 $ 323 Net Profit $ 49 $ 55$ 40 Revenue $ 840 $ 981 $ 913 Cost of sales $ 554 $ 645$ 590 PAT $ 49 $ 55$ 40 Equity $ 399 $ 430 $ 466 Gross Profit Ratio 34.05% 34.25% 35.38% Net Profit Ratio 5.83% 5.61% 4.38% Cost of Sales to Revenue Ratio 65.95% 65.75% 64.62% Return on Equity 12.28% 12.79% 8.58% On analysis of the above profitability ratios, the following can be noticed 1. Based on the Cost of sales to Revenue ratio, it is clear that the entity cost of sales is more or less at a fixed margin of the sales achieved. Similar margins indicate that the company is not incurring additional / abnormal costs. Although the economies of production dictate lowering of fixed costs with the level of activity, atleast the company is not incurring higher costs. 2. The Gross Profit and Net Profit ratios indicate that the company is earning positive returns over the period. However only a small percentage of the revenue is finding its way back to the business as retained earnings. Management might need to take steps for reducing the existing costs, or change the dividend policy etc. 3. Lastly, the company boasts a comparatively modest ROE. Since the company has an optimal debt-equity ratio, consistent profits, and the practise of declaring and paying consistent dividends, the ROE is likely to have a positive impact in the owners and prospective investors.