FIAM8411/p/w - Financial Statement & Analysis or Demis Gorgeous Limited - Accounting Assignment Help

Assignment Task -                 
 

Demis Gorgeous Limited is a South African resident company that produces hair care products.

Products are exclusively provided to salons and not available in retail stores. 

Demis Gorgeous working capital figures at 31 December 2019 and 2018 were as follows: 2019 2018 

Inventory 113 591 109 750 Trade receivables 136 138 126 640 Cash at bank  ?  8 260 Trade payables 149 570 137 726 Overdraft 7 666  ?  

Current Ratio 1.59 1.78 Quick Ratio 0.87 0.98 

The finance director is preparing a projected statement of financial position for 31 December 2020. He estimates that inventory will increase by the same percentage as it increased between 2018 and 2019. He expects trade receivables to increase by R1 000 and trade payables should decrease by 6% of the 2019 figure. A closing overdraft of R10 000 is predicted for 31 December 2020.  

Analyze the liquidity ratios over the three years and comment on the liquidity of the business.

The following industry ratios are available: Current Ratio 2.2:1; Quick Ratio 0.95:1 

You can assume that the 2020 actual results were in line with the projections.

Would hair salon owners be interested in the financial information of Demis Gorgeous?

Questions

Ross Galler has owned and run a manufacturing business, Galler (Pty) Limited (‘Galler’) for many years. The business makes high?quality, old?fashioned kitchen ranges. There has been a resurgence of demand in recent years as these ranges have become fashionable again, and the business has performed quite well both in terms of sales and net profits.   

Ross will be retiring soon and is planning to hand over the business to his son, Chandler. Chandler recently left university with a degree in business studies. Ross and Chandler get along reasonably well outside work, but there have been several disagreements over operational details within the business. Chandler has a lot of ideas about improving the marketing and the financial management of the company, but Ross really does not seem interested.   

The latest disagreement is over a potential sales contract. Chandler has been approached by Monica Kitchens Limited, a company that installs up?market kitchens. Monica wants to order, initially, 10 ranges per month, but at a substantially discounted price. Galler’s list price is R13 000 per range. Sometimes, Ross allows discounts to long?standing customers, but never more than R500 per range. On average, it sells for R12 800 per range. Monica wants to pay no more than R10 500. Monica tells Chandler that he should accept the order because ‘there’ll be plenty more business coming your way so long as we get a decent price. 

Ross: ‘I’ll take your word for it, but you know, it isn’t all about figures. There are other things besides figures consider. I’ve always been prepared to negotiate on discount, but R2 500 per range is just out of the question.   

Chandler: ‘Yes, but Monica’s asking for 10 ranges which is far more than our normal customers, and who knows how many more she’ll want, if we give her the price she’s asking for’.   Ross: ‘But that’s another thing. It’s all very well getting the orders, but we’ve got a maximum production capacity in this factory of 100 units a month. Sometimes, we’re producing as many as 95. If we take this business, and Monica starts ordering big numbers we’ll not be able to do it’. Chandler: ‘Yes, well, I’m glad you’ve mentioned that, because I think we should be looking at increasing capacity anyway. This factory building’s a disgrace – it’s a nightmare trying to meet the health and safety regulations, and it costs a fortune to heat. We should be thinking about moving into one of those factory units they’re building by the highway’. 

Questions

Chandler has done some work on how to increase capacity. They have two options in order to increase capacity. They can either upgrade the existing manufacturing factory in order to increase capacity and meet the health and safety regulations or they can move into one of the new factory units that is currently being built next to the highway. The upgrade of the current factory will require a capital investment of R2 500 000 with a payback period of three years and a net present value of R1 284 569. 

If they decide to move into one of the new factory units next to the highway an initial capital investment of R4 000 000 will be required and Chandler has estimated the following cash inflows over the next five years. 

Year Cashflows 

1 980 000 

2 1 400 000 

3 1 850 000 

4 2 100 000 

5 2 400 000 

The business has a cost of capital of 15%. 

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