a) Cash flows from operating activities for the company for 2024:
Operating Profit before taxation 98,078
Add: Depreciation 3,502
Less: Loss on sale of fixed asset 2,237
Changes in working capital:
Increase in inventory (192,085-149,002) (43,083)
Increase in trade and other receivables (425,665-229,633) (196,032)
Increase in creditors (130,732-44,784) 85,948
Increase in shareholders for dividends (17,409-11,606) (5,803)
Net cash flows from operating activities (60,639)
b) Financial ratios calculation and interpretation:
Debt equity ratio = Total liabilities / Equity attributable to ordinary shares
= (237,652 + 148,141) / 248,026
= 1.75
Interpretation: The company has a debt equity ratio of 1.75, indicating that it relies more on debt financing compared to equity. This may pose a risk in terms of financial stability and solvency.
Times interest earned = Operating Profit / Net Finance Cost
= 137,342 / 39,264
= 3.5
Interpretation: The times interest earned ratio of 3.5 shows that the company is able to cover its interest payments 3.5 times with its operating profit. A higher ratio is generally more favorable.
Current ratio = Current Assets / Current Liabilities
= 617,750 / 148,141
= 4.17
Interpretation: The current ratio of 4.17 indicates that the company has sufficient current assets to cover its current liabilities, suggesting good liquidity and ability to meet short-term obligations.
Debtors average collection period = (Trade and other receivables / Turnover) x 365
= (425,665 / 1,287,052) x 365
= 120.77 days
Interpretation: The debtors average collection period of 120.77 days suggests that the company takes an average of around 4 months to collect its receivables, which may impact cash flow and liquidity.
Inventory turnover = Cost of Goods Sold / Average Inventory
= 1,287,052 / [(192,085 + 149,002) / 2]
= 8.44
Interpretation: The inventory turnover of 8.44 indicates that the company sells and replaces its inventory approximately 8.44 times in a year, showing efficient management of inventory.
Overall assessment: The company appears to have strong growth potential based on the increase in share price and number of stores. However, the high debt equity ratio raises concerns about financial risk and leverage. The current ratio and times interest earned ratio are satisfactory, indicating liquidity and ability to cover interest payments. The debtors collection period is slightly high, potentially impacting cash flow, while the inventory turnover ratio shows efficient inventory management.
c) Audit steps to verify the existence of inventory:
1. Confirm the existence of inventory physically by conducting comprehensive stock counts.
2. Confirm the ownership of inventory by reviewing ownership documents such as purchase invoices and delivery notes.
3. Check the inventory locations and perform spot checks to ensure accuracy.
4. Verify the valuation of inventory by reconciling physical counts with the accounting records.
5. Trace inventory transactions to supporting documentation such as sales orders, purchase orders, and inventory reports.
6. Investigate any discrepancies or inconsistencies found during the inventory verification process.
7. Obtain third-party confirmation of inventory held at external warehouses or locations.
8. Review internal controls and procedures related to inventory management to assess reliability of inventory records.
9. Perform analytical procedures to assess reasonableness of inventory balances and movements.
10. Document all audit procedures performed and findings in the audit working papers.