Reference no: EM132636842

Happy Wholesalers (Pty) Ltd

The accountant of Happy Wholesalers had recently resigned and left before they had time to replace her. While the bookkeeper managed to continue with all the necessary record keeping, it was now year end and Tom Smith (owner and managing director) realised he had to do something fast! Knowing that you had recently completed an excellent accounting and finance course at WBS he arranged to meet with you and asked if you would help.

The bookkeeper had compiled the following operating summary for the year ended 31 December 2011 : -

Sales R64 500

Selling Expenses 3% of Sales

Depreciation R1 265

Cost of Sales 80% of Sales

General & Admin Expenses 1 700

In addition you were told that no interest had been paid during the year as you had gone into overdraft for the first time just before the Balance Sheet date. Half of all Earnings after Tax were to be paid out as a dividend and the prevailing corporate tax rate was 35%.

The following balances were also extracted from the accounts as at the close of trading on 31 December 2011: -

Debtors R12 370

Ordinary Share Capital 8 000

Cash on Hand R1 330

Bank Overdraft R2 467

Stock R6 000

Creditors R6 503

At the beginning of 2011 the balance on the retained income account was R15 100 and Net Book Value of Fixed Assets stood at R16 235. There had been not purchase of additional Fixed Assets during the year.

Tom and his management team had identified new markets and predicted exciting growth for 2012. However, their suppliers were tightening up on their settlement terms and debtors were taking longer and longer to pay. Thus they suspected they would need more permanent funding than the overdraft and had negotiated a L-T loan of up to R10 000.

Estimates for the year ahead were: -

Sales Up by 40%

General & admin Expenses R2 176

Interest Paid R1 110

Cost of Sales 80% of Sales

Selling Expenses 3% of Sales

Depreciation R1 265

The corporate taxation rate had remained the same and in an effort to reduce required borrowings, Smith had agreed to take no dividend in 2012.

They predicted the following for Balance Sheet accounts at 31st December 2012 :-

No additional share capital was to be raised

Cash requirements would grow to R3 427 by year end

Creditors were expected to come down toR 4 750

Stock levels would need to increase to R8 400 to support the increased trade volumes

No Fixed Assets would be bought or sold during the year

Debtors would increase in direct proportion to Sales

The overdraft facility was to be cancelled (all necessary funding to be obtained from the L-T Loan)

The required borrowings would be determined by the balancing figure in the projected Balance Sheet Tom Smith wished to hire you as a consultant and asked you to prepare the following for him, while he continued his search for a new accountant -

Problem a) An Income Statement for the year ended 31 December 2011

Problem b) The Balance Sheet as at 31st December 2011

Problem c) A full set of pro-forma financial statements (Income Statement, Balance Sheet & Cash Flow Statement) for the year ahead. Grid provided for Cash Flow Statement

Problem d) Calculate all the ratios in the attached grid.

Problem e) Comment on the ratios and the performance of the business. Tell the story of the business as best that you can determine from the numbers.