Alpha Industries Limited is a manufacturer of PVC pipes and plastics for use in domestic and industrial establishments. The company was founded some 10 years ago as a family concern and has transformed into a medium-sized entity. The company owned its rapid growth to private housing development springing up in the Accra and Tema metropolis. It also won a tender to supply to 3 big state institutions, about 5 years ago, which together form 40% of sales. Henry Alpha-Koney, 68, founder and chairman plays less active role in the day to day running of the company which is now being managed by his children. Paul, 38, the eldest son and managing director took over from his father 2 years ago. Francis, 35, looks after the production whist Selina, who is 29, is responsible for finance and administration. Paul and Francis call in today to see you. They have drawn up a 3-year business plan which forecast sales growth at 20% annually. This will involve the upgrading of production equipment and an extension to the existing factory. They had initially intended to fund this expansion by raising equity capital which did not materialised at the last minute due to their foreign partner’s inability to raise his share of the funds from his oversee bankers. They claim some attractive offers have been coming from some rival banks but will want to give your bank the opportunity to finance this project if possible, in view of the long-standing relationship. The venture is expected to cost GH¢550,000 which will go into purchasing modern plant and equipment and to make extensions to the existing factory, which is too small for the growth, envisaged. More details about the project can only be made available only if the bank can give some agreement in principle. The request for the financing is to cover the cost of the new plant and the equipment at the current interest rate of 24% per annum for the period of 6 years’ repayment duration. Required Based on the information provided plus the financial statement, including the industry average data, make an assessment to determine whether the bank should grant the request to finance the project. Alpha Industries Limited Comprehensive Income Statement for December 2018 2019 2020 GH¢ GH¢ GH¢ Sales 885,680 1,058,630 1,501,000 Cost of sales 575,890 667,630 749,720 Gross profit 309,800 391,000 751,280 Selling, general and administration expense 163,660 208,080 351,000 Net operating profit 146,140 182,920 403,280 Interest income 3,730 3,890 4,200 Interest expense 33,920 24,350 33,280 Profit before tax 115,950 162,460 371,200 Tax 53,620 75,990 86,420 Net profit after tax 62,330 86,470 284,780 Dividends payable -------- 20,000 25,000 Retained earnings 62,330 66,470 259,780 Alpha Industries Limited Statement of Financial Position as at 31 December 2018 2019 2020 Non-current assets GH¢ GH¢ GH¢ Land 10,800 10,800 10,800 Machinery and equipment 195,740 192,770 190,890 Total non-current assets 206,540 203,570 201,690 Current assets Stock 409,870 342,510 390,000 Debtors 126,730 173,240 230,000 Prepayments 36,540 35,800 40,550 Cash 66,780 61,450 72,100 Total current assets 639,920 613,000 732,650 Total assets 846,460 816,570 934,340 Share capital and surplus Stated capital 120,000 120,000 120,000 Income surplus 269,010 335,480 447,370 Shareholders’ funds 389,010 455,480 567,370 Current liabilities Trade creditors 68,790 72,340 85,610 Accrued expenses 37,800 38,310 42,900 Short term loans 122,360 70,780 105,800 Total current liabilities 228,950 181,430 234,310 Non-current liabilities Long-term debt 200,000 150,000 100,000 Deferred tax 28,500 29,660 32,660 Total non-current liabilities 228,500 179,660 132,660 Equity plus liabilities 846,460 816,570 934,340 Note: The selling, general and administration expense for 2020 includes the following: Loss on sale of plant GH¢20,000 Profit on sale of equipment GH¢32,000 Depreciation GH¢38,900 Accounting ratios Industry average Gross profit margin (%) 42 Net profit margin (%) 15 Return on equity (%) 45 Return on assets (%) 30 Current ratio 2.0 Quick ratio 1.0 Cash ratio 0.5 Stock turnover ratio (times) 2.0 Stock holding period (days) 180 Debtors’ collection period (days) 50 Creditor’s payment period (days) 30 Debt to total assets (%) 40 Interest cover (times) 3.0

Alpha Industries Limited is a manufacturer of PVC pipes and plastics for use in domestic and industrial establishments. The company was founded some 10 years ago as a family concern and has transformed into a medium-sized entity. The company owned its rapid growth to private housing development springing up in the Accra and Tema metropolis. It also won a tender to supply to 3 big state institutions, about 5 years ago, which together form 40% of sales. Henry Alpha-Koney, 68, founder and chairman plays less active role in the day to day running of the company which is now being managed by his children. Paul, 38, the eldest son and managing director took over from his father 2 years ago. Francis, 35, looks after the production whist Selina, who is 29, is responsible for finance and administration. Paul and Francis call in today to see you. They have drawn up a 3-year business plan which forecast sales growth at 20% annually. This will involve the upgrading of production equipment and an extension to the existing factory. They had initially intended to fund this expansion by raising equity capital which did not materialised at the last minute due to their foreign partner’s inability to raise his share of the funds from his oversee bankers. They claim some attractive offers have been coming from some rival banks but will want to give your bank the opportunity to finance this project if possible, in view of the long-standing relationship. The venture is expected to cost GH¢550,000 which will go into purchasing modern plant and equipment and to make extensions to the existing factory, which is too small for the growth, envisaged. More details about the project can only be made available only if the bank can give some agreement in principle. The request for the financing is to cover the cost of the new plant and the equipment at the current interest rate of 24% per annum for the period of 6 years’ repayment duration. Required Based on the information provided plus the financial statement, including the industry average data, make an assessment to determine whether the bank should grant the request to finance the project. Alpha Industries Limited Comprehensive Income Statement for December 2018 2019 2020 GH¢ GH¢ GH¢ Sales 885,680 1,058,630 1,501,000 Cost of sales 575,890 667,630 749,720 Gross profit 309,800 391,000 751,280 Selling, general and administration expense 163,660 208,080 351,000 Net operating profit 146,140 182,920 403,280 Interest income 3,730 3,890 4,200 Interest expense 33,920 24,350 33,280 Profit before tax 115,950 162,460 371,200 Tax 53,620 75,990 86,420 Net profit after tax 62,330 86,470 284,780 Dividends payable -------- 20,000 25,000 Retained earnings 62,330 66,470 259,780 Alpha Industries Limited Statement of Financial Position as at 31 December 2018 2019 2020 Non-current assets GH¢ GH¢ GH¢ Land 10,800 10,800 10,800 Machinery and equipment 195,740 192,770 190,890 Total non-current assets 206,540 203,570 201,690 Current assets Stock 409,870 342,510 390,000 Debtors 126,730 173,240 230,000 Prepayments 36,540 35,800 40,550 Cash 66,780 61,450 72,100 Total current assets 639,920 613,000 732,650 Total assets 846,460 816,570 934,340 Share capital and surplus Stated capital 120,000 120,000 120,000 Income surplus 269,010 335,480 447,370 Shareholders’ funds 389,010 455,480 567,370 Current liabilities Trade creditors 68,790 72,340 85,610 Accrued expenses 37,800 38,310 42,900 Short term loans 122,360 70,780 105,800 Total current liabilities 228,950 181,430 234,310 Non-current liabilities Long-term debt 200,000 150,000 100,000 Deferred tax 28,500 29,660 32,660 Total non-current liabilities 228,500 179,660 132,660 Equity plus liabilities 846,460 816,570 934,340 Note: The selling, general and administration expense for 2020 includes the following: Loss on sale of plant GH¢20,000 Profit on sale of equipment GH¢32,000 Depreciation GH¢38,900 Accounting ratios Industry average Gross profit margin (%) 42 Net profit margin (%) 15 Return on equity (%) 45 Return on assets (%) 30 Current ratio 2.0 Quick ratio 1.0 Cash ratio 0.5 Stock turnover ratio (times) 2.0 Stock holding period (days) 180 Debtors’ collection period (days) 50 Creditor’s payment period (days) 30 Debt to total assets (%) 40 Interest cover (times) 3.0

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Required

Based on the information provided plus the financial statement, including the industry average data, make an assessment to determine whether the bank should grant the request to finance the project.

Alpha Industries Limited Comprehensive Income Statement for December
	2018	2019	2020
	GH¢	GH¢	GH¢
Sales	885,680	1,058,630	1,501,000
Cost of sales	575,890	667,630	749,720
Gross profit	309,800	391,000	751,280
Selling, general and administration expense	163,660	208,080	351,000
Net operating profit	146,140	182,920	403,280
Interest income	3,730	3,890	4,200
Interest expense	33,920	24,350	33,280
Profit before tax	115,950	162,460	371,200
Tax	53,620	75,990	86,420
Net profit after tax	62,330	86,470	284,780
Dividends payable	--------	20,000	25,000
Retained earnings	62,330	66,470	259,780

Alpha Industries Limited Statement of Financial Position as at 31 December	2018	2019	2020
Non-current assets	GH¢	GH¢	GH¢
Land	10,800	10,800	10,800
Machinery and equipment	195,740	192,770	190,890
Total non-current assets	206,540	203,570	201,690
Current assets Stock	409,870	342,510	390,000
Debtors	126,730	173,240	230,000
Prepayments	36,540	35,800	40,550
Cash	66,780	61,450	72,100
Total current assets	639,920	613,000	732,650
Total assets	846,460	816,570	934,340
Share capital and surplus Stated capital	120,000	120,000	120,000
Income surplus	269,010	335,480	447,370
Shareholders’ funds	389,010	455,480	567,370
Current liabilities Trade creditors	68,790	72,340	85,610
Accrued expenses	37,800	38,310	42,900
Short term loans	122,360	70,780	105,800
Total current liabilities	228,950	181,430	234,310
Non-current liabilities Long-term debt	200,000	150,000	100,000
Deferred tax	28,500	29,660	32,660
Total non-current liabilities	228,500	179,660	132,660
Equity plus liabilities	846,460	816,570	934,340

Note:

The selling, general and administration expense for 2020 includes the following:
- Loss on sale of plant GH¢20,000
- Profit on sale of equipment GH¢32,000
- Depreciation GH¢38,900

Accounting ratios	Industry average
Gross profit margin (%)	42
Net profit margin (%)	15
Return on equity (%)	45
Return on assets (%)	30
Current ratio	2.0
Quick ratio	1.0
Cash ratio	0.5
Stock turnover ratio (times)	2.0
Stock holding period (days)	180
Debtors’ collection period (days)	50
Creditor’s payment period (days)	30
Debt to total assets (%)	40
Interest cover (times)	3.0

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

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