Awen Ltd is a manufacturer of machine tools and is at present contemplating an issue of GH¢2,000,000 10% debenture stock (2020) in order to assist the remodelling of its present production facilities. Some shareholders are reluctant to approve additional long-term debt due to the fact that the machine tools industry is subject to wide-ranging fluctuations in sales and profits. A group of shareholders have approached you and asked you to comment on the performance of Awen Ltd as compared with industrial averages and to make recommendations as to whether they should approve the proposed additional long- term debt. Abbreviated financial statements and typical ratios for firms in the machine tools industry are as follows: Awen Ltd Statement of Comprehensive Income for the year ended 31/12 2005 2004 GH¢000 GH¢000 Sales 23,500 16,000 7,500 (2,000) (3,000) 20,500 14,000 6,500 (1,900) (2,600) Cost of Sales Gross profit Selling expenses Administrative expenses Operating profit Interest cost 2,500 _(500) 2,000 _(300) Profit before tax 2,000 (1,200) 800 6,365 1,700 (1,020) 680 6,090 Taxation Profit after tax Income surplus a/c

FINANCIAL ACCOUNTING
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Chapter1: Financial Statements And Business Decisions
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Awen Ltd
Statement of Financial Position as at 31/12
2005
GH¢000
2004
GH¢000
Non
Current
assets
tangible
6,315
5,600
Intangible
800
750
7,115
6,350
Current assets:
Stock
5,100
3,200
Debtors
2,900
1,900
Prepaid expenses
100
100
Cash & Bank
600
590
8,700
5,790
Total Assets
15,815
12,140
Capital & Liabilities:
Stated capital
350
350
6,365
Debenture
6,090
stock
Income surplus
8%
(2006)
5,500
3,300
12,215
2,740
Current
3,600
15,815
2,400
12,140
Liabilities
Typical industrial ratios for 2005 are
Gross profit margin
34%
Current ratio
2.5:1
Quick ratio
Average age of debtors
Stock turnover
earned
1.2:1
30 days
5 times
Int
8 times
0.7:1
Debt/Equity ratio
Net profit before tax to net assets
19.5%
You are required:
(a) Compute the above ratios for Awen Ltd for both 2004
and 2005, taking into account the stock valuation at
31/12/2003 of GH¢ 2,500,000 and Debtors balance on
the same date of GH¢ 1,700,000.
(b) In a report format, comment on the performance of Awen
Ltd and recommend a course of action to the group of
shareholders.
Transcribed Image Text:Awen Ltd Statement of Financial Position as at 31/12 2005 GH¢000 2004 GH¢000 Non Current assets tangible 6,315 5,600 Intangible 800 750 7,115 6,350 Current assets: Stock 5,100 3,200 Debtors 2,900 1,900 Prepaid expenses 100 100 Cash & Bank 600 590 8,700 5,790 Total Assets 15,815 12,140 Capital & Liabilities: Stated capital 350 350 6,365 Debenture 6,090 stock Income surplus 8% (2006) 5,500 3,300 12,215 2,740 Current 3,600 15,815 2,400 12,140 Liabilities Typical industrial ratios for 2005 are Gross profit margin 34% Current ratio 2.5:1 Quick ratio Average age of debtors Stock turnover earned 1.2:1 30 days 5 times Int 8 times 0.7:1 Debt/Equity ratio Net profit before tax to net assets 19.5% You are required: (a) Compute the above ratios for Awen Ltd for both 2004 and 2005, taking into account the stock valuation at 31/12/2003 of GH¢ 2,500,000 and Debtors balance on the same date of GH¢ 1,700,000. (b) In a report format, comment on the performance of Awen Ltd and recommend a course of action to the group of shareholders.
QUESTION 2
Awen Ltd is a manufacturer of machine tools and is at present
contemplating an issue of GH¢2,000,000 10% debenture
stock (2020) in order to assist the remodelling of its present
production facilities. Some shareholders are reluctant to
approve additional long-term debt due to the fact that the
machine tools industry is subject to wide-ranging fluctuations
in sales and profits.
A group of shareholders have approached you and asked you
to comment on the performance of Awen Ltd as compared
with industrial averages and to make recommendations as to
whether they should approve the proposed additional long-
term debt.
Abbreviated financial statements and typical ratios for firms
in the machine tools industry are as follows:
Awen Ltd
Statement of Comprehensive Income for the year ended 31/12
2004
GH¢000
2005
GH¢000
23,500
16,000
7,500
(2,000)
(3,000)
Sales
20,500
14,000
6,500
(1,900)
(2,600)
Cost of Sales
Gross profit
Selling expenses
Administrative expenses
Operating profit
Interest cost
2,500
_(500)
2,000
_(300)
Profit before tax
2,000
(1,200)
800
6,365
1,700
(1,020)
680
6,090
Taxation
Profit after tax
Income surplus a/c
Transcribed Image Text:QUESTION 2 Awen Ltd is a manufacturer of machine tools and is at present contemplating an issue of GH¢2,000,000 10% debenture stock (2020) in order to assist the remodelling of its present production facilities. Some shareholders are reluctant to approve additional long-term debt due to the fact that the machine tools industry is subject to wide-ranging fluctuations in sales and profits. A group of shareholders have approached you and asked you to comment on the performance of Awen Ltd as compared with industrial averages and to make recommendations as to whether they should approve the proposed additional long- term debt. Abbreviated financial statements and typical ratios for firms in the machine tools industry are as follows: Awen Ltd Statement of Comprehensive Income for the year ended 31/12 2004 GH¢000 2005 GH¢000 23,500 16,000 7,500 (2,000) (3,000) Sales 20,500 14,000 6,500 (1,900) (2,600) Cost of Sales Gross profit Selling expenses Administrative expenses Operating profit Interest cost 2,500 _(500) 2,000 _(300) Profit before tax 2,000 (1,200) 800 6,365 1,700 (1,020) 680 6,090 Taxation Profit after tax Income surplus a/c
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