Liquidity 3 / 6

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Question 31a

Mowair Co is an international airline which flies to destinations all over the world.

Mowair Co experienced strong initial growth but in recent periods the company has been criticised for under-investing in its non-current assets.

Extracts from Mowair Co’s financial statements are provided below.

Statements of financial position as at 30 June:

20X720X6
$’000$’000
Assets
Non-current assets
Property, plant and equipment 317,000 174,000
Intangible assets (note ii) 20,000 16,000

337,000

190,000
Current assets
Inventories 580 490
Trade and other receivables 6,100 6,300
Cash and cash equivalents 9,300 22,100
Total current assets
15,980

28,890
Total assets 352,980
218,890
Equity and liabilities
Equity
Equity shares 3,000 3,000
Retained earnings 44,100 41,800
Revaluation surplus 145,000 Nil
Total equity
192,100

44,800
Liabilities
Non-current liabilities
6% loan notes 130,960
150,400
Current liabilities
Trade and other payables 10,480 4,250
6% loan notes 19,440 19,440
Total current liabilities
29,920

23,690
Total equity and liabilities 352,980
218,890

Other EXTRACTS from Mowair Co’s financial statements for the years ended 30 June:

20X720X6
$’000$’000
Revenue154,000159,000
Profit from operations12,30018,600
Finance costs(9,200 )(10,200 )
Cash generated from operations18,48024,310

The following information is also relevant:

(i)

Mowair Co had exactly the same flight schedule in 20X7 as in 20X6, with the overall number of flights and
destinations being the same in both years.

(ii)

In April 20X7, Mowair Co had to renegotiate its licences with five major airports, which led to an increase in the prices Mowair Co had to pay for the right to operate flights there. The licences with ten more major airports are due to expire in December 20X7, and Mowair Co is currently in negotiation with these airports.

Required:

(a) Calculate the following ratios for the years ended 30 June 20X6 and 20X7:

(i)

Operating profit margin;

(ii)

Return on capital employed;

(iii)

Net asset turnover;

(iv)

Current ratio;

(v)

Interest cover;

(vi)

Gearing (Debt/Equity).

Note: For calculation purposes, all loan notes should be treated as debt.

(6 marks)

Specimen
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MC Question 6

The following information has been taken or calculated from Fowler’s financial statements for the year ended 30 September 2014.

Fowler’s cash cycle at 30 September 2014 is 70 days.

Its inventory turnover is six times.

Year-end trade payables are $230,000.

Purchases on credit for the year were $2 million.

Cost of sales for the year was $1·8 million.

What is Fowler’s trade receivables collection period as at 30 September 2014? All calculations should be made to the nearest full day. The trading year is 365 days.

A     106 days
B     89 days
C     56 days
D     51 days

Specimen
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MC Question 17

Trent uses the formula:
(trade receivables at its year end/revenue for the year) x 365 to calculate how long on average (in days) its customers take to pay.

Which of the following would NOT affect the correctness of the above calculation of the average number of days a customer takes to pay?

A

Trent experiences considerable seasonal trading

B

Trent makes a number of cash sales through retail outlets

C

Reported revenue does not include a 15% sales tax whereas the receivables do include the tax

D

Trent factors with recourse the receivable of its largest customer

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