Attached as Appendix 1 are the financial statements for Super Cheap Auto Limited, a public company in Australia which operates two chains of retail shops which sell equipment and accessories for motor cars, boats and camping. Most sales are cash sales to retail consumers.
Using the information provided in these financial statements answer the following questions.
Note that the earnings per share are provided on the income statement.
Please also note the following data;
Dividends declared in 2006 were 8 cents per share and in 2007 10.5 cents per share.
a) Calculate the Current ratio and the Quick ratio for 2007. Comment on the liquidity of this company. For comparison purposes, other firms in this industry sector have an average Current ratio of 1.76 and an average Quick ratio of 0.78. 3 marks
b) From the information provided about dividends and earnings and from the Cash flow statement and Balance sheet, comment on long term and short sources of finance that Super Cheap Auto has used to expand the business from 2006 to 2007. 3 marks
c) Calculate a ratio that will tell you how many times a year Super Cheap Auto turns over its inventory in 2007 (or, calculate the ratio that tells you the number of days it takes to turn over inventory). Comment on this aspect of working capital management. 3 marks
d) Do you think Super Cheap should borrow more money to expand faster? Why? Explain you reasoning. 3 marks
e) Assuming a share price of $4.50, calculate a Price Earnings (PE) ratio and a Dividend Yield ratio for Super Cheap Auto. Interpret these ratios and comment on the value of shares in Super Cheap Auto, given that sector average PE is 16.7 and sector average dividend yield is 3.7%. What does this tell us about the market’s expectations about growth in Super Cheap Autos share price? 3 marks
a) List 4 different types (groups) of people who are users of general purpose financial statements. 1 mark
b) Select 2 different groups from your list in part a) then compare and contrast their financial information needs. Discuss the benefits they would gain by reading and analyzing the financial statements. What limitations might each group find with this source of information? 1 mark
c) For each of the following items, state whether it is either; Revenue or Expense or Asset or Liability or Equity.
1. A loan to another company
2. Shares issued to the public
3. Inventory purchased last week
4. Depreciation of equipment
5. Provision for long service leave
6. Excess payment to the tax department
7. Shares owned in another company
8. Accounts payable
9. Prepaid insurance premiums
10. Deposit paid by a customer for work yet to be done
11. Credit sales
12. Cash sales
13. Retained profit
15. Bad debts
16. Dividend declared, not yet paid 3 marks
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