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Accounting Assignment Question

The Bujang Lapok Berhad manufactures and sells a line of exclusive sportswear. The company

was started by Miss Sizuka just 10 years ago and has been profitable every year since its

inception. The chief financial officer for the firm, Mr. Nobitha, has decided to seek a line of

credit form the firm's bank. In the past, the company has relied on its suppliers to finance a

large part of its needs for inventory. However, in recent months tight money conditions have

led the firm's suppliers to offer sizable cash discounts to speed up payments for purchases. Mr.

Nobitha wants to use the line of credit to supplant a large portion of the firm's payable during

the summer, which is the firm's peak seasonal sales period.

The firm's two most recent statement of financial position were presented to the bank in

support of its loan request. In addition, the firm's income statement for the year just ended was

provided. These statements are found in the following:

Master of Business Administration

GSFM7514 Accounting & Finance for Decision Making Income Statement

for the year ending December 31, (in RM millions)

This year Last year

Sales revenue 53,195 52,235

Less: Cost of goods sold 41,304 38,032

Gross profits 11,891 14,203

Less: Operating expenses

Selling & administration 4,064 3,933

Pension 405 714

Non-pension post retirement 758 834

Depreciation 1,100 994

Amortization of tools 1,120 961

Total operating expenses 7,447 7,436

Operating profits 4,444 6,767

Less: Interest expenses 995 937

Net profit before taxes 3,449 5,830

Less: Taxes (40%) 1,380 2,332

Net profit after taxes 2,069 3,498

Statement of Financial Position

for the year ending December 31 (in RM millions)

This year Last year

Current Assets

Cash and cash equivalents 5,543 5,145

Marketable securities 2,582 3,226

Account receivables 2,003 1,695

Inventories 4,448 3,356

Prepaid taxes 985 1,330

Other receivables 13,623 12,433

Total Current Assets 29,184 27,185

Property & equipment 20,468 18,281

Master of Business Administration

GSFM7514 Accounting & Finance for Decision Making

This year Last year

Less: Accumulated Depreciation 7,873 7,208

Net Plant & Equipment 12,595 11,073

Other Assets

Special tools 3,566 3,643

Intangible assets 2,082 2,162

Deferred tax assets 490 395

Total Other Assets 6,138 6,200

Total Assets 47,917 44,458

Current Liabilities

Account payables 8,290 7,826

Short-term debt 2,674 4,645

Accrued liabilities 7,032 5,582

Other payments 1,661 811

Total Current Liabilities 19,657 18,864

Non-Current Liabilities

Long-term debt 9,858 7,650

Accrued employee benefits 3,378 3,514

Other non-current liabilities 4,065 3,736

Total Non-Current Liabilities 17,301 14,900

Total Liabilities 36,958 33,764

Shareholder's Equity

Preferred stock 0 2

Common stock (at RM1 par) 408 364

Additional paid-in capital 5,506 5,536

Retained earnings 5,045 4,792

Total Shareholder's Equity 10,959 10,694

Total Liabilities and Shareholder's Equity 47,917 44,458

Industry Average Ratio this year

Current Ratio 1.78

Acid Test Ratio 1.55

Inventory Turnover 7.41

Average Collection Period 22.8

Master of Business Administration

GSFM7514 Accounting & Finance for Decision


Non-Current Asset Turnover 1.54

Total Asset Turnover 0.89

Debt 75%

Times Interest Earned 6.4

Net Profit Margin 4.70%

Return on Assets 4.60%

Return on Common Equity 20.70%

You were assigned the task of analysing Mr Nobitha's loan request.

Based on the given information, answer the following questions.

a. Which of the ratios reported in the average industry do you feel should be most crucial

in determining whether the bank should extend the line of credit?

b. Compute the financial ratios for both years, and using the average industry evaluate

the firm in the following areas:

i. Liquidity

ii. Operating profitability

iii. Financing policies

iv. Return on the shareholders' investment

c. How does your finding support of fail to support what you would conclude using ratio

analysis to evaluate the firm's performance? 

Answer & Explanation
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