Cosmed Limited: 2023 Cash Flows, 2024 Ratios & 2026 Project

COSMED LIMITED Cosmed Limited was founded over twenty years ago. It started as a retailer with various stores that sold health care products and cosmetics. The management of Cosmed Limited took advantage of the changes in South African legislation in the year that it commenced operations (2003) by entering the pharmacy market in December of the same year. The company currently competes successfully in the personal care and pharmacy markets. The statement of cash flows for the financial year ended 31 December 2023 shown below reveals a strong cash position:

COSMED LIMITED
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2023
	R
Cash flows from operating activities	17 000 000
Operating profit	30 000 000
Depreciation	7 000 000
Profit before working capital changes	37 000 000
Working capital changes	(6 000 000)
Decrease in inventory	500 000
Increase in receivables	(4 500 000)
Decrease in payables	?
Cash generated from operations	31 000 000
Interest paid	(2 000 000)
Investment income	?
Dividends paid	(8 000 000)
Company tax paid	(5 700 000)
Cash flows from investing activities	(26 000 000)
Non-current assets purchased	(19 000 000)
Investment	(7 000 000)

Cash flows from financing activities	?
Increase/Decrease in long-term borrowings	?
Net increase (decrease) in cash	300 000
Cash balance (31 December 2022)	8 700 000
Cash balance (31 December 2023)	9 000 000

During 2024 the purchasing manager was able to negotiate for all the inventories to be purchased on credit from its suppliers subject to credit terms of 60 days. The inventory balance increased from R5 500 000 at the end of 2023 to R6 500 000 at the end of 2024. Cosmed Limited was able to pay out an interim dividend of R1 850 000 during 2024. The profitability and financial position for 2024 are evident in the following excerpts of the financial statements:

COSMED LIMITED
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2024
	R
Sales	75 000 000
Cost of sales	48 000 000
Operating profit	12 000 000
Interest expense	1 000 000
Profit before tax	11 000 000
Tax	2 970 000
Profit after tax	8 030 000

COSMED LIMITED
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2024
	R
ASSETS
Non-current assets (including investment)	35 000 000
Inventories	6 500 000
Accounts receivable	4 500 000
Cash	3 000 000
	49 000 000
EQUITY AND LIABILITIES
Ordinary share capital (6 000 000 shares)	15 000 000
Retained earnings	9 000 000
Long-term loan	11 000 000
Accounts payable	9 000 000
Final dividend payable	5 000 000
	49 000 000

Corporate social responsibility
Cosmed Limited engaged the services of an agency that specialises in aiding emerging entrepreneurs. The agency approached the company to provide financial advice to a group of women who started their own manufacturing entity (Umdloti Manufacturers). They needed advice related to break-even,
margin of safety and profitability. The following information was obtained from them:
They manufacture a product that sells for R270 each. Production and sales are presently 100 000 units per year. Manufacturing costs include direct materials cost of R70 per unit, direct labour cost of R41.50 per unit, variable overheads of R25 per unit and fixed overheads of R7 000 000. The salespersons earn a commission of 5% of sales. Fixed costs of R2 750 000 are incurred for selling and administrative activities.

Capital budgeting: 2026
Cosmed Limited is looking at the possibility of investing in a project during 2026. Two projects are under consideration. The cost of capital is 15%. Depreciation is calculated using the straight-line method. Each project is expected to have a useful life of five years.

Project A
The project would cost R10 000 000. It is estimated that the project would generate revenues of R8 000 000 per year and the cash operating expenses would total R4 800 000 per year. The project is expected to have no scrap value.

Project B
This project would also cost R10 000 000 and is expected to generate net profits of R1 600 000 (Year 1), R1 500 000 (Year 2), R1 300 000 (Year 3), R1 100 000 (Year 4) and R1 000 000 (Year 5). The
project is expected to have a scrap value of R1 000 000.

QUESTION 1 (25 Marks)

REQUIRED
Refer to the statement of cash flows for the year ended 31 December 2023 and answer the following
questions:
1.1 Calculate the following:
1.1.1 Decrease in payables (2 marks)
1.1.2 Investment income. (2 marks)
1.2 Did the company increase or decrease its non-current liabilities? Motivate your answer with the relevant calculations. (3 marks)
1.3 Identify THREE (3) significant changes to the financial position that are evident in this Statement of Cash Flows that the Statement of Comprehensive Income will not reveal. (3 marks)
1.4 Comment on the following:
1.4.1 Decrease in inventory of R500 000 (3 marks)
1.4.2 Increase in receivables of R4 500 000 (3 marks)
1.4.3 Cash flows from operating activities of R17 000 000 (3 marks)
1.4.4 Non-current assets purchased for R19 000 000 (3 marks)
1.4.5 Investment of R7 000 000. (3 marks)

QUESTION 2 (25 Marks)

Refer to the statement of comprehensive income for the year ended 31 December 2024, statement of
financial position as at 31 December 2024 and additional information related to the 2024 financial year.
REQUIRED
Calculate the ratios for 2024 (fully stated to two decimal places e.g. 2.14:1; 23.67%) that would reflect each of the following and comment on your answers. Use only the formulas provided in the formula sheet that appear after Question 4 or in the module guide.
2.1 An indication of the profitability of the company after the cost of goods sold have been deducted. (Note: A ratio of 30% was achieved in 2023.) (4 marks)
2.2 The amount of time the company takes to pay its suppliers after purchasing goods and services on credit. (4 marks)
2.3 A measure of the profitability of the company’s own and borrowed capital investment. (4 marks)
2.4 The ability of the company to pay its short-term obligations using only its most liquid assets. (4 marks)
2.5 An indication of the company’s profitability per share. (Note: A ratio of 98.56 cents per share was achieved in 2023.) (4 marks)
2.6 The percentage of the profit that has been put back into the company. (5 marks)

QUESTION 3 (25 Marks)

REQUIRED
Use the information provided by Umdloti Manufacturers to answer the following questions
independently. The expanded contribution margin model must be used to answer questions 3.2 and 3.3.
3.1 Calculate the margin of safety (as a percentage expressed to two decimal places). (5 marks)
3.2 Calculate the number of units that must be sold if an operating profit of R6 750 000 is desired. (5 marks)
3.3 Suppose the owners of Umdloti Manufacturers want to spend R600 000 more per year on advertising and reduce the selling price by R20 per unit, with the expectation that the sales volume will increase by 20%. Is this a good idea in respect of profitability? Motivate your answer with the relevant calculations. (5 marks)
3.4 Suppose the selling price is reduced by 10% and fixed costs drop by R500 000. By what percentage (expressed to two decimal places) will the operating profit decrease if the sales volume remains unchanged? (5 marks)
3.5 Calculate the selling price per unit (expressed to the nearest cent) that will enable the entity to break-even. (5 marks)

QUESTION 4 (25 Marks)

REQUIRED
Refer to the investment opportunities for 2026 (Project A and Project B) and calculate the following. Where discount factors are required use only the four decimals present value tables that appear after
the formula sheet or in the module guide. Ignore taxes.
4.1 Payback Period of both projects (expressed in years, months and days). (6 marks)
4.2 Accounting Rate of Return on initial investment of Project A (expressed to two decimal places).
(5 marks)
4.3 Net Present Value of both projects. Your answers must include the calculations of the present values and NPVs. (8 marks)
4.4 Internal Rate of Return (expressed to two decimal places) of Project A. Your answer must include two net present value calculations (using consecutive cost of capital rates/percentages) and interpolation. (6 marks)