Question

You have been asked by your CEO to evaluate, analyse and calculate commonly used ratios relating to a company’s profitability, liquidity, solvency and management efficiency.

Requirement:

1. Complete the balance sheet and sales data (fill in the blanks), using the following financial data:

                Debt/net worth                                                        60%

              Acid test ratio                                                            1.2

              Asset turnover                                                           1.5 times

              Day sales outstanding in accounts receivable     40 days

              Gross profit margin                                                   30%

              Inventory turnover                                                    6 times

                                                                           Balance sheet

Cash                               ________                       Accounts payable     ________

Accounts receivable   ________                        Common stock         RM15,000                        

Inventories                   ________                        Retained earnings    RM22,000

Plant & equipment     ________

Total assets                  ________                        Total liabilities          ________

                                                                                   & capital

Sales                              ________

Cost of goods sold      ________

Answer 1

Capital = Common stock + Retained earnings
Capital = 15,000 + 22,000
Capital = 37,000

Debt/Net Worth = Total liabilities / (Total liabilities + Capital)
0.60 = Total liabilities / (Total liabilities + 37,000)
0.60 * Total liabilities + 22,200 = Total liabilities
0.40 * Total liabilities = 22,200
Total liabilities = 55,500

Total liabilities = Accounts payable
Accounts payable = 55,500

Total liabilities and Capital = Total liabilities + Capital
Total liabilities and Capital = 55,500 + 37,000
Total liabilities and Capital = 92,500

Total assets = Total liabilities and Capital
Total assets = 92,500

Asset turnover = Sales / Total assets
1.50 = Sales / 92,500
Sales = 138,750

Gross profit margin = (Sales - Cost of goods sold) / Sales
0.30 = (138,750 - Cost of goods sold) / 138,750
Cost of goods sold = 97,125

Days sales outstanding in accounts receivable = 365 * Accounts receivable / Sales
40 = 365 * Accounts receivable / 138,750
Accounts receivable = 15,205

Inventory turnover = Cost of goods sold / Inventories
6 = 97,125 / Inventories
Inventories = 16,188

Acid test ratio = (Cash + Accounts receivable) / Accounts payable
1.20 = (Cash + 15,205) / 55,500
Cash = 51,395

Total assets = Cash + Accounts receivable + Inventories + Plant and equipment
92,500 = 51,395 + 15,205 + 16,188 + Plant and equipment
Plant and equipment = 9,712