Question

Section B:

Using the financial statements of XYZ Furnishings (below), comment on your interpretation of the financial health of the company.

There is a maximum of 10 marks available for this section, four marks for your knowledge and understanding of the financial statements, four marks for your analysis and evaluation and 2 marks for your communication.

Statement of Financial Position
Assets
Current
Cash and equivalents		220
Trade receivables		8,420
Other receivables		10
Inventories		1,000
ST Investments		160
Non-Current
Land and Buildings		14,644
Fix and Fit		708
Plant		15,012
Vehicles		1,235
LT Investments		1,500
Total Assets		42,909
Liabilities
Current
Trade payable		6,580
Overdraft		150
ST Loans		1,310
Taxation Due		500
Dividend		200
Non-Current
Loans		8,000
Total Liabilities		16,740
Net Assets		26,169
Equity		26,169
Retained Earnings		10,063
Shareholders’ Equity		16,106

Income Statement
Sales		60,600
COGS		34,020
Gross Profit		26,580
Operating Expenses		15,256
Operating Profit		11,324
Interest received		559
Tax paid		1,026
Financing costs		3,050
Profit for the period		7,807

Answer 1

Analysis of financial statements can be done using the help of various ratios.
Current Ratio	Current assets/Current Liabilites
Current Assets	Current Liabilities	Current Ratio
9810	8740	1.12
The higher the ratio, the better the company's liquidity position.
Solvency ratios
Debt to Equity Ratio	Total Debt/Equity
Debt	Equity	Debt to Equity Ratio
8000	26169	0.31
Business with a high debt to Equity ratio indicates that it is more dependent on debts for operation
A low ratio of 0.31 indicates that the business is not dependent on debt to finance its operations and has a significantly lower leverage amounting to a lower risk
Asset turnover ratio	Net Revenue/Assets
Net Revenue	Assets	Asset turnover ratio
60600	42909	1.41
A higher ratio indicates a better asset utilisation by the management.
A ratio of 1.41 indicates that the company is generating a revenue of 1.41 times the value of assets which is considered a positive sign.
Gross Profit Ratio	Gross Profit/Sales
Gross Profit	Sales	Gross Profit Ratio
26580	60600	43.86%
This indicates a good percentage of gross profit margin over sales.
Return on capital employed	Operating Profit/Capital employed
Operating Profit	Capital Employed or Equity
11324	26169	43.27%
This indicates that the operating profit is almost that of Gross profit. This is a sign of good financial health.