Question

Financial information for Mario Ltd is presented here.

MARIO LTD Statement of Financial Position as at 31 December
	2019	2018
	$	$
ASSETS
Cash	50,000	42,000
Short-term investments	80,000	50,000
Receivables (net of allowance for doubtful accounts of $4,000 for 2019 and $3,000 for 2018)	100,000	87,000
Inventories	440,000	300,000
Prepaid expenses	25,000	31,000
Land	75,000	75,000
Building and equipment (net)	570,000	400,000
Total assets	$1,340,000	$985,000
LIABILITIES AND EQUITY
Short term provisions	125,000	25,000
Accounts Payable	160,000	90,000
Accrued Liabilities	50,000	50,000
Bonds payable, due 2021	200,000	100,000
Share capital (100,000 shares)	500,000	500,000
Retained earnings	305,000	220,000
Total liabilities and equity	$1,340,000	$985,000
MARIO LTD Statement of Profit or Loss for the year ended 31 December
	2019	2018
	$	$
Sales	1,000,000	940,000
Cost of sales	(650,000)	(635,000)
Gross profit	350,000	305,000
Finance cost	(20,000)	(10,000)
Operating expenses	(115,000)	(145,000)
Profit before tax	215,000	150,000
Tax expense	(100,000)	(70,000)
Profit	$115,000	$80,000

Additional information:

1. Inventory at the beginning of 2018 was $350,000.
2. Receivables at the beginning of 2018 were $80,000, net of an allowance for doubtful debts account of $3,000.
3. Total assets at the beginning of 2018 were $1,175,000.
4. No share capital transactions occurred during 2018 or 2019.
5. All sales were on account.

Required

1. Please calculate the following ratios, for 2019 and 2018, using the information from Mario Ltd:

• Liquidity: Current, Quick, Receivables Turnover, and Inventory Turnover.
• Profitability: Profit Margin, Asset Turnover, Return on Assets, and Earnings Per Share.

2. Based on your calculations, explain the changes in liquidity and profitability of Mario Ltd from 2018 to 2019. That is, has each ratio improved/declined, and what does this movement mean?
3. How can Mario Ltd improve their Receivables Turnover and their Inventory Turnover?

Answer 1

Following are the formulas for the respective ratios.

a LIQUIDITY

Current ratio = current assets / current liabilities

Current ratio in 2018 = 510000 / 165000 = 3.09

Current ratio in 2019 = 695000 / 335000 = 2.07

Quick ratio = cash and cash equivalents + marketable securities + account receivables / current liabilities

Quick ratio in 2018 = 176000 / 165000 = 1.067

Quick ratio in 2019 = 226000 / 335000 = .67

Account receivables turnover = credit sales / average account receivables

Account receivables turnover in 2018 = 940000 / 80500

= 11.67

Account receivables turnover in 2019

= 1000000 / 90000 = 11.11

Inventory turnover = cost of goods sold / average inventory

Inventory turnover in 2018 = 635000 / 325000 = 1.95

Inventory turnover in 2019 = 650000 / 370000 = 1.75

PROFITABILITY

Profit margin = (Net profit / sales) × 100

Profit margin in 2018 = (80000 / 940000) × 100 = 8.51%

Profit margin in 2019 = (115000 / 1000000) × 100 = 11.5%

Assets turnover = (sales /average total assets) × 100

Assets turnover in 2018 = (940000 / 1080000) × 100 = 87.03%

Assets turnover in 2019 = (1000000 / 1162500 ) × 100 = 86.02%

Return on assets = (net profit / average total assets) × 100

Return on assets in 2018

= (80000 / 1080000) × 100 = 7.40%

Return on assets in 2019

= (115000 / 1162500) × 100 = 9.89%

Earnings per share = income available to common share holders / weighted average number of common shares outstanding

There is no information about dividend so full net income is taken as income available to common share holders

Earnings per share in 2018 = 80000 / 100000 = .8

Earnings per share in 2019 = 115000 / 100000 = 1.15

Ratios	2019	2018
Liquidity
Current ratio	2.07	3.09
Quick ratio	.67	1.067
Account receivables turnover	11.11	11.67
Inventory turnover	1.75	1.95
Profitability
Profit margin	11.5%	8.51%
Assets turnover	86.02%	87.03%
Return on assets	9.89%	7.40%
Earnings per share	1.15	.8

b

LIQUIDITY

* current ratio is declined from 3.09 to 2.07. It indicates the short term obligation meet ability of company decreased as compared 2018 to 2019

* quick ratio also decreased from 1.067 to .67 It clearly show that the company ability to meet its short term liabilities by using its more liquid assets like cash and cash equivalents, marketable securities and account receivables are decreased.

* Account receivables turnover of the company is decrease from 11.67 to 11.11 . Which show the account receivables collection capacity of the company decrease and collection period increase. It is negatively affect the company.

* inventory turnover of the company decrease from 1.95 ho 1.75. It means that the inventory selling ability of the company decrease and inventory in hand days increase. It is negatively affecting the company.

PROFITABILITY

* Profit margin of the company increase from 8.51% to 11.5% . Which means the profitability of the company increase from 2018 to 2019.

* Assets turnover ratio of the company decrease from 87.03% to 86.02%. It means the company ability to use its assets for generating revenue (sales) decrease .

* Return on assets ratio increase from 7.40% to 9.89%. Which means the ability of the company to use its assets to generate profit increase.

* Earnings per share of the company increase from .8 to 1.15. It means the earnings per share of common stock increases.

c * the company can improve its account receivables by timely collecting the receivables,maintaining a good relationship with positive customer's, and take initiative for early payment

* the company can improve its inventory turnover by increasing demand for inventory, good sales predictions , good pricing strategies, set price based on the situation , and provide advertisements, discount and offers

The above are the detailed calculations,equations and explanations.