Question
In: Finance
The directors of Avengers wish to compare the company’s most recent financial statement with those of...
| The directors of Avengers wish to compare the company’s most recent financial statement with those of the previous year. The company’s financial statements are given below: | ||||||||
| Statement of profit and loss | ||||||||
| Year ended 31st March | ||||||||
| 2017 | 2016 | |||||||
| Sales revenue (80% credit, 20% cash) | 2500000 | 1800000 | ||||||
| Cost of Sales | -1800000 | -1200000 | ||||||
| 700000 | 600000 | |||||||
| Distribution costs | -250000 | -200000 | ||||||
| Administrative expenses | -200000 | -200000 | ||||||
| Profit from operations | 250000 | 240000 | ||||||
| Finance costs | -50000 | -50000 | ||||||
| Profit before tax | 200000 | 190000 | ||||||
| Income tax | -46000 | -44000 | ||||||
| Profit for the year | 154000 | 146000 | ||||||
| Note: cost of sales figures are made up as follows: | ||||||||
| Opening inventory | 200000 | 180000 | ||||||
| Purchases (all on credit) | 1960000 | 1220000 | ||||||
| Less Closing inventory | -360000 | -200000 | ||||||
| Cost of sales | 1800000 | 1200000 | ||||||
| Statement of financial position | ||||||||
| 31/02/2017 | 31/02/2016 | |||||||
| Assets | ||||||||
| Non-current assets | 3674000 | 3100000 | ||||||
| Acc Depn | -1422000 | 2252000 | -1214000 | 1886000 | ||||
| Current Assets | ||||||||
| Inventory | 360000 | 200000 | ||||||
| Trade receivable | 750000 | 400000 | ||||||
| Cash at bank | 120000 | 1230000 | 100000 | 700000 | ||||
| Current liabilities | ||||||||
| Trade payables | 380000 | 210000 | ||||||
| Sundry payables | 430000 | 260000 | ||||||
| Income tax ) | 50000 | -860000 | 48000 | -518000 | ||||
| Non-current assets | ||||||||
| 10% Loan notes | -500000 | -500000 | ||||||
| 2122000 | 1568000 | |||||||
| Equity | ||||||||
| Issued ordinary SC | 1200000 | 1000000 | ||||||
| Share premium | 600000 | 400000 | ||||||
| Retained earnings | 322000 | 168000 | ||||||
| 2122000 | 1568000 | |||||||
| Notes: additional share capital was issued on 1st April 2017 | ||||||||
| Required | ||||||||
| (a) Calculate, for each of the 2 years, eight accounting ratios which should assist the directors in their comparison, using closing figures for items in the statement of financial position | ||||||||
| (b) Suggest possible reasons for the changes in the ratios between the 2 years | ||||||||
Solutions
Expert Solution
Sol :
a) Accounting Ratio
| RATIO | FORMULAE | 2017 | 2016 |
| FIXED ASSETS TURNOVER RATIO | NET SALES / NET FIXED ASSETS | 2500000/2252000 = 1.11 | 1800000/1886000=0.9544 |
| CURRENT RATIO | CURRENT ASSETS / CURRENT LIABILITIES | 1230000/860000=1.43 | 700000/518000=1.35 |
| DEBT EQUITY RATIO | LONG TERM DEBT / SHAREHOLDER'S FUND | 500000/2122000=0.24 | 500000/1568000=0.31 |
| QUICK RATIO |
QUICK ASSET/CURRENT LIABILITIES( QUICK ASSET =CASH+LIQUID SECURITIES + TRADE RECEIVABLES |
(750000+120000)/860000 = 1.01 |
(400000+100000)/518000=0.96 |
| GROSS PROFIT RATIO | GROSS PROFIT / NET SALES | (700000/2500000)*100=28% |
(600000/1800000)*100 = 33.33% |
| RETURN ON CAPITAL EMPLOYED (ROCE) | (PAT-DIVIDEND )/SHAREHOLDERS FUND | 154000/2122000=7.25% | 106000/1568000=6.7% |
| NET PROFIT RATIO | NET PROFIT (PAT)/NET SALES | 154000/2500000=6.16% |
106000/1800000=5.89% |
| SOLVENCY RATIO | TOTAL ASSETS / TOTALS LIABILITIES | 3482000/1360000=2.56 | 2586000/1018000=2.54 |
B)
| SL.NO | OBSERVATION | REASON |
| 1 | FIXED ASSETS TURNOVER RATION HAS IMPROVED FROM 0.95 TO 1.11 | AS A RESULT OF INCREASE IN SALES IN 2017 , THOUGH ADDITION TO FIXED ASSETS HAD A LITTLE PULL BACK EFFECT . |
| 2. | CURRENT RATIO HAS IMPROVED FROM 1.35 TO 1.43 | AS A RESULT OF INCREASE IN TRADE RECEIVABLES AND CLOSING INVENTORY |
| 3 | DEBT EQUITY RATIO HAS IMPROVED FROM 0.31 TO 0.24 | AS A RESULT OF INCREASE IN EQUITY BASE THE RATIO HAS DECREASES . |
| 4 | IMPROVEMENT IN QUICK RATIO | DUE TO INV=CREASE IN CASH BALANCE / AND INCREASE IN TRADE RECEIVABLES |
| 5 | DECREASE IN GP RATIO | AS A RESULT OF INCREASE IN SALES - RELAISATION MIGHT HAVVE GOT EFFECTED . |
| 6 | IMPROVEMENT IN ROCE | AS A RESULT OF IMPROVES NET PROFIT . |
| 7 | INCREASE IN NP RATIO | DUE TO REDUCTION IN OPRATING COST RATIO . |
| 8 | MINOR IMPROVEMENT IN SOLVENCY RATIO | NO COMMENTS |
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