Question

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

Answer 1

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