Question

Question 9

As a newly employed Accountant of Peace Limited, you have been presented with the financial statements as follows:

Statement of Comprehensive Income for the year ended 31st December                                                                             2017                         2016
GHC                         GHC
Net Turnover Cost of Sales Gross Profit General, Admin and Selling Expenses Operating profit Debenture Interest Expenses Investment Income Profit before tax Corporate Tax Profit after tax Statement of income surplus Balance b/f Net Profit Dividend: Preference Shares                  Ordinary Shares		456,500 (295,000) 161,500 (109,500) 52,000 (14,500) 5,000 42,500 (12,500) 30,000 149,500 30,000 179,500 (10,000) (12,000) 157,500		420,000 (227,000) 193,000 (93,000) 100,000 (3,000) 4,500 101,500 (15,000) 86,500 89,500 86,500 176,000 (9,000) (17,500) 149,500
Statement of Financial Position as at 31st December:
2017                                      2016
GHC                                      GHC
Assets Goodwill Tangible Fixed Assets Inventories Accounts Receivable Bank and Cash on hand Liabilities: Accounts Payable Accruals Debentures Stated Capital    Preference Shares    Ordinary Shares Income Surplus	10,000 106,000 147,000 80,000 26,000 369,000 37,500 25,500 58,500 40,000 50,000 157,500 369,000		5,000 132,000 118,500 24,000 28,500 308,000 26,500 20,000 37,000 25,000 50,000 149,500 308,000

Required:

a) Compute for the two years the following ratios:

i. Return on Capital Employed

ii. Fixed Asset Turnover

iii. Current ratio

iv. Debt/Equity Ratio

v. Interest Cover                                                                                    

(b) Write a report to the Finance Director commenting on the financial performance of the company.

Answer 1

Answer -

Given Information
		2017	2018
a	Net Turnover	456500	420000
b	Cost of Sales	-295000	-227000
c	Gross Profit	161500	193000
d	General, Admin and Selling Expenses	-109500	-93000
e	Operating profit	52000	100000
f	Debenture Interest Expenses	-14500	-3000
g	Investment Income	5000	4500
h	Profit before tax	42500	101500
i	Corporate Tax	-12500	-15000
j	Profit after tax	30000	86500
	Statement of income surplus	149500	89500
j	Balance b/f	30000	86500
k	Net Profit	179500	176000
l	Dividend: Preference Shares	-10000	-9000
m	Ordinary Shares	-12000	-17500
		157500	149500
	Assets	2017	2017
n	Goodwill	10000	5000
o	Tangible Fixed Assets	106000	132000
p	Inventories	147000	118500
q	Accounts Receivable	80000	24000
r	Bank and Cash on hand	26000	28500
s		369000	308000
t	Liabilities:
u	Accounts Payable	37500	26500
v	Accruals	25500	20000
w	Debentures	58500	37000
x	Stated Capital
y	Preference Shares	40000	25000
z	Ordinary Shares	50000	50000
aa	Income Surplus	157500	149500
		369000	308000
		2017	2018
A	Return on capital employed	=Net Operating Profit / Capital Employed
Ai	Operarting Profit	52000	100000	(refer to e)
AII	Capital Employed	306000	261500
	Return on capital employed	16.99%	38.24%	(Ai/Aii)
	Capital Employed	=Total Assets -Current Liabilities
		=369000-63000	308000-46500
		306000	261500
	Total Assets	369000	308000
	Current Liability	63000	46500
	Accounts Payable	37500	26500
	Accruals	25500	20000
B	Fixed Assets Turnover Ratio	Net Sales / Fixed Assets
Bi	Net Sales	456500	420000
Bii	Fixed Assets	116000	137000	(Bi /Bii)
	Fixed Assets Turnover Ratio	3.94	3.07
	Fixed Assets
	Goodwill	10000	5000
	Tangible Fixed Assets	106000	132000
		116000	137000
C1	Current Ratio	Current Assets / Current Liabilities
		253000/63000	=171000/46500
		4.02	3.68	(refer to Ci and Cii)
	Current Assets
	Inventories	147000	118500
	Accounts Receivable	80000	24000
	Bank and Cash on hand	26000	28500
C1		253000	171000
	Current Liability
	Accounts Payable	37500	26500
	Accruals	25500	20000
Cii		63000	46500
D	Debt/Equity Ratio	Debt/ Equity
	Debt	58500	37000	Refer to below calculations
	Equity	157500	149500	Refer to below calculations
		0.37	0.25
	Debt
	Debentures	58500	37000
	Equity	247500	224500
	Preference Shares	40000	25000
	Ordinary Shares	50000	50000
	Income Surplus	157500	149500
E	Interest Cover Ratio	Earning Before Interest & Taxes / Interest
	Earning Before Interest & Taxes	52000	100000	Refer to operating ratio
	Interest	14500	3000
	Interest Cover Ratio	3.59	33.33
B	Report on the financial performance of the company
	As above ratio suggests, there are mixed signals about the company. Following ration has imporved a lot
	Interest Coverage Ratio
	Return on capital employed
	Operating profit
	Profit before tax
	Profit after tax
	however below ratio have declined, as compared to 2017, so we can say perforance has declined a little bit
	Debt/Equity Ratio
	Fixed Assets Turnover Ratio
	Current Ratio