Question

Question No 4:

(A). Ahmed Company is doing trading business in Oman. It has the following details relating
        to its business for the year 2019:

            Stock on 1.1.2019 ……………..… OMR     240,000
Stock on 31.12.2019…………….. OMR     280,000
            Sales…….. ……….…………….… OMR   1400,000
Wages …… ……………………..... OMR    130,000
Carriage Inwards ……………….… OMR    110,000
Total Purchases ………………..... OMR    700,000
Purchases Returns……………           OMR    180,000
            Selling expenses……………. …        OMR     70,000
Administrative expenses………         OMR      80,000
            Interest paid on Bank loan………       OMR   120,000


Requirement: Calculate Inventory Turnover, Gross Profit Ratio and Net profit Ratio from the above information.                                                                                    

(B). Al Mashoor company is a manufacturing company established in Oman involved in
        the manufacturing of plastic products. The details of Assets and Liabilities of Al
        Mashoor Company for the year 2019 are given below:

Cash in hand….. OMR 62,000
Cash at Bank……. OMR 76,000
Inventory……………. OMR 58,000
Accounts Receivable….. OMR 96,000
Accounts Payable……… OMR 65,000
Prepaid Insurance……….. OMR 18,000
Outstanding expenses OMR 45,000
Bills Payable………………. OMR 34,000
            Bills Receivable……………. OMR 42,000
            Long term loan……………... OMR 32,000
Plant and Machinery ………. OMR 72,000
Building…….………..…..... OMR 104,000

Requirement: Calculate Current Ratio, Quick Ratio and Debt Ratio from the above information and give your interpretation for Current Ratio and Quick Ratio.      

Answer 1

A-	Inventory turnover ratio = cost of goods sold/(average of inventory)	820000/260000	3.15			Income statement
	average inventory	(280000+240000)/2	260000			sales		1400000
						less cost of goods sold		820000
	gross profit ratio = gross profit/sales	580000/1400000	41.43%			beginning stock	240000
						add purchases net	620000
	net profit ratio = net profit/sales	310000/1400000	22.14%			add wages	130000
						add carriage inwards	110000
						total of inventory available during the year	1100000
						less year end stock	280000
						gross profit		580000
						selling expense		70000
						administrative expense		80000
						operating profit		430000
						less interest		120000
						net profit		310000
B-
current ratio = total of current assets/total of current liabilities	417000/79000	5.28
total of current assets	62000+76000+58000+96000+65000+18000+42000	417000
total of current liabilities	45000+34000	79000
quickt ratio = (total of current assets-inventory)/total of current liabilities	(417000-58000)/79000	4.54
total of quick assets = total of current assets-inventory	(62000+76000+58000+96000+65000+18000+42000)-58000	417000
total of current liabilities	45000+34000	79000
Debt ratio = total of liabilities/total of assets	111000/593000	18.72%
total of liabilities = total of current assets+long term debt	79000+32000	111000
total of assets = total of current assets+plant and machinery+building	417000+72000+104000	593000
Company has invested huge capital into current assets as its current ratio and quick ratio is much more than the ideal ratio 2 & 1 respectively.