Question

The following relates to a firm:

Statement of Financial Position

Figures in Sh. 2018 2017 2016
Cash 308,000 356,250 368,000
Accounts receivables 885,000 625,000 492,000
Inventory 1,115,000 825,000 530,000
Prepaid expenses 97,000 93,750 40,000
PPE 2,775,000 2,550,000 2,295,000
Total assets 5,180,000 4,450,000 3,725,000
Accounts payable 1,289,000 752,500 492,500
Loan 975,000 1,025,000 825,000
Share capital (Sh. 10 par) 1,625,000 1,625,000 1,625,000
Retained earnings 1,291,000 1,047,500 782,500
Total liability and equity 5,180,000 4,450,000 3,725,000

Income Statement
2018 2017
Sales 6,725,000 5,300,000
Cost of sales 4,102,250 3,445,000
Gross profit 2,622,750 1,855,000
Other operating expenses 2,085,500 1,339,800
Operating income 537,250 515,200
Interest expense 111,000 123,000
Income before tax 426,250 392,200
Income tax 85,250 78,450
Net income 341,000 313,750

Page 2 of 2

Required:
a) Evaluate the Firm’s efficiency, profitability and solvency for the years 2018 and 2017
b) What additional information would you require to conclude your evaluation

Answer 1

(a) Ratio Evaluation				2018	2017	Remarks
Efficiency	Inventory Turnover		Cost of revenue	=	4102250/(1115000+825000)/2	4.23	3445000/(825000+530000)/2	5.08	Reduced ratio show weak sales and excess invemtory
			Average Inventory
Efficiency	AR Turnover		Revenue	=	6725000/(885000+625000)/2	8.91	5300000/(492000+625000)/2	9.49	Efficiency reducing
	(Accounts Receivable)		Average Accounts Receivable
Efficiency	Total Assets Turnover		Revenue	=	6725000/5180000	1.30	5300000/4450000	1.19	Efficiency increasing as assets
			Total assets						utilising effectively
Profitability	Profit Margin		Net Income	=	341000/6725000	5.07%	313750/5300000	5.92%	Profit ratio decreasing
			Revenue
Profitability	Return on Total Assets		Net Income	=	341000/5180000	6.58%	313750/4450000	7.05%	Return on assets invested getting
			Total Assets						decrease
Profitability	EPS on common stock		Net Income - Preference dividend	=	341000/162500	2.10	313750/162500	1.93	Per share earning to shareholders
			Number of common stock						increasing
Profitability	Book Value per share		Total Shareholder's Equity	=	(1625000+1291000)/162500	17.94	(1625000+1047500)/162500	16.45	Shareholders fund increased
(stock value)	(common stock)		Number of common stock
Solvency	Debt to Equity Ratio		Total Debt	=	(1289000+975000)/(1625000+1291000)	0.78	(752500+1025000)/(1625000+1047500)	0.67	Debt increased as leveraged
			Total Shareholder's Equity
(b) Additional Information required for overall conclusion:
(i) Cashflow Statement
(ii) Audit Report
(iii) Compliance Report