Question

You are required to use the following information relating to Gone Limited, and answer the questions below: Gone Limited Income Statement for the year to 31 March 2017 ($) 2018 ($) Sales 160,000 200,000 Cost of goods sold (96,000) (114,000) Gross profit 64,000 86,000 Operating expenses (35,000) (39,000) Net profit before tax 29,000 47,000 Gone Limited Statement of Financial Position As At 31 March Assets 2017 2018 $ $ $ $ Non Current Assets (at Net Book Value) 300,000 320,000 Current Assets Inventory 18,000 20,000 Trade Receivables 30,000 40,000 Cash at Bank 7,000 9,000 Cash in Hand 3,000 58,000 2,000 71,000 Total assets 358,000 391,000 Equity: Ordinary Share Capital 200,000 200,000 Retained earnings 123,000 323,000 146,000 346,000 Current Liabilities Trade Payables 25,000 35,000 Accrued salaries payable 10,000 35,000 10,000 45,000 Total Equity and Liabilities 358,000 391,000 (a) Calculate the following ratios for each of the 2 years:

i. Current Ratio [4 marks]

ii. Acid-Test Ratio [4 marks]

iii. Gross Profit Ratio [4 marks]

iv. Net Profit Ratio [4 marks]

(b) From the results of the ratios computed, what advice would you give to the management regarding the state of the business?

Answer 1

(a) Calculate the following ratios for each of the 2 years:

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i. Current Ratio = Current assets / Current liabilities

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For 2017 =

Current Assets= Inventory 18,000 + Trade Receivables 30,000 + Cash at Bank 7,000 + Cash in Hand 3,000 = 58000

Current liabilities = Trade Payables 25,000 + Accrued salaries payable 10,000 = 35000

Current Ratio = 58000 / 35000 = 1.66 : 1

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For 2018=

Current Assets= 71000

Current liabilities = 45000

Current Ratio = 71000/ 45000 = 1.58 : 1

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ii. Acid-Test Ratio ( Quick ratio ) = Quick assets / Current liabilities

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For 2017

Quick assets = Trade Receivables 30,000 + Cash at Bank 7,000 + Cash in Hand 3,000 = 40000

Current liabilities = 35000

Acid-Test Ratio ( Quick ratio ) = 40000 / 35000 = 1.14 : 1

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For 2018

Quick assets = Trade Receivables 40000 + Cash at Bank 9000 + Cash in Hand 2000 = 51000

Current liabilities = 45000

Acid-Test Ratio ( Quick ratio ) = 51000 / 45000 = 1.13 : 1

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iii. Gross Profit Ratio = Gross profit / Sales

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For 2017

Gross profit = 64000

Sales = 160000

Gross Profit Ratio = 64000 / 160000 = 0.40 or 40%

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For 2018

Gross profit = 86000

Sales = 200000

Gross Profit Ratio = 86000 / 200000 = 0.43 or 43%

iv. Net Profit Ratio [4 marks]

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For 2017

Net profit = 29000

Sales = 160000

Net Profit Ratio = 29000 / 160000 = 0.1813 or 18.13%

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For 2018

Net profit = 47000

Sales = 200000

Net Profit Ratio = 47000 / 200000 = 0.235 or 23.5%

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(b) From the results of the ratios computed, what advice would you give to the management regarding the state of the business?

> In the case of current ratio, Decreased in 2018 compared to 2017, it create a affect to business, so should improve the current ratio.

The standard ration is 2 : 1, so try to be in this ratio.

Curren5t ratio is liquidity ratio, which compute the ability of company to pay its short term obligation with in one cycle period or with in one year. Higher the liquidity ratio is better to the company.

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> In the case of quick ratio also same as current ratio, decrease compare to 2017 ratio, but the standard ratio was 1 : 1.

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>In the case of Gross profit ratio and net profit ratio, the ratio are improved in 2018 compare to 2017, so keep those performance.