Question

The following are the comparative accounts for MM Enterprise for the financial year 2018 and 2017: 2018 2017 Accounts (RM) 300,000 (RM) 250,000 Sales Cost of goods sold Expenses Net profit Equipment Cash 60,000 50,000 80,000 80,000 160,000 120,000 420,000 10,000 500,000 8,000 Inventories 30,000 40,000 Debtors 12,000 14,000 Prepaid expenses Creditors 4,000 3,000 10,000 15,000 Accrued expenses 10,000 6.000 Bank loan 150,000 100,000 Total Equities 410,000 400,000 Required: Calculate (use two decimal points) the following ratios for 2018: (a) i. Current ratio. Quick ratio. Return on equity ii. iii. Return on asset iv. Debt to equity ratio. Debt to asset ratio. V. vi. (12 marks)

Answer 1

a)

i	Current ratio	2.2	Current Asset/ Current Liability
ii	Quick ratio	0.88	Quick Asset/ Current Liability
iii	Return on Equity	39.51%	Net Income/ Average Shareholders’ Equity *100
iv	Return on Asset	30.74%	Net Income/ Average Total Assets *100
v	Debt to Equity ratio	30.49%	Total Debt/ Total Equity *100
vi	Debt to Asset ratio	26.32%	Total Debt/ Total Assets *100

-

Formula:

N A B C F o D Accounts Sales Cost of goods sold Expenses Net profit 2018(RM) 2017 (RM) 3,00,000 250000 60,000 50000 80,000 80000 1,60,000 120000 no no al 9 F S S 99 Equipment 4,20,000 500000 Cash 10,000 8000 Inventories 30,000 40000 Debtors 12,000 14000 Prepaid expenses 3,000 4000 Total Assets 4,75,000 566000 Creditors 15,000 10000 Accrued expenses 10,000 6000 Bank loan 1,00,000 1,50,000 Total Equities 4,10,000 4,00,000 Total Liabilities & Equity 5,35,000 5,66,000 *** There is a Mistake in Question, Total Assets not equal to Total Liabilities & Equity in 2018. Net income Current Asset Current Liability na sasa Quick Asset Average Shareholders' Eq Average Total Assets Total Debt Total Equity Total Asset 1,60,000 55,000 25,000 Current Assets- 22,000 Inventories-Prepaid 405000 (Opening+Closing)/2 520500 (Opening+Closing)/2 1,25,000 4,10,000 4,75,000

-

D Accounts Sales Cost of goods sold Expenses Net profit Ε 2018(RM) 300000 60000 80000 160000 2017 (RM) 250000 50000 80000 120000 Equipment 420000 500000 Cash 10000 8000 Inventories 30000 40000 Debtors 12000 14000 Prepaid expenses 3000 4000 Total Assets =SUM(E7:E11) =SUM(F7:F11) Creditors 15000 10000 Accrued expenses 10000 6000 Bank loan 100000 150000 Total Equities 410000 400000 Total Liabilities & Equity =SUM(E13:E16) =SUM(F13:F16) *** There is a Mistake in Question, Total Assets not equal to Total Liabilities & Equity in 2018. Net income Current Asset Current Liability =E5 =E8+E9+E10+E11 =E13+E14 Current Assets Inventories-Prepaid (Opening+Closing)/2 (Opening+Closing)/2 Quick Asset =E21-E9-E11 Average Shareholders' Equity =(E16+F16)/2 Average Total Assets =(E12+F12)/2 Total Debt =E13+E14+E15 Total Equity =E16 Total Asset =E12 Nobotect une otack ontne Grible coating bo+7

b)

	MM Enterprise	Industry Average
Current ratio	2.2	2.8
Return on Equity	39.51%	30%
Return on Asset	30.74%	-25%
Debt to Asset ratio	26.32%	30%

-

Compared to industry average MM Enterprise has:-

Lower current ratio, but still they have a better ratio, they can easily meet its current obligations

Higher rate of return on equity than industry average

Higher rate of return on asset than industry average

Lower Debt to asset ratio, it means MM Enterprise's bulk of asset funding is coming from equity when compared to industry average.

--

Hope you Understood.
If you have any doubt please leave a comment.

Thank you.