Question

Style Limited (Adapted from Dyson p 245, 10.9) | 2018 £ 000 000 2017 £ 000 2017 £000 £000 000 000 1,900 1,500 420 685 Income Statement Sales (all credit) Cost of Goods Sold Opening stock Purchases (all credit) 80 100 2018 £ 000 Statement of Financial Position Fixed Assets (NBV) Current Assets Inventory 250 Trade debtors 850 Bank 1,100 Less : Current Liabilities Bank overdraft Trade creditors 995 100 1,400 1,500 200 375 1,075 Less closing stock 100 Gross Profit Expenses Net profit Total Assets less Current Liabilities 100 Long Term Liabilities Bank loan Capital and reserves Ordinary share capital Retained profit Long Term Liabilities & Equity Required: (a) Calculate the following accounting ratios for the two years 2018 and 2017 respectively: Profitability ratios Liquidity and solvency ratios 900 310 1,310 900 205 1.105 1. Gross profit margin 6. Current ratio 2. Net profit margin 7. Acid test ratio Efficiency ratios Returns 3. Inventory turnover period 8. Return on capital employed 4. Receivables settlement period 9. Return on shareholders funds 5. Payable settlement period (4 marks)

Answer 1

(a)	Profitability ratios
1	Gross profit margin=Gross profit/Sales
				2018	2017
	Gross profit (a)			600	525
	Sales (b)			1900	1500
	Gross profit margin (a)/(b)			31.58%	35.00%
2	Net profit margin=Net profit/Sales revenue
				2018	2017
	Net profit   (a)			105	105
	Sales (b)			1900	1500
	Net profit margin (a)/(b)			5.53%	7.00%
	Efficiency ratios
3	Inventory turnover period=365/Inventory turnover ratio
	Inventory turnover ratio=Cost of goods sold/Average inventory
	Due to lack of information average inventory=Inventory for the year
						2018	2017
	Cost of goods sold				a	1300	975
	Inventory				b	250	100
	Inventory turnover ratio				c=a/b	5.2	9.75
	Inventory turnover period in days				365/c	70.19	37.44
4	Receivables settlement period=(Average accounts receivable/Credit sales)*365
	Due to lack of information average accounts receivable=Trade debtors for the year
						2018	2017
	Trade debtors				a	850	375
	Credit sales				b	1900	1500
					c=a/b	0.4473684	0.25
	Receivables settlement period in days				d=365*c	163.29	91.25
5	Payable settlement period=(Average accounts payable/Credit purchases)*365
	Due to lack of information average accounts payable=Trade creditors for the year
						2018	2017
	Trade creditors				a	200	80
	Credit purchases				b	1400	995
					c=a/b	0.1428571	0.080402
	Receivables settlement period in days				d=365*c	52.14	29.35
	Liquidity and solvency ratios
6	Current ratio=Current assets/Current liabilities
						2018	2017
	Current assets					1100	500
	Current liabilities					210	80
	Current ratio					5.24	6.25
7	Acid-test ratio=(Current assets-Inventory)/Current liabilities
						2018	2017
	Current assets-Inventory					850	400
						(1100-250)	(500-100)
	Current liabilities					210	80
	Acid-test ratio					4.05	5
	Returns
8	Return on capital employed=Net profit/Capital employed
	Capital employed=Total assets-Current liability
						2018	2017
	Net profit				a	105	105
	Total assets less current liability				b	1310	1105
	Return on capital employed				a/b	8.02%	9.50%
9	Return on shareholders funds=Net profit/Shareholders funds
	Shareholders funds=Ordinary share capital+Retained profit
						2018	2017
	Net profit				a	105	105
	Ordinary share capital				b	900	900
	Retained profit				c	310	205
	Shareholders funds				d=b+c	1210	1105
	Return on shareholders funds				a/d	8.68%	9.50%
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