Homework Answers
Ans1)
current ratio= Current assets/Current Liabilities
=575000/345000=1.67
Acid test ratio= Current assets-inventories/Current Liabilities
=575000-243000/345000
=332000/345000=0.96
Accounts receivable to turnover
=Total sales/Accounts Receivable
=2080976/237000 =8.78
Inventory to turnover ratio
=Total Sales/inventory
=2080976/243000 = 8.56
Debt Ratio
=(Total borrowings/Capital Employed)*100
capital employed=Total assets-Current Liabilities
=1000000-345000=655000
therefore debt ratio= 188000/655000*100
=28.70%
Times interest earned
Profit before interest and tax/Interest Expenses
=106130/19296 =5.5 times
Ans 2) Evaluation of companies position base on industry standards
a) Liquidity position-Liquidity position of a company shos short term solvency of the company to pay its current liabilities. The liquidity position of the company can be evaluated by the current ratio and quick ratio( Acid test ratio)
The current ratio indicates that businesses should have enough current assets to meet their current liabilities.
Generally, the accepted current ratio is 2 to 1.
Quick ratio =Quick ratio gives a better accurate measurement of short term solvency as it does not consider inventory which may not generate immediate cash. it is calculated as Quick assets /current Liabilities
On the basis of industry standards, the Liquidity position of the company is good as it has a high current ratio and quick ratio as compared to the industry which indicates good short term solvency.
B) Debt Management level- Debt management level can be evaluated by debt ratio. The debt ratio indicates that the percentage of companies debt to its total capital employed. In the above case, the debt management level of the company is good as total debt is lower than the industry standards as per industry total debt is 35% of capital employed the company has 28.7% of debt to capital employed which is less compared to the industry.
Ans 3 ) Limitations of financial ratio analysis
1) Difference between accounting policies and periods
Two companies may follow different accounting policies and period which makes difficult to compare ratios of the companies. it also affects industries' aggregate ratio.
Diversified products- The company may deal with different products and different industries. in this case calculation of ratios of the company may not give accurate data to compare.
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