Question

The following figures relate to a hospitality business. 35% of all sales and 80% of all purchases are on credit. Using accepted ratios and percentages comment on the gross and net profits, the current ratio and the acid test, debtors and creditors payment periods, stock turnover, and return on capital employed. Trading and profit and loss account for year ending December 31st 2014 £000's 2014 60,000 24,000 36,000 15.000 21,000 9.750 11,250 Sales Cost of sales Gross profit Wages Net margin Other expenses Net profit £000's 2015 62,000 28.000 34,000 14,500 19,500 8.000 11,500 Balance sheet as at December 31st 2015 45,000 5.000 50,000 Freehold property equipment 50,000 5.500 55,500 Current Assets 1,500 stock 1,700 900 debtors 1,200 975 bank 1,200 3375 4,100 less Current Liabilities 2,825 creditors 2,500 550 accruals 600 3,375 3,100 1,000 56.500 0 50.000 Financed by Capital net profit 42.250 11.250 53,500 4.000 49,500 49,500 11.500 61,000 4.500 56,500 drawings

Answer 1

Calculation of ratios are as follows

1. Gross profit ratio

Gross profit ratio can be calculated by following formula

Gross profit ratio = (Gross profit / Sales ) X100%

In 2014

= (36,000 / 60,000) X 100%

= 0.6 X 100%

= 60 %

In 2015

= (34,000 / 62,000) X 100%

= 0.5484 X 100%

= 54.84 %

Sales increased from $ 60,000 to $ 62 000 in year 2015. But gross profit ratio decreased from 60 % to 54.84 % in year 2015.

2. Net Profit Ratio

Net profit ratio can be calculated from following formula

Net profit ratio = (Net profit / sales) X100%

In 2014

= (11,250 / 60,000) X100%

=0.1875 X100%

= 18.75%

In 2015

= (11,500 / 62,000)X 100%

= 0.1855 X100%

=18.55%

Net profit ratio decreased from 18.75 % to 18.55% in the year 2015.

3. Current Ratio

Current Ratio can be calculated from following formula

Current ratio = (Current Assets / Current Liabilities)

In 2014

=3375/3375

=1:1

In 2015

=4100/3100

=1.32:1

Current ratio increased to 1.32 in the year 2015.

4. Acid Test Ratio

Acid Test Ratio can be calculated from following formula

Acid Test Ratio = (Current Assets- Stocks- prepaid expenses) / Current Liabilities

In 2014

= (3,375-1,500) / 3,375

= 1,875/3,375

=0.56

In 2015

= (4,100- 1,700) / 3,100

= 2,400 / 3,100

=0.77

Acid Test Ratio Increased from 0.56 to 0.77 in the year 2015.

5. Debtors Payment period

Debtors payment period can be calculated from following formula

Debtors payment period = (Average Debtors / Credit Sales ) X 365

In 2015

Average Debtors = (Opening debtors + closing debtors ) / 2 = (900 + 1,200) / 2

= 2,100/ 2

= 1,050

Credit Sales = Total Sales X % of credit sales

= 62,000 X 35%

= 21,700

Debtors payment period = (1,050 / 21,700) X 365

= 0.048 X 365

= 17.66

= Approximate 18 days

6. Creditors Payment period

Creditors payment period can be calculated from following formula

Creditors payment period = (Trade creditors / Credit purchases)X 365

In 2015

Trade creditors = 2,500

Credit Purchase = Total purchase X % of credit purchases

Total Purchase = (Cost of sales + ending inventory - opening inventory)

= 28,000+1,700-1500

= 28,200

% of credit purchase = 80% as given in the question

Credit Purchase = 28, 200 X 80%

= 22,560

Now credit payment period =( 2,500/ 22,560) X 365

= 0.111 X 365

= 40.45

= Approximate 40 days

7. Stock turnover ratio

Stock turnover ratio can be calculated by following formula

Stock turnover ratio = Net sales / average inventory

It is assumed that amount of sales given in the question is net sales

Therefore net sales = 62,000

Average inventory = (opening inventory + closing inventory) / 2

= (1,500+1,700) / 2

= 3,200/2

= 1,600

Now stock turnover ratio = 62,000 / 1,600

= 38.75 times

8. Return on capital employed

Return on capital employed can be calculated from following formula

Return on capital employed = Operating profit / capital employed or ( total assets - current liabilities)

In 2015

Operating profit = 19,500 given in the question

Total assets = Fixed assets+ current assets = 55,500+1,000= 56,500

Current liabilities = 3,100 given in the question

Thus Return on capital employed = 19,500 / (56,500-3,100)

= 19,500/ 53,400

= 0.3652 or 36.52 %