Question

Q1.

You are to study the following financial statements for two furniture stores and then answer the question which follow.

Financial Statements

                                                                        A                                             B

                                                            $’000               $’000               $’000               $’000

Income Statements

Sales                                                                            2,500                                       1,600

Opening Inventory                              190                                          110

Add Purchases                                                2,100                                       1,220

Less Closing Inventory                       (220)                (2,070)             (160)                (1,170)

Gross profit                                                                 430                                          430

Less;

   Directors remuneration                    70                                            120

   Wages and salaries                           180                                          130

Other expenses                                  14                    (264)                10                    (260)

Net profit                                                                    166                                          170

Statement of financial position

Non-current assets

   Equipment at cost                            264                                          98

Less Acc. depreciation                      (106)                158                  (36)                  62

Current Assets

Inventory                                            220                                          160

Accounts receivable                            104                                          29

Bank                                                    75                    399                  10                    199

Total Assets                                                                 557                                          261

Share capital                                                                200                                          100

General reserve                                                           68                                            35

Retained profit                                                            100                                          88

                                                                                    368                                          223

Current liabilities

Accounts payable                                                      189                                          38

Total Capital and current liabilities                             557                                          261     

Required:

After calculating appropriate ratios, prepare a report that comments on the recent performance and financial health of the two companies.

Answer 1

Profitability ratio

(1)Gross Profit ratio = [ Gross Profit / Net Sales ] X 100%

Company A : Gross Profit ratio = [ 430 / 2,500 ] X 100% = 17.20 %

Company B : Gross Profit ratio = [ 430 / 1,600] X 100 % = 26.88 %

(2)Net Profit ratio = [ Net Profit / Net Sales ] X 100 %

Company A : Net Profit ratio = [ 166 / 2,500] X 100 % = 6.64%

Company B : Net Profit ratio = [ 170 / 1,600] X 100 % = 10.63 %

Liquidity ratio :

(3)Current ratio = Current assets / Current liabilities

Company A = 399 / 189 = 2.11

Company B = 199 / 38 = 5.24

(4)Quick ratio = [Current assets - Inventory ] / Current liabilities

Company A = [ 399 - 220 ] / 189 = 0.95

Company B = [ 199 - 160 ] / 38 = 1.03

Solvency Ratio :

(5)Debt ratio = [Total debts / Total assets ] X 100%

Company A = [ 189 / 557 ] X 100 % = 33.93 %

Company B = [ 38/ 261 ] X 100 % = 14.56 %

(6)Debt equity ratio = [ Total debts / Total shareholder's equity ] X 100 %

Company A = [ 189 / 368 ] X 100 % = 51.36 %

Company B = [ 38 / 223 ] X 100 % = 17.04 %

(7)Proprietary ratio = [ Shareholder's fund / Total assets ] X 100 %

Company A = [ 368 / 557 ] X 100 % = 66.07 %

Company B = [ 223/ 261 ] X 100 % = 85.44 %

FINANCIAL REPORT ON FINANCIAL PERFORMANCE AND HEALTH

1) May be the volume of sales revenue of Company A is larger than Company B but gross profit margin ratio and net profit margin ratio of Company B [ GP Ratio = 26.88 % and NP Ratio = 10.63 % ] are more impressive than Company A [ GP Ratio = 17.20 % and NP Ratio = 6.64 %] . It suggests that Company B is running successfully in comparison with Company A. So, the recent financial performance of Company B is better than Company A.

2) The short term liquidity position of Company B is far more better than Company A. Company B has more advantageous current ratio [ 5.24 > 2.11 ]  and quick ratio [ 1.03 > 0.95 ] , which are important to pay off short term liabilities on demand .

3) The long term solvency ratio comprises of debt ratio , debt equity ratio and proprietary ratio. Company B has a lower debt ratio [ 14.56 < 33.93]  and higher proprietary ratio [ 85.44 > 66.07 ]  in comparison with Company A , which says that Company B is less dependant on its debts rather most of the assets financed by owner's fund.

Apart from that debt equity ratio of Company B [ 17.04 < 51.36 ] is much lower than Company A , which specks about more dependence on equity for company B , which is less risky than company A.

This story says that the financial health of Company B is more stable and well constructed than Company A.

If you understand the above solution then please give me a like .Your like is really important for me .Thank you. .