Question

Required:

110 You are to study the following financial statements for mofurniture &ores and then answer the question such follow. Financial Statements A B S'000 S 000 S1000 S'000 Income Statements Sales 12,500 1,600 Opening Inventory 190 Add Purchases 2,100 1.220 Less Closing Inventory (220) 2.070) (160) 1170) Gross profit 430 430 Less Directors remuneration 70 120 Wages and salaries 180 130 Other expenses 14 (264) 10 (260) Net profit 166 26 (106) 98 136 158 62 Statement of financial position Non-curent assets Equipment at cost Less Acc. depreciation Current Assets Inventory Accounts receivable Banke Total Assets 220 104 15 160 29 10 399 192 1261 Share capital General reserve Retained profit 200 69 100 369 100 35 SS 223 Cuorent llaunes Accounts payable Total Capital and current liabilities 189 557 1261 Required: After calculating appropriate ratios, prepare a report that conuments on the recerut performance and financial healdt of de tho conpanies.

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

Answer 1

Company A Company B a) Gross margin ratio Gross margin Sales $430 17.2% $430 $1,600 26.9% $2,500 b) Net margin ratio Net profit Sales $166 $2,500 6.6% $170 $1,600 10.6% c) Return on Equity Net profit Total Equity $166 $368 45.1% $170 $223 76.2% d) Return on assets Net profit Total assets $166 $557 29.8% $170 $261 65.1% e) Current assets ratio Current assets Current liabilities $399 $1891 2.11 $199 $38 5.24 f) Quick ratio Quick assets Current liabilities $179 0.95 $39 $38 1.03 $1891 Quick assets exclude inventory 8) Total assets turnover ratio Sales Total Assets $2,500 $557| 4.49 $1,600 $261 6.13 h) Total Debt to Assets ratio Total Debt Total Assets $1891 $5571 33.9% $38 $261 14.6% Comments on recent performance Profitablity ratios: The Gross margin of company B is better than Company A. Higher gross margin gives higher profits for covering operating costs and improve return on equity and return on total assets The net profit of Company B is higher than Company A however Company B is having higher operating costs which it should reduce to improve the net profit margin The return on equity and return is better for Company B due to higher net profit. Company A has to increase its profits to improve profitablity ratios Liquidity ratios: The current ratio is higher for Company B compared to company A. Current ratio indicates the ability of firm to have liquidity to meet its current obligations. Quick ratio is also better for Company B Company A is also having sufficient liquidity but lower than Company A Efficiency ratio: The total asset turnover ratio is better for Company B which means it is using its assets efficiently in business Company A has to improve its asset turnover ratio Solvency ratio: The debt level of company A is higher compared to Company B Higher debt indicates higher leverage and solvency risk when there are lower cash flows