Question

You are a consultant for Glory Ltd, a quoted company operating in the manufacturing sector. Following are a Statement of Profit or Loss and Statement of Financial Position with comparatives for the year ended 31st December 2018.

Statement of Profit or Loss for the year ended 31st December, 2018

Sales revenue

Cost of sales

Gross profit

Interest receivable Administration expenses Operating profit

Interest

Profit before taxation Income tax expense Profit for the year

2018

GHS 3,095,576 2,402,609

692,967 744 333,466 360,245 18,115 342,130 74,200 267,930

2017

GHS 1,909,051 1,441,950

467,101 2,782 222,872 247,011 21,909 225,102 31,272 193,830

2

Statement of Financial Position as at 31 December 2018

Assets 2018 GHS

Non-current assets

Property, plant and equipment 802,180 Current assets

Inventory 64,422

2017 GHS

656,071

86,550 807,712 45,729 68,363 1,008,354

1,664,425

258,178 410,591 668,769

100,000

545,340 280,464 37,200 32,652 895,656

1,664,425

Trade receivables

Prepayment and accrued income Cash at bank and in hand

Total assets

Equity and liabilities

Equity

Ordinary shares

Income surplus

Non-current liabilities

10% loan stock

Current liabilities

Trade payables

Accruals and deferred income Corporate taxes

Other taxes

Total equity and liabilities

Required:

905,679 97,022 1,327 1,068,450

1,870,630

258,178 651,721 909,899

100,000

627,018 81,279 108,000 44,434 860,731

1,870,630

a. Calculate the following ratios:

i. Profitability ratios - Return on Capital Employed, Return on Equity, Gross profit margin and Net

profit margin

ii. Long term solvency and stability - Debt/Asset ratio, Gearing ratio and Interest cover

iii. Short-term solvency and liquidity – Current ratio and Acid test ratio

iv. Efficiency (turnover ratios) – Account receivable collection period, Account payable payment

period, Inventory turnover (times) (6 marks)

b. Prepare a report addressed to the Chief Executive Officer, assessing the relative performance and financial

position of Glory Ltd for the year ended 31st December, 2018

Answer 1

a. Computation of Ratios -

Profitability ratios
Return on Capital Employed	=	Earnings before interest and tax	X 100	=	360,245	=	35.67%
Capital Employed	1,009,899
Return on Equity	=	Net Income	X 100	=	267,930	=	29.45%
Shareholder's Equity	909,899
Gross profit margin	=	Gross Profit	X 100	=	692,967	=	22.39%
Net Sales	3,095,576
Net profit margin	=	Net Profit	X 100	=	267,930	=	8.66%
Net Sales	3,095,576
ii. Long term solvency and stability
Debt/Asset ratio	=	Total Debt		=	960,731	=	0.51
Total Assets		1,870,630
Gearing ratio	=	Total Debt		=	960,731	=	1.06
Total Equity		909,899
Interest cover	=	Earnings before interest and tax		=	360,245	=	19.89
Interest Expenses		18,115
iii. Short-term solvency and liquidity
Current ratio	=	Current assets		=	1,068,450	=	1.24
Current Liabilities		860,731
Acid test ratio	=	Current assets - Inventory		=	1,004,028	=	1.17
Current Liabilities		860,731
iv. Efficiency (turnover ratios)
Account receivable collection period	=	Average accounts receivable	X 365	=	856,696	=	101.01	Days
Net Credit Sales	3,095,576
Account payable payment period	=	Average accounts Payables	X 365	=	586,179	=	89.05	Days
Cost of sales	2,402,609
Inventory turnover (times)	=	Inventory	X 365	=	75,486	=	11.47	Days
Cost of sales	2,402,609

b.  Report addressed to the Chief Executive Officer, assessing the relative performance and financial position of Glory Ltd for the year ended 31st December, 2018 -

i. Profitability ratios - Profitability ratio indicates company has 36% of operating profit against capital employed by the company. Return on equity indicates 29% of the income earned by the company on equity invested. Gross profitability of the company is 22%. Also the company earned 9% of profit from its sales activity.

ii. Long term solvency and stability - The total debt of the company is .51 to its total assets means .51 portion of the assets are invested by the debt. debt portion of the company is 1.06 as compare to the equity portion means company has borrowed from the equity and financial institution in the same proportion. Company has great interest cover in 2018 i.e. 20%.

iii. Short-term solvency and liquidity - Current ratio of the company in 2018 is 1.24 which indicates company has 1.24 assets to pay off its current liabilities. From which Highly liquid portion is 1.17.

iv. Efficiency (turnover ratios) - Companys debtors pays thier dues in 101 days to the company which is month than 3 months. Company need to tak it down to 90 days. Company pays its creditors in 90 days which shows good indication of reputation of the company. Company's inventory turnover times is 11 days which indicates good postion that company's inventory is movings so fast.

Overall financial position and profitability indicates company is in a good condition in 2018.