Question

2006 2005 Balance Sheet for the period ending June 30 Assets Current assets Cash Accounts receivables Inventories Prepaid expenses Total current assets Property and equipment Total assets $21,000 $160,000 $300,000 $9,000 $490,000 $810,000 $1,300,000 $24,000 $162,000 $315,000 $10,000 $511,000 $700,000 $1,211,000 Liabilities and shareholders equity Liabilities Current liabilities 10% bonds payable Total liabilities $200,000 $300,000 $500,000 $290,000 $275,000 $565,000

PLEASE TYPE ANSWERS. DO NOT WRITE ! IT SHOULD LOOK SIMILAR TO THIS (SEE IMAGE BELOW):

Answer 1

Solution

(a)

				2006		2005
i. Gross Margin Percentage =	Gross Margin X 100		840 * 100	40	710 * 100	37.37
	Sales		2100		1900
ii. Net Income Percentage =	Net Income X 100		105 * 100	5	85 * 100	4.47
	Sales		2100		1900
iii. Current Ratio =	Current Assets		490	2.45	511	1.76
	Current Liabilities		200		290
iv. Acid Test Ratio =	Current Assets - Inventories		490 - 300	0.95	511 - 315	0.68
	Current Liabilities		200		290
v. Inventory Turnover Ratio =	Cost of Goods Sold		1260	4.38	1190	3.87
	Average Inventory		287.5		307.5
Average Inventory =	Opening Inventory + Closing Inventory		260 + 315	287.5	315 + 300	307.5
	2		2		2
vi. Debt to Equity Ratio =	Total Debt		300	0.375	275	0.426
	Shareholders’ Equity		800		646
vii. Interest Coverage Ratio =	Net Operating Income		180	6	200	3.33
	Interest Expenses		30		60

(b)

Liquidity: It is a measure of business’s ability to use current assets to cover current liabilities. It can be clearly seen that the business has gained more liquidity than previous year.

Profitability: It is a measure of business's efficiency by showing its overall return by utilizing its resources. It can be clearly seen that as the business has gained more than previous year, it has become more efficient than previous year.