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POA HW Ratio Analysis

Maxie's current ratio is 21.4:1 and acid test ratio is 20.3:1, indicating strong liquidity. The return on capital invested is 141.4% and rate of stock turnover is 108.6 times per year. Net profit percentage is 19.3%. For S. Christie, the gross profit margin is 25%, net profit margin is 14.8%, return on capital invested is 104%, current ratio is 27:1, and acid test ratio is 16.18:1. The stock turnover is 9.5 times per year. A good current ratio indicates a business has more assets than liabilities and liquidity to repay debts quickly. A bad acid ratio means insufficient assets to cover

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12 views

POA HW Ratio Analysis

Maxie's current ratio is 21.4:1 and acid test ratio is 20.3:1, indicating strong liquidity. The return on capital invested is 141.4% and rate of stock turnover is 108.6 times per year. Net profit percentage is 19.3%. For S. Christie, the gross profit margin is 25%, net profit margin is 14.8%, return on capital invested is 104%, current ratio is 27:1, and acid test ratio is 16.18:1. The stock turnover is 9.5 times per year. A good current ratio indicates a business has more assets than liabilities and liquidity to repay debts quickly. A bad acid ratio means insufficient assets to cover

Uploaded by

Sasha King
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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1.

(a) Calculate the following ratios for Maxie

(i) Current Ratio


Current ratio = Current Assets/Current Liabilities
Current ratio= 15 010/700
= 21.4 :1

(ii) Acid test


Acid test = Current Assets- Inventory/Current liabilities
Acid test= 15 010-810/700
= 20.3 :1

(iii) Return on capital invested


Return on capital invested= Net profit/Average capital x 100
Return on Capital invested= 29 860/21 110 x 100
= 141.4%

(iv) Rate of stock turnover


Rate of stock turnover = Cost of goods sold/average inventory
Average inventory = Opening Stock+ Closing Stock/2= 680+810/2=745
Rate of stock turnover= 80 940/745
= 108.6 times a year

(v) Net profit percentage


Net profit percentage= Net profit/Sales revenue x 100%
Net profit percentage= 29 860/154 610 x 100%
= 19.3%
(b) Answer the following questions
(i) Give another term for net current assets as indicated on the balance sheet
ANS: Working Capital
(ii) Why does loan interest of $500 appear on the balance sheet even though it is recorded in the profit
and loss account?
ANS: Because it is an accrued expense ( it is owing)
(iii) What does a good current ratio indicate?
ANS: A good current ratio indicates that a business has enough money to pay of its liabilities and also
effectively run the business
(iv) What is the term used for the fixed asset amount of 10 060?
ANS: Net Book Value
(v ) It can be assumed that year 2005 is not the first year depreciation has been charged on fixed assets.
Why is this assumption correct?
ANS:

(c) Indicate whether the following statements are TRUE or FALSE


(i) An acid test ratio of 1:5 is good- False
(ii) A current of ratio of 2:4 is not good- True
(iii) The purchase of fixed assets is a capital expenditure- True
(iv) Prepayments should be charged against profits for the current period- false
(v ) Bad debts is written off in the Profit and Loss Account, and then subtracted from the debtors amount
in the balance sheet- false
Provision for bad debt is the only one that needs to be subtracted in the balance sheet
2. Calculate the following profitability and financial ratios for S.Christie

 Gross Profit margin


Gross profit margin= Gross profit/sales x 100%
Goss profit margin= 8750/35000 x 100%
= 25%

 Net Profit Margin


Net profit margin= Net profit/ sales x 100%
Net profit margin= 5 200/35000 x 100%
= 14.8%

 Return on capital invested


Return on capital invested= Net profit/Average capital x 100%
Return on capital invested = 5 200/7 700 x 100%
= 104%

 Current Ratio
Current Ratio= Current assets/ Current liabilities
Current Ratio = 7 450/275
=27 : 1

 Acid test ratio


Acid test ratio= Current assets- inventory/ current liabilities
Acid test ratio= 7 450-3000/ 275
=16.18 : 1

 Stock turnover
Stock turnover = Cost of goods sold/ Average inventory
Stock turnover = 26250/2750
= 9.5 times a year

(ii) Explain briefly what EACH of the following indicates about a business:

 A good current ratio- this means that the business has more assets than liabilities and has a
relatively good amount of liquidity which therefore means it can repay its liabilities quickly.
 A Bad acid ratio-this means that when inventory is taken away from current assets, the business
will not have enough money to pay its liabilities

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