Bachelor of Science Degree in Business Administration

GROUP 7 - PROJECT 1

Submitted in Partial Fulfillment of the Course

Intermediate Accounting 1: ACCT 317

Lecturer: Ms. Annemarie Rose

Students: Venise Mason ID# 31075327

Leighton Sinclair ID# 31090319
Maradona Wright ID# 31090329
Nicolette Brown ID# 31070279
Aretta Ferguson ID# 31080189

Due Date: September 28, 2010

1. Discuss how ratio analysis can be used to assess a company’s financial

performance.

A ratio simply refers to one quantity divided by another. In regards to accounting,

ratios are used to analyze and interpret accounting statements. The best way to obtain

meaningful information from ratio analysis is comparison. Calculating ratios enables

the comparison of firms which differ in size. Ratios can be used to compare a firm’s

financial performance with industry averages and also allows companies to compare

and contrast among similar businesses to gauge the company against its competitors

as well as to form a trend analysis to identify performance improvement or lack

thereof over a period of time. This can also be done by comparing ratios over time

within the same business to determine whether or not conditions are improving or are

in line with stated in-house projections.

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2. (a) Calculate the comparable ratios for NC Annex Company Limited for the

years ended June 30, 2009 and June 30, 2008.

 Using the Current Assets Ratio:

Current Assets
Current Liabilities
(2009)
= 3,900
1,780

= 2.19

(2008)
= 3,380
1,580

= 2.14

 Using the Quick Ratio/Acid Test Rate:

Current Assets – Inventories

Current liabilities

(2009)
= 3,900 – 1,280
1,780

= 2,620
1,780

= 1.47 or 1.5

(2008)
= 3,380 – 980
1,580

= 2,400
1,580

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 = 1.52 or 1.5

 Using the Accounts Receivable Turnover method:

Credit Sales
Accounts Receivable

(2009)
= 22,400
2,460

= 9.11 or 9 times

(2008)
= 19,500
2,160

= 9.03 or 9 times

 Using the Inventory Turnover method:

Cost of Sales
Average Stock

(2009)
= 17,920
1,280

= 14 times

(2008)
= 13,750
980

= 14.03 or 14 times

 Using Accounts Payable Turnover:

Cost of Sales
Trade Payables

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 (2009)
= 17,920
1,500

= 11.95 or 12 times

(2008)
= 13,750
1,380

= 9.96 or 10 times

 Using Accounts Receivables Period:

Accounts Receivable X 365

Credit Sales

(2009)
= 2,460 X 365
22,400

= 40.08 or 40 days

(2008)
= 2,160 X 365
19,500

= 40.43 or 40 days

 Using Accounts Payable Turnover Period:

Accounts Payable X 365

Cost of Sales

(2009)
= 1,500_ X 365
17,920

= 30.55 or 31 days

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 (2008)
= 1,380_ X 365
13,750

= 36.63 or 37 days

 Using Inventory Turnover Period:

Average Stock X 365

Cost of Sales
(2009)
= 1,280 X 365
17,920

= 26.07 or 26 days

(2008)
= 980__ X 365
13,750

= 26 days

 Using Return on Capital Employed (R.O.C.E):

Profit before Interest & Taxes

Total Assets – Current Liabilities

(2009)
= 1,120____
7,600 – 1,780

= 1,120 X 100
5,820

= 19.2% or19%

(2008)
= __778___
6,240 -1,580

= 778 X 100
4,660

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 = 16.7% or 17%

 Using Gross Profit Margins:

Gross Profit X 100

Sales

(2009)
= 4,480 X 100
22,400
= 20%

(2008)
= 5,750 X 100
19,500

= 29.50%

 Using Net Profit Margins:

Net Profit X 100

Sales

(2009)

= 930 X 100
22,400

= 4.15% or 4%

(2008)

= 640 X 100
19,500

= 3.28% or 3.3%

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 Using the Total Asset Turnover:

Sales
Total Assets

(2009)

= 22,400
7,600

= 2.95 times

(2008)

= 19,500
6,240

= 3.13 or 3 times

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2. (b) Write a report to the Board of Directors of NC Annex Company Limited

analyzing the performance of NC Annex Company Limited, comparing the results

against the previous year and against the industry average. (Ensure that the issues

of profitability and liquidity are addressed in your report.)

The liquidity ratios indicate that NC Annex Company Limited has the ability to meet its

short term obligations. The company’s current assets were 2.19 times its short-term debt

obligations for 2009 while in 2008 it was 2.14 which is higher than the latest industry

average of 1.9 using the Current Asset Ratio. This could also be an indication that the

company may have excess funds in cash or other investments that could be put to better

use in the business. On the other hand, the Asset Test Ratio indicates that the firm has

the ability to pay its debts as they become due. The test reveals that in 2008 and 2009 the

firm was above the industry average at of 1.27 averaging at 1.5, which again is an

indication that the firm might have too much cash on hand.

Based on the Profitability ratios, Gross Profit Margin is 20% in 2009 a considerable

reduction from the 29.5% in 2008. Even though the liquidity ratios indicate that the firm

is able to meet its short-term obligations, the comparable industry percentage of 35.23%

indicates a significant difference. This would indicate that for each sales dollar that is

available to meet its expenses, it falls below the industry average, which in relative terms,

the profits after expenses can merely cover the goods that were sold. The Net Profit

Margin, on the other hand, is calculated at 4.15% in 2009, an increase from the 3.3% in

2008. When compared to the industry average of 4.73%, the firm’s profit margin

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indicates that it is marginal. This is a good indication of how much profit the company

makes for every $1 it generates in revenue or sales.

For the years 2008 and 2009 the Inventory Turnover for the firm was 14 times, which is

relatively lower than the industry average of 18.3 times. This is an indication that the firm

has either excessively high or low moving stocks. Accounts Receivable Turnover

Period for the firm for 2008 and 2009 reflects a steady trend of approximately 9 times

which measures how soon receivables will be converted into cash. However, the

Accounts Receivable Turnover Period for the firm is 40 days which is comparatively

lower than that of the industry’s average of 52 days, which means that the company has a

fairly good control of its collection of monies outstanding.

Accounts Payable Turnover for NC Annex Company Limited for the 2009 financial

year is 12 times, a slight increase from the 2008 figure of 10 times which indicates that

the company is able to make payments to its creditors on a short turn-around time.

However, the Accounts Payable Turnover Period for 2009 is approximately 31 days, a

significant improvement from the 37 days calculated for 2008. In comparison to the

industry average figure of 49 days, the results indicate that the firm will be able to meet

its short-tem liabilities with relative ease.

Based on the profitability ratios calculated using the Return on Capital Employed

(R.O.C.E) method, the result indicates that the company will achieve 19% in 2009 a

noticeable increase from the 17% in 2008. These figures indicate that the company is

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relatively on par with the industry average of 18.5%, which means that the firm is

efficiently utilizing its capital to generate revenue.

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