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Statement Analysis_Solution

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Statement Analysis_Solution

Uploaded by

wanglaohu0812
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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FINANCIAL STATEMENT ANALYSIS

The Statement of Financial Position and Statement of Profit or Loss for XYZ Ltd.
are shown below.

Statement of Financial Position


as at 30 June 2021

2021 2020

Current Assets
Cash at Bank 390 300
Trades Receivable 1,460 1,290
Short Term Investments 380 440
Inventory 2,010 1,770
Prepaid Expenses 100 100
Total Current Assets 4,340 3,900

Non-Current Assets
Long Term Investments 200 500
Property, Plant and Equip. 2,100 1,800
Other 100 100
Total Non Current Assets 2,400 2,400

Total Assets 6,740 6,300

Current Liabilities
Accounts Payable 910 800
Accrued Expenses 250 250
Loan Payable 600 650
Total Current Liabilities 1,760 1,600

Non-Current Liabilities
Loan Payable 1,900 1,700
Total Non Current Liabilities 1,900 1,700

Total Liabilities 3,660 3,300

Net Assets 3,080 3,000

Equity
Capital 2,502 2,502
Retained Profits 578 498
Total Equity 3,080 3,000
Statement of Profit or Loss
For the year ended 30 June 2021
2021 2020

Sales 10,320 9,582


Less Cost of Sales 7,719 6,975
Gross Profit 2,601 2,607

Less Operating Expenses


Wages Expense 1,030 800
Depreciation 567 620
Interest Expense 252 230
Total Operating Expense 1,849 1,650

Operating Profit 752 957

NOTE: Total assets as at 30 June 2019 were $5,900.

Ratio 2021 2020 Industry Average


Current 4,340/1,760 3,900/1,600 1.38
= 2.46: 1 = 2.44:1
Net Profit (752/10,320) x 100 (957/9,582) x 100 11.4%
= 7.3% = 9.99%
Debt/Equity (3,660/3,080) x 100 (3,300/3000) x 100 65%
= 119% = 110%
Interest Coverage 752 + 252 957 + 230 6.7
252 230
= 3.98 = 5.16
Return on Assets1 752 + 252 957 + 230 21.2%
(6,740 + 6,300)/2 (6,300 + 5,900)/2
= 15.4% = 19.5%
Trade Receivables 10,320 9,582 12
(1,460 + 1,290)/2 (1,290 + 1,100)/2
= 10,320 = 9,582
1,375 1,195
= 7.5 = 8.02
or or
365/7.5 365/8.02
= 48.7 days = 45.5 days
Inventory Turnover 7,719 6,975 6.5
(2,010 + 1,770)/2 (1,770 + 1,560)/2
= 7,719 6,975
1,890 1,665
= 4.08 4.19
Or Or
365/4.08 365/4.19
= 89.5 days = 87 days
1 When calculating the Return on Assets the ‘average assets’ refers to the average
amount of assets held over the last 12 months. To calculate this you take the
closing balance for the current year, add this to the closing balance for the
previous year and then divide by two. The same principle is used when
calculating the trade receivables turnover ratio and inventory turnover ratio.

Brief Analysis
The ratios indicate this business is in fairly poor condition. The current ratio has
remained relatively stable but it is significantly higher than the industry average.
This suggests the organisation is not using its available resources efficiently (i.e.
too many resources are in the Current Asset section – it is not productive to hold
excessive levels of cash in low interest bank accounts, excessive levels of
inventory or excessive levels of trades receivable). The trade receivables
turnover ratio indicates the business is taking longer to collect cash from credit
sales (48.7 days as opposed to 45.5 days in 2020), which is a poor sign and is
contributing to higher trades receivable (and therefore a higher current ratio).
Similarly, the inventory turnover ratio has declined, with inventory being turned
over every 89.5 days (as opposed to every 87 days in 2020). This is well below
the average of competitors and has contributed to rising levels of inventory on
hand (and a higher current ratio).

The profit ratio has declined and remains significantly below the level being
achieved by its competitors. For every $100 of sales this organisation earns $7.30
in operating profit whereas its competitors, on average, earn $11.40. The level of
debt for this entity has increased and is significantly higher than its competitors,
and its capacity to meet interest payments has declined (as evidenced by the
interest coverage ratio). The interest coverage ratio is well below that of
competitors, which indicates this organisation has a significantly higher level of
financial risk, relative to its competitors. The level of efficiency has also declined,
with return on assets trending downwards and now well below competitors’
average rate of return.

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