Question for understanding ratios

Using the following information, Calculate the firm’s debtor’s turnover and briefly explain the ratio you have calculated.

Year 1 Year 2 Sales – Cash 20,000 30,000 Sales - Credit 300,000 400,000 Debtors 50,000 30,000 Solution:

Explanation: Collection from Credit customers have exceed the usual 30 days term in year 1. The situation improves for the better in year 2 where collections give within the 30 days term.

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Debtor’s Turnover Year 1 Year 2

Debtors / Credit sales x 365 50000/300000 x 365 =60.83 =61 days

30000 /400000 x 365 = 27.375 Days

Question for understanding ratios

Using the Following information, calculate the firm’s Stock Turnover And briefly explain the ratios you have calculated. Year 3 Year 4 Opening Stock 15,000 25,000 Closing Stock 25,000 80,000 Purchases 460,000 700,000Solution:

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Stock Turnover Year 3 year 4

Cost of Goods sold Average Stock

Explanation: The rapidity of Proof that the firm is selling

450000 /20000 = 22.5 times

Sales is higher in year 3 asThe goods slower in year 4.

645000/ 52500 = 12.3 times

compared to year 4. This

Question for understanding ratios

Using the following information, calculate the following ratios.

a. Gross profit marginb. Net Profit margin.c. Return on Shareholder’s fund Year 1 year 2 $ $Sales 150,000 250,000Opening Stock 20,000 ?Purchases 80,000 130,000Closing Stock 30,000 50,000Operating Expenses 40,000 80,000Shareholder’Fund 300,000 300,000

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Question for understanding ratios

Using the following information, calculate the following ratios.

a. Gross profit margin = Gross profit / net Sales x 100 = 80000/15000x100 = 53.33%

Sales 150000Less: Cost of good sold Opening Stock 20000 Add: Purchases +80000 100000Less: Closing Stock -(30000) 70000 Gross profit 80000Less operating Expenses - ( 40000) Net profit 40000

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Question for understanding ratios

Using the following information, calculate the following ratios.

B. Net profit Margin= Net profit before Tax / Net sales x 100 = 40000/ 150000 x 100 = 26.66 %

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Question for understanding ratios

Using the following information, calculate the following ratios.

C. Return on Shareholder’s Fund = Net Profit / Capital Employed x 100

= 40000/300000 x 100

Return on Shareholder’s Fund = 13.33 %

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Horizontal analysis & Vertical analysis

HorizontalAnalysis and Vertical Analysis are also popular forms. Horizontal analysis is used to evaluate the trendin the accounts over the years, while vertical analysis, also called a Common Size Financial Statementdiscloses the internal structure of the firm. It indicates the existing relationship between sales and eachincome statement account. It shows the mix of assets that produce income and the mix of the sources ofcapital, whether by current or long-term debt or by equity funding.

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The Balance sheets of Lauder corporation :

31/12/2005 31/12/2004 $ $Fixed Assets 625,000 520,000Current Assets 816000 756,000 Less: Current Liabilities 275600 540,400 242,400 513.600 1,192,400 1,033,600Less: Long term Liabilities 390,000 397,600 802,400 636,000

Financed By:

Ordinary Share Capital 220,320 216,000Retained Profit 582,080 420,000 802,400 636,000

Required: a). Compute the amount and percentage changes in 2005 using Horizontal analysis, Assume 2004

is the base year. b).Compute the percentage change in the individual asset, liability and shareholders equity items

using the vertical analysis.

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The Balance sheets of Lauder corporation :

a)Horizontal Analysis

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2005 2004 Amount Percentage

Fixed AssetsCurrent AssetTotal Assets

Current LiabilitiesLong term liabilitiesTotal Liabilities

Shareholders Fund

Ordinary Share Capital

Retained profit

652,000816,0001,468,000

275,600 390,000 665,600

220,320

582,080

802,400

520,000756,0001,276,000

242,400397600 640,000

216,000

420, 000

636,000

132,00060,000 192,000

33,200 (7,600) 25,600

4 ,320

162,080

166,400

25.38%7.94 %15.05%

13.70% -1.91 % 4.00%

2.00%

38.59%

26.16%

Horizontal Analysis

C.The horizontal analysis shows a number of significant changes for the company from 2004 to 2005:

Fixed assets increase by 132,000 representing 25.38%Current Liabilities increased by 33,200 representing 13.70%The Retained profit increased by 162,080 representing 38.59%

These changes suggest that the company expanded its assets financed primarily by retained profit rather than long-term debts.

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The Balance sheets of Lauder corporation :

b) Vertical Analysis.

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2005Amount Percentage

2004Amount Percentage

Fixed AssetsCurrent assets

Total Assets

Current LiabilitiesLong term Liabilities

Total Liabilities

Shareholders Fund:Ordinary Share CapitalRetained Profit

Total liabilities & shareholders fund

652,000 44.41%816,000 55.59%

1,468,000 100.00%

275,600 18.77%390,000 26.57%

665,600

220,320 15.01%582,080 39.65% 802,400

1,468,000 100.00

520,000 40.75%756,000 59.25%

1,276,000 100.00%

242,400 19.00% 397600 31.16%

640,000

216,000 16.93% 420,000 32.92% 636,000

1,276,000 100.00%

Vertical Analysis

Vertical Analysis shows the relative size of each category in the balance sheet.

Current assets decreased from 59.25% to 55.59% even though the absolute dollar amount has increased.

Fixed assets increased from 40.75% to 44.41 %

Retained profit has increased from 32.92% to 39.65% of total liabilities and shareholders fund. These results reinforce the earlier observations that the company finances its growth through retained profit rather than through long term debts.

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Prepared by: Muhammad akhtar

Home work Questions

You as on of the staff in the finance department, you manager ask you to prepare a formal report to the management on the performance of Kohinoor KDM after analysis the results over the previous years and also with the industry average.

The manager has given you the following information.

The latest industry financial ratio’s average is :

Gross profit margin 38%Net profit margin 4.5%Return on capital employed (equity and debentures) 17.85Current ratio 1.95 : 1Quick ratio 1.25: 1Total Asset Turnover 3.85 timesDebtors collection period 50 daysCreditors collection period 45 daysStock turnover 18.5 daysGearing 30 %

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Home work Questions

The following information was extracted from the published accounts of Kohinoor kdm.

Income Statement for the year ended 31 December

2010 2011 $ $Turnover 482,625 554,400Cost of Sales 337,838 418,770

Gross profit 144,787 135,630Operating ExpensesDepreciations 13,860 17,820Audit fees 495 594Debenture interest 2,970 3,960Selling and Administrative expenses 111,623 90,239Net Profit 15,839 23,017

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Home work Questions

Balance Sheet as at 31 December 2010 2011 $ $ $ $ $ $Property, Plant and Equipment 70,785 91,575Current AssetsInventory 24,255 31,680Debtors 53,640 60,885Cash 5,760 3,960 83,655 96,525Less: Current LiabilitiesBank overdraft 3,960 5,445Creditors 34,155 37,125Taxation payable 990 1,485Others payables 2,723 3218 41,828 47,273 Working Capital 41,827 49,252

112,612 140.827 Financed By:Capital And Reserves Share Capital 39,600 39,600Reserves 43,312 61,627 82,912 101,227Non-Current Liabilities 10% debenture 29,700 39,600 112,612 140,827

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Home work Questions

a. The Relevant financial ratios for the Kohinoor kdm for the years ended 31 December 2010 and 2011. All Foumulas and Calculations must be shown clearly.

b. And also interpretation of ratios.

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