ACT 2112

TUTORIAL 10
1. One purpose of financial statement analysis is to evaluate the performance of a company
with an eye toward identifying problem areas. Another purpose of financial statement
analysis is to use the past performance of a company to predict how it will do in the
future.
2. The usefulness of financial ratios is greatly enhanced when they are compared with past
values for the same company and with values for other firms in the same industry.

Q3

Computing and Using Common Ratios

ABC

XYZ

2.50

1.25

1.

Current ratio..................................................................
(Current assets/Current liabilities)

2.

Debt ratio......................................................................
(Total liabilities/Total assets)
Total liabilities = Current liabilities + Long-term liabilities
Total assets = Current assets + Long-term assets

3.

Return on sales..............................................................
(Net income/Sales)

2.0%

1.2%

4.

Asset turnover...............................................................
(Sales/Total assets)

3.33

3.95

5.

Return on equity............................................................
(Net income/Total equity)
Total equity = Total assets Total liabilities

12.5%

40%

6.

Price-earnings ratio.......................................................
(Market value/Net income)
Market value = Price per share Number of shares

22.5

15.0

47%

88%

4. (i). Gross profit percentage (2007) = (Net Sales COGS) x 100%

Net Sales
= (650,000 590,000) x 100%
650,000
= 9.2%
(ii). Inventory Turnover =
COGS
Average Total Inventory
a. Cost of goods sold

2007
RM590,000

Inventories:
Beginning of year
End of year
Total
b. Average (Total/2)

RM85,000
64,000
RM149,000
RM74,500

Inventory turnover (a/b)

7.9

(iii). Receivables turnover =

Net Sales
Average Total Receivables

a. Net sales

2007
RM650,000

Account receivable:
Beginning of year
End of year
Total
b. Average (Total/2)

RM50,000
80,000
RM130,000
RM65,000

Receivables turnover (a/b)

10

5. Financial condition of Kenanga Trading is stronger than that of Cempaka Trading for the

following reasons:
(a) The stock turnover of Kenanga Trading is higher that of Cempaka Trading. This means
the sales of Kenanga Trading is increasing much faster than that of Cempaka Trading.
(b) The current ratio of Kenanga Trading is higher than that of Cempaka Trading. This means
that Kenanga Trading has more ability to repay its current liabilities when they become
due.
(c) The gross profit margin of Kenanga Trading is higher than that of Cempaka Trading
whereby the gross profit margin of Kenanga Trading is 10 cents more than that of

Cempaka Trading to cover the operating and non-operating expenses for a particular
accounting period.