ALWADI INTERNATIONAL SCHOOL ACCOUNTING

AS LEVEL

NOTES

GRADE 11

Grade: 11

Subject: Accounting

Name: _____________________

Date:_____________
Ratio Analysis

Worked example 1:
On 1 October 2013 Manny Kyoor and his wife formed a limited company, Kyoor Ltd, and each paid
in $37500 as share capital. The bank loaned the company a further $80000 at 9% interest per
annum. At 30 September 2014 the businesss final accounts were drawn up as follows:
Income statement for the year ended 30 September 2014
$
Revenue
(-) Cost of Sales:
Inventory (1st October 2013)
(+) Purchases

31500
280000
311500
66500

(+) Inventory (30th September 2014)

Gross Profit
(-) Expenses:
Rent and Rates
Advertising
Wages
Heat and Light
Depreciation
Profit from operations
(-) Finance costs (debenture interest)
Profit for the year

3950
1750
29000
5250
12000

$
350000

245000
105000

(51950)
53050
(7200)
45850

Statement of financial position as at 30 September 2014

Non current assets:
Premises
Fixtures and fittings

RATIO ANALYSIS

Cost
$
124000
48000
172000

Depn
$
12000
12000

NBV
$
124000
36000
160000

Page 1

ALWADI INTERNATIONAL SCHOOL ACCOUNTING

Current assets:
Inventory
Trade receivables
(-) Current liabilities:
Trade payables
Accrued debenture interest
Bank overdraft
Net current assets
Capital employed
(-) Non current liabilities:
9% Debentures
Net assets
Equity:
75000 Ordinary shares of $1 each
Retained profit

AS LEVEL

NOTES

66500
21500

88000

21000
7200
18950

(47150)

GRADE 11

40850
200850
(80000)
120850
75000
45850
120850

Industry average ratios and other relevant data concerning businesses similar to Kyoor Ltd were as
follows:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)

Gross Profit margin

30.00%
Net Profit percentage
18.07%
Current ratio
2.21:1
Liquid (quick) ratio
1.02:1
Inventory turnover ratio
8 times
Non current assets turnover ratio
50.18%
Return on total assets
25.37%
Return on net assets
34.93%
Trade receivables collection period
25 days
Trade payables payment period
30 days

(a) Calculate each of the above ratios, to 2 decimal places, for Kyoor Ltd.
(b) Define each ratio and Comment on the business performance in the light of the data for the
industry.
Suggested answer:
(a)
Kyoor Ltd
(i) Gross profit margin

105000 x 100
350000

(ii) Net profit ratio

45850 + 7200
350000

RATIO ANALYSIS

x 100

30 %

15.16 %

Page 2

ALWADI INTERNATIONAL SCHOOL ACCOUNTING

AS LEVEL

NOTES

GRADE 11

(iii) Current ratio

88000
47150

1.87:1

(iv) Quick ratio

21500
47150

0.46:1

(v) Inventory turnover

245000
(31500 + 66500) / 2

5 Times

(vi) Non current assets turnover

160000 x 100
350000

45.71%

2.19 times

Or
350000 x 100
160000
(vii) Return on total assets

53050 x 100
248000

21.39%

(viii) Return on net assets

53050 x 100
120850

43.89%

(ix) Trade receivables collection period

21500 x 365
350000

23 Days

(x) Trade payables payment period

21000 x 365
280000

28 Days

(b) Definition & comments:

The gross profit margin expresses the gross profit as a proportion of sales revenue. The gross
profit percentage of 30% for the company is the same as the industry average. This is
satisfactory because it shows that the margin earned on revenue is equal to the companys
competitors and is not the cause of any unfavourable net profit percentage.

Net Profit margin is calculated with selling price (or revenue) taken as base times 100. It is the
percentage of selling price that is turned into profit. The percentage of 15.16% is worse than the
industry average of 18.07%, nearly 3% lower. As the gross profit percentage was favourable, it
shows that the expenses were comparatively more burdensome than the average. The net profit
percentage was calculated on profit from operations and if we consider the loan interest then
the percentage would further reduced by 2% (i.e. from 15.16% to 13.1%). Although the
company owns premises, it also pays rent. Non current assets have been depreciated by 25%

RATIO ANALYSIS

Page 3

ALWADI INTERNATIONAL SCHOOL ACCOUNTING

AS LEVEL

NOTES

GRADE 11

but it is not apparent whether this is on the straight line or the reducing balance method. The
depreciation charged may be higher than the average rate for the industry.

Current ratio measures a company's ability to pay short-term debts.The current ratio of 1.87:1 is
slightly lower than the industry average of 2.21:1. It may not be worse as a high ratio is not
necessarily good. At 1.87 it should be considered safe.

The Acid-test or quick ratio or liquid ratio measures the ability of a company to use its
current assets (excluding inventory) to cover its current liabilities. A liquid ratio of 0.46:1 is worse
than the industry average of 1.02:1 because of the large bank overdraft. It is probably about half
what it should be. As the trade payables payment period is only 28 days, the company must be
heavily reliant upon its bank overdraft to meet emergencies.

The inventory turnover ratio is an efficiency ratio that shows how effectively inventory is
managed by comparing cost of sales with average inventory for a period. This measures how
many times average inventory is "turned" or sold during a period. The inventory turnover ratio
is worse than the industrys average as it is only 5 times compared with 8 times for the
industry. Closing inventory is more than twice the opening inventory it suggests that the
inventory being carried is too high, which may result in additional costs for the company.

Non current assets turnover is an efficiency ratio which tells how successfully the company is
using its assets to generate revenue. If a company can generate more sales with fewer assets it
has a higher turnover ratio which tells it is a good company because it is using its assets
efficiently. A lower turnover ratio tells that the company is not using its assets optimally. The
companys non current assets turnover percentage of 45.71% is lower than the industry average
of 50.18%. The company is not using its non current assets as efficiently as the average
company. This may be due to the fact that accounts cover only the first year of the business
before it had become properly established.

Return on total assets measures the profit from operations in relation to the total assets. It
identifies how well the investments of the company (the total assets) have generated earnings
back to the company. Smart companies strictly control major purchases, attempting to limit
those that will best bring a return in greater revenue to the company. The return on total assets
is a useful way to measure how well the company is actually able to make intelligent choices on
how to spend its money on new assets. The return on total assets is 21.39% as compared to
industry average of 25.37%. Similarly, this may be explained by the fact that it is only the first
year of the business before it had become properly established.

The return on net assets compares profit from operations to net assets to see how well a
company is able to utilize its asset base to create profits. A high ratio of assets to profits is an
indicator of excellent management performance. The companys return on net assets of 43.89%
is higher than the industry average of 34.93%. This is unusual comparing the return on total
assets. It could be due to the high level of loan.

RATIO ANALYSIS

Page 4

ALWADI INTERNATIONAL SCHOOL ACCOUNTING

AS LEVEL

NOTES

GRADE 11

The trade receivables collection period is used to measure how effective a company is in
extending credit as well as collecting debts. A high ratio implies either that a company operates
on a cash basis or that its extension of credit and collection of trade receivables is efficient.
While a low ratio implies the company is not making the timely collection of credit. A period at 23
days is 2 days better than the industry average of 25 days. This marginally helps cash flow of
the company.

The trade payables payment period is a short-term liquidity measure used to quantify the rate at
which a company pays off its suppliers. If the payment period is falling from one period to
another, this is a sign that the company is taking longer to pay off its suppliers than it was
before. A period at 28 days is 2 days less than the industry average of 30 days. Failure to take
full advantage of the period of credit allowed by suppliers is generally not the most efficient
management of cash. An early payment is good for relations with suppliers, but not good for
cash flow.

Worked example 2:
The following information summarises the latest set of final accounts of Worky Tout & Co., a
partnership.
At 30 April 2014
Inventory $45000 (This was 50% more than the inventory at 30 April 2013)
For the year ended 30 April 2014
Inventory turnover 12 times
Gross profit margin 40%
Net profit margin 18%
Non current asset turnover 3 times

RATIO ANALYSIS

Page 5

ALWADI INTERNATIONAL SCHOOL ACCOUNTING

AS LEVEL

NOTES

GRADE 11

Average time taken by trade receivables to pay: 36 days (based on a year of 365 days)
Average time taken to pay trade payables: 40 days (based on a year of 365 days)
The current ratio is 3 : 1
The only current assets of the firm consist of inventory, trade receivables and balance at bank.
Partners drawings for the year $125000
All sales and purchases were on a credit basis
Required:
(a) Prepare, in as much detail as possible the income statement of Worky Tout & Co. for the year
ended 30 April 2014 and a statement of financial position as at that date. (All calculations should
be made to the nearest $000.)
The following information is available for Zenopad, a similar business, for the year ended
30 April 2014.
Inventory turnover 10 times
Gross profit margin 45%
Net profit margin 20%
Non current assets turnover 3 times
Time taken by trade receivables to pay
Time taken to pay trade payables

30 days (based on a year of 365 days)

28 days (based on a year of 365 days)

(b) Compare the performance of Worky Tout & Co. with that of Zenapod. Indicate the ratios which
show that one business is more efficient than the other. Your answer should be in sentence form
with supporting figures.
Suggested answer:
Workings:
W 1 Opening inventory

45000 x 100
150

$ 30000

W 2 Cost of sales

X
(30000 + 45000) / 2
450000

12 Times

=
W 3 Gross profit

450000 x 40
60

$ 300000

W 4 Sales

300000 + 450000

$ 750000

W 5 Net profit

750000 x 18

$ 135000

RATIO ANALYSIS

Page 6

ALWADI INTERNATIONAL SCHOOL ACCOUNTING

AS LEVEL

NOTES

GRADE 11

100
W 6 Non current assets

750000 / 3

$ 250000

W 7 Trade receivables

X
x 365
750000
750000 x 36
365

36 Days

$ 74000

=
W 8 Trade payables

465000 x 40
365

$ 51000

W 9 Bank (X)

45000 + 74000 + X
51000
119000 - 153000

3:1

$ 34000

X
(a)

Income statement for the year ended 30 April 2014

$

Sales (W 4)
(-) Cost of Sales:
Inventory (1 May 2013) (W 1)
(+) Purchases (balancing figure)
(+) Inventory (30 April 2014)
Cost of sales (W 2)
Gross Profit (W 3)
(-) Expenses:
Expenses
Net Profit (W 5)

$
750000

30000
465000
495000
(45000)
(450000)
300000
(165000)
135000

Statement of financial position as at 30 April 2014

Non current assets:
Non current assets (W 6)
Current assets:
Inventory
Trade receivables (W 7)
Bank (W 9)
(-) Current liabilities:
Trade payables (W 8)
Working capital
Net Assets

$
250000

45000
74000
34000
153000
(51000)
102000
352000

Financed by:

RATIO ANALYSIS

Page 7

ALWADI INTERNATIONAL SCHOOL ACCOUNTING

AS LEVEL

NOTES

Partners Capital (balancing figure)

(+) Net profit
(-) Drawings

GRADE 11

342000
135000
(125000)
352000

(b) Comments:
Inventory turnover

WTs stock turn of 12 times is better than Zs 10 times. WTs

gross profit percentage suggests that it is selling inventory at
prices below those charged by Z.

Gross profit %

WTs gross profit percentage at 40% is 5% lower than Zs. While

WTs prices may be lower than Zs, it is possible that Z is
obtaining supplies more cheaply than WT.

Net profit %

WTs net profit percentage at 18% is 2% lower than Zs.

However, WTs overheads are 22% of sales compared with Zs
25%. WT appears to control its costs more efficiently than Z.

Non
current
turnover

asset Z is utilising its assets more efficiently (i.e. 3.5 times) than WT 3
times. This is reflected in profitability of the firm.

Trade receivables days

WTs customers are taking 6 days longer to pay than Zs

customers. Z appears to have a more efficient credit control
system. If the trend continues than WT may face cash flow
problems in future.

Trade payables days

WT takes 12 days longer than Z to pay its suppliers. It suggests

that either WT may be straining its relations with its suppliers or Z
may not be taking full advantage of its credit to improve its cash
flow. Delaying payments to suppliers, may affect WTs stock turn
ratio and also probably may not be able to avail cash discounts
as well.

Worked example 3
The Profit and loss account of Ahmed a sole trader at 30 June 2008 has been drawn up and the
following balances remain in the books:
$
Ahmed capital

10% bank loan

90 000

Net profit

15 000

Trade creditors

29 00

Trade debtors

36 000

Stock, at cost

111 510

Plant and machinery, at cost

211 800

Provision for depreciation on plant and machinery

RATIO ANALYSIS

76 140

Page 8

ALWADI INTERNATIONAL SCHOOL ACCOUNTING

AS LEVEL

Premises, at cost

NOTES

GRADE 11

255 000

Cash in hand

1 170

Bank overdraft

45 000

Drawings

10000

Required:
(a)

Prepare the Balance Sheet at 30 June 2008, in a style, which clearly shows working capital,
Ahmed capital and the capital employed.

(b)

Explain the importance of the ratio for the return on capital employed when using ratio
analysis.

(c)

(i)

Calculate the current ratio and the quick ratio for Ahmed.

(ii)

State your interpretation of the ratios you have obtained in (c) (i).

(iii) Select three items used in your calculations in (c) (i). Which questions do you need to
ask about each of these to improve your interpretation of the ratios?

Suggested Answer
(a)

Ahmed
Balance Sheet at 30 June 2008

RATIO ANALYSIS

Page 9

ALWADI INTERNATIONAL SCHOOL ACCOUNTING

AS LEVEL

Fixed assets:

Premises at cost

NOTES

GRADE 11

$
255 000

Plant and machinery at cost

211 800

(-) Provision for depreciation

(76 140)
135 660
390660

Current assets:
Stock

111 510

Debtors

36 000

Cash in hand

1 170
(148 680)

(-) Current Liabilities:

Creditors

29 340

Bank Overdraft

45 000
74 340

Working Capital (Current assets Current liabilities)

74 340

Capital employed

465000

(-) Long term liabilities:

10% bank loan

(90000)

Net assets

375000

Financed by:
Ahmed Capital (1 July 2007)

370000

(+) Net profit

15000

(-) Drawings

(10000)

Capital (30 June 2008)

375000

(b) Importance of the ratio for the return employed when using ratio analysis are:
(i) Its main purpose is to give a dependable measure of judging the over-all efficiency or
inefficiency of the business. Rate of capital employed reveals how effectively the capital has
been used.

(ii) It reflects on a business borrowing policy. For example the return on capital employed is 8%
and the business has borrowed money at 9% then definitely the business borrowing policy is
bad and it should depend upon owned capital unless it is impossible for them.

RATIO ANALYSIS

Page 10

ALWADI INTERNATIONAL SCHOOL ACCOUNTING

(c)

(i) Current ratio

AS LEVEL

NOTES

GRADE 11

= Current Assets
Current liabilities
= Debtors + Stock + Cash in hand
Creditors + Bank overdraft
= 36 000 + 111510 + 1170
29 340 + 45 000
= 148 680
74 340
=2:1

Quick ratio

= Current Assets - Stock

Current liabilities
= Debtors + Cash in hand
Creditors + Bank overdraft
= 36 000 + 1170
29 340 + 45 000
= 37170
74 340
= 0.5 : 1

Comments Current ratio helps us to study the ability of the business in paying off its liabilities due in
the next 12 months. In the above workings the current ratio is 2 times that is Ahmed has
about $2 available in Current Assets to meet every $1 of its current financial obligations.
Quick ratio studies the ability of the business in paying off current liabilities within a short
notice, from assets readily convertible into cash. From the calculations in c (i) we see that
quick ratio is 0.5 to 1. This means that $0.50 is available in quick /liquid assets to meet
every $1 of its current financial obligations. This is not a healthy situation as the reputation of
the business will certainly suffer if the business cannot meet its liabilities when they fall due
for payment.

RATIO ANALYSIS

Page 11

ALWADI INTERNATIONAL SCHOOL ACCOUNTING

AS LEVEL

NOTES

GRADE 11

(i) Three items used in the calculations in c(i) are:

(a) Trade Debtors: Is there adequate provision for bad and doubtful debts?
(b) Stock: Are slow moving stock omitted or adequately written down before the
calculation of ratio?
(c) Trade Creditors: Are all the creditors due to be paid on the same date or they are
due at different intervals?

ACCOUNTING RATIOS - WORKSHEET

1.

The following information summarises the latest set of final accounts of Worky Tout & Co., a
partnership.

RATIO ANALYSIS

Page 12

ALWADI INTERNATIONAL SCHOOL ACCOUNTING

AS LEVEL

NOTES

GRADE 11

At 30 April 2008
Stock $45000 (This was 50% more than the stock at 30 April 2007)
For the year ended 30 April 2008
Stockturn 12 times
Gross profit margin 40%
Net profit margin 18%
Fixed asset turnover 3 times
Average time taken by debtors to pay: 36 days (based on a year of 365 days)
Average time taken to pay creditors: 40 days (based on a year of 365 days)
The current ratio is 3 : 1
The only current assets of the firm consist of stock, debtors and balance at bank.
Partners drawings for the year $125000.
All sales and purchases were on a credit basis.
Required:
(c) Prepare, in as much detail as possible the Trading and Profit and Loss Account of Worky Tout &
Co. for the year ended 30 April 2008 and a Balance Sheet as at that date. (All calculations
should be made to the nearest $000.)
The following information is available for Zenopad, a similar business, for the year ended
30 April 2008.
Stockturn 10 times
Gross profit margin 45%
Net profit margin 20%
Fixed asset turnover 3 times
Time taken by debtors to pay
Time taken to pay creditors

30 days (based on a year of 365 days)

28 days (based on a year of 365 days)

(d) Compare the performance of Worky Tout & Co. with that of Zenapod. Indicate the ratios which
show that one business is more efficient than the other. Your answer should be in sentence form
with supporting figures.

2.

Najim wants to analyse the results of his trading for the year ended 31 December 2008 and has
prepared his Trading and Profit and Loss Account and Balance Sheet. He compares these with the
final accounts for the previous year. The Trading and Profit and Loss Accounts and Balance Sheet
for the two years are as follows.

RATIO ANALYSIS

Page 13

ALWADI INTERNATIONAL SCHOOL ACCOUNTING

AS LEVEL

NOTES

GRADE 11

Trading and Profit and Loss Accounts

Sales
(-) Cost of sales:
Opening stock
(+) Purchases
(-) Closing stock
Gross profit
(-) Expenses
Net Profit

For the year ended

For the year ended
31st December 2007
31st December 2008
$
$
$
$
172308
187500
12000
116000
128000
16000

112000
60308
38769
21539

16000
125500
141500
14000

127500
60000
32678
27322

Balance Sheet as at

Fixed assets (net book values)

Current assets:
Stock
Trade debtors
Bank
(-)Current liabilities:
Trade Creditors
Financed by:
Opening capital
(+) Net profit
(-) Drawings

31 . 12 . 2007

31 . 12 . 2008

$
78322

16000
9914
4851
30765
13984

$
93750

14000
12511
7185
33696
16781
95103

17192

81176
21539
102715
7612
95103

16504
110254
95103
27322
122425
12171
110254

Further information:
1. 60% of Najims sales are on credit.
2. Najim purchases all his stock of goods on credit.
3. The only current assets are stock, trade debtors and a bank balance.

Required:

RATIO ANALYSIS

Page 14

ALWADI INTERNATIONAL SCHOOL ACCOUNTING

AS LEVEL

NOTES

GRADE 11

(b) Calculate the following ratios to two decimal places for each of the years ended 31 December
2007 and 2008:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)

Gross profit percentage.

Net profit percentage.
Fixed assets turnover.
Stockturn.
Debtors days.
Creditors days.
Current ratio.
Liquid (acid test) ratio.

(c) Compare the performance of Najims business in 2008 with its performance in 2007 using the
ratios calculated in (a), and comment on the comparison.
3.

Patience has mislaid her final accounts for the year ended 31 December 2008 but has found the
report, which her accountant has prepared, based on those accounts. She has decided to
reconstruct the accounts from the information contained in the report. The accountants report
contained the following data.
At 31 December 2008:
Stock $54000 (This was 20% more than the stock at 1 January 2008)
For the year ended 31 December 2008:
Stock
Gross profit margin
Net profit margin
Fixed asset turnover
Debtors days
Creditors days
Current ratio

10 times
35%
22%
4 times
34 (based on 365 days in the year)
42 (based on 365 days in the year)
2.5: 1

The current assets consist of stock, trade debtors and bank balance.
All sales and purchases were made on credit.
Patience drew $140000 from business during the year.
Required:
(a) Prepare, in as much detail as possible, Patiences Trading and Profit and Loss Account for the
year ended 31 December 2008 and the Balance Sheet at that date. Make all calculations to the
nearest $.

Virtue carries on a similar business to that of Patience and has the following data for the year
ended 31 December 2008.

RATIO ANALYSIS

Page 15

ALWADI INTERNATIONAL SCHOOL ACCOUNTING

Stockturn
Gross profit margin
Net profit margin
Fixed asset turnover
Debtors days
Creditors days

AS LEVEL

NOTES

GRADE 11

12 times
40%
20%
5 times
31
36

Required:
(b) Compare Virtues performance with that of Patience and indicate the ratios that show which
business is the more efficient. You should write your answer in sentence form and include
supporting figures.
4.

During the year to 31 December 2008 Timberlake Ltd has attempted to stimulate sales and
increase its profits by reducing selling prices, holding larger stocks and giving customers longer
credit. All of the companys purchases and sales are on credit terms. The summarised accounts for
the years to 31 December 2007 and 2008 are as follows:
Timberlake Ltd
Profit and Loss accounts for the year to 31 December
2007
$000
3725
2905
820
45
775
25
750
225
525
400
125

Turnover
(-) Cost of sales
Gross profit
(-) Net operating expenses
Operating profit
(-)Interest payable
Profit on ordinary activities before taxation
(-)Tax on profit on ordinary activities
Profit on ordinary activities after taxation c/f
(-) Dividend
Retained profit for the year

2008
$000
5327
4420
907
87
820
130
690
215
475
400
75

Timberlake Ltd
Balance sheets as at 31 December
Fixed assets
Current assets:
Stocks
Debtors
Bank
(-) Creditors due within a year:
Trade creditors
Taxation
Dividends
Net Current Assets

RATIO ANALYSIS

$000
5100

$000
5520

730
596
400
1726

1334
1278
11
2623

618
225
400
1243

1020
215
400
1635
483

988

Page 16

ALWADI INTERNATIONAL SCHOOL ACCOUNTING

(-)Creditors due more than a year:

Debenture loans
Share Capital and reserves:
Ordinary shares of $1each
Profit and loss account

AS LEVEL

NOTES

5583

6508

150
5433

1000
5508

2000
3433
5433

2000
3508
5508

GRADE 11

Required:
Calculate the following ratios for Timberlake Ltd for each of the two years concerned and comment
on your results:
(a) Return on total capital employed
(c) Gross profit margin
(e) Current ratio
(g) Stock holding period
5.

(b) Return on equity

(d) Net profit margin
(f) Quick ratio
(h) Debtor collection period

The following information concerns two companies - one of which manufactures electrical
components and the other is a goods retailer.
Cost of goods sold
Gross profit margin
Net profit ratio
Current ratio
Debtor days outstanding
(calculation based on total sales)
Stock
Bank balance (debit)
Loan capital
Gearing ratio (Loans as a percentage of total capital
employed)

Company A
$400000
50%
15%
1.5 : 1

Company B
$1050000
30%
5%
6.6 : 1

45 days
$ 40000
$ 28000
$1200000

6 days
$ 50000
$ 15000
$100000

60%

12%

Note: Figures for assets and liabilities relate to the balance sheet figures at the end of the
year. You may assume that there are 360 days in the year.
Required:
(a) Identify (giving at least two reasons) which company is the electrical manufacturer and which is
the food retailer.
(b) Prepare, so far as the information allows, profit and loss accounts and balance sheets for both
companies for the past year.

6.

(c) What is meant by liquidity? Which company would you regard as the more likely to have liquidity
problems? Why?
AX Limited is a manufacturing company which has experienced rapid growth in recent years. The
financial director is concerned that although the company is apparently trading successfully, some
elements of working capital appear to be getting out of control. He tells you that three years ago

RATIO ANALYSIS

Page 17

ALWADI INTERNATIONAL SCHOOL ACCOUNTING

AS LEVEL

NOTES

GRADE 11

our debtors used to pay us in 35 days, and we could usually pay our creditors within 30 days, and
we always had some cash at the bank.

Sales (all on credit)

Purchases (all on credit)
Cost of goods sold
Stocks (31 October)
Debtors (31 October)
Bank account (overdraft),(31 October)
Creditors(31 October)
Total Net assets

31 October 2007
$
350 000
250 000
230 000
45 000
72 000
6 000
35 000
130 000

31 October 2008
$
680 000
440 000
390 000
95 000
175 000
(15 000)
127 000
330 000

Required:
(a) Calculate in days, the stock turnover, Debtors turnover, and creditors turnover ratios, to each of
the above two years Use the figures given above. Do not use average figures.
(b) Calculate the length of the working capital cycle in days for each year.
(c) Explain what these figures tell you about AX Ltds working capital management and the liquidity
position. Use additional appropriate ratios to illustrate your answer.
(d) If AX Ltd has plans to increase its sales by 60% in the year to 31 October 2008, what effects is
this likely to have on its bank overdraft balance? Assume that the components of the working
capital cycle also increase by 60%.
(e) (i) What is meant by over-trading?
(ii) List the main symptoms of over-trading, referring to the data for AX Limited.

7.

(a) (i) Describe three different types of Preference shares.

(ii) State the major differences between Ordinary shares, Preference shares and Debentures.

RATIO ANALYSIS

Page 18

ALWADI INTERNATIONAL SCHOOL ACCOUNTING

AS LEVEL

NOTES

GRADE 11

On 1 October 2001 Manny Kyoor and his wife formed a limited company, Kyoor Ltd, to run a
beauticians business, and each paid in $37500 as share capital. The bank loaned the company
a further $80000 at 9% interest per annum. At 30 September 2002 the businesss final accounts
were drawn up as follows:
Trading and Profit and Loss Account for the year ended 30 September 2002
$
Sales and fees
(-) Cost of Sales:
Stock (1 October 2001)
(+) Purchases
(+) Stock (30 September 2002)
Gross Profit
(-) Expenses:
Rent and Rates
Advertising
Wages
Heat and Light
Interest due
Depreciation

$
350000

31500
280000
311500
66500

245000
105000

3950
1750
29000
5250
7200
12000
59150
45850

Net Profit
Balance Sheet as at 30 September 2002
Cost
Depn
$
$
Premises
124000
Fixtures and fittings
48000
12000
172000
12000
Current Assets
Stock
66500
Debtors
21500
88000
Fixed Assets

Amounts to be settled within one year

Creditors
Interest due
Bank overdraft
Amounts to be settled after more than one year
Long term loan

21000
7200
18950

47150

NBV
$
124000
36000
160000

40850
200850
80000
120850

Share Capital and Reserves

75000 Ordinary shares of $1 each
Retained profit

75000
45850
120850
Industry average ratios and other relevant data concerning businesses similar to Kyoor Ltd were as
follows:

RATIO ANALYSIS

Page 19

ALWADI INTERNATIONAL SCHOOL ACCOUNTING

(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)

AS LEVEL

NOTES

GRADE 11

Gross Profit percentage

30.00%
Net Profit percentage
18.07%
Current ratio
2.21:1
Liquid (Quick) ratio
1.02:1
Stock Turnover ratio
8 times
Fixed Assets to Sales
50.18%
Return on Total Assets
25.37%
Return on Net Assets
34.93%
Debtors Payment period
25 days
Creditors payment period
30 days

(b) Calculate each of the above ratios, to 2 decimal places, for Kyoor Ltd.
(c) Comment on the business performance in the light of the data for the industry.
8.

Following are the summarised Profit Statements and Balance Sheets for Greenyards
manufacturing company, and Poynder Ltd, a retailer.
Greenyards Ltd
Profit Statements for the
years ended 31 March
Sales
Cost of sales
Operating costs
Loan interest paid
Net profit
Balance sheets at 31 March
Fixed Assets at Net Book Value
Stock
Debtors
Bank
Creditors
Share capital
Retained profit
Long term loans

Poynder Ltd

2001
$000
500
(245)
(225)
(7)
23

2002
$000
610
(355)
(230)
(10)
15

2001
$000
425
(210)
(190)
(7)
18

2002
$000
460
(230)
(200)
(3)
27

150
50
20
10
(25)
205

225
60
30
(35)
(20)
260

220
27
13
(35)
225

175
20
57
(50)
202

50
95
60
205

50
110
100
260

50
100
75
225

50
127
25
202

Required:
(a) Use Six ratios to compare the managements performance from 2001 to 2002 for each
company. Use year end figures, not averages, to calculate ratios. Give answers to a
maximum of one decimal place. Show all workings.
(b) Comment on your findings.
(c) State six short comings or dangers in using ratio analysis.

RATIO ANALYSIS

Page 20

ALWADI INTERNATIONAL SCHOOL ACCOUNTING

9.

AS LEVEL

NOTES

GRADE 11

The summarised final accounts of two very similar companies are given below. The similarities
extend to both products and areas where the products are sold.
Summarised Trading and profit and Loss Accounts for 2008

Sales
(-) Cost of sales:
Opening Stock
Purchases
Closing Stock
Cost of sales
Gross profit
(-)
Interest payable
Expenses
Net profit

Alpha Ltd
$000
$000

Omega Ltd
$000
$000

480
1120
1600
600

600
1550
2160
660
1000
400

170

170
230

1500
600
30
190

220
380

Balance Sheet as at 31 December 2008

Ordinary Share of $ 1
General Reserve
Profit & Loss account
Loan (Repayable 2010)
Trade Creditors
Bank overdraft

Alpha Ltd
$000
600
400
120
220
1400

Omega Ltd
$000
600
300
100
300
240
160
1700

Fixed Assets
Stock
Trade Debtors
Bank

Alpha Ltd
$000
420
600
280
100
1400

Omega Ltd
$000
680
660
360
1700

Required:
(a) Calculate the following ratios for both of the companies:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)

Net operating profit to sales;

Stock (inventory) turnover;
Turnover/ Fixed Assets;
Return on long term capital employed;
Collection period to debtors;
Return on equity;
Acid test (quick) ratio.

(b) From the information available to you, including the ratios calculated in (a), compare the
performance of the two companies, using two criteria:
(i)
(ii)

Profitability;
Liquidity.

(c) Identify and explain two possible limitations in the use of ratios.

RATIO ANALYSIS

Page 21

ALWADI INTERNATIONAL SCHOOL ACCOUNTING

AS LEVEL

NOTES

GRADE 11

MULTIPLE CHOICE QUESTIONS:

RATIO ANALYSIS

Page 22

ALWADI INTERNATIONAL SCHOOL ACCOUNTING

RATIO ANALYSIS

AS LEVEL

NOTES

GRADE 11

Page 23

ALWADI INTERNATIONAL SCHOOL ACCOUNTING

RATIO ANALYSIS

AS LEVEL

NOTES

GRADE 11

Page 24

ALWADI INTERNATIONAL SCHOOL ACCOUNTING

RATIO ANALYSIS

AS LEVEL

NOTES

GRADE 11

Page 25