AFU 07202
TUTORIAL QUESTIONS FINANCIAL RATIO ANALYSIS
QUESTION ONE
Musanze Ltd is an indigenous supermarket that is being taken over by an international company
from France. Media reports cite high levels of debt, losses and poor liquidity position in 2019
as the reasons for the takeover. Gasabo Ltd is the main competitor of Musanze Ltd in Rwanda.
The management of Gasabo Ltd is restless following the news of the takeover since Musanze
Ltd was viewed as a big company far from a takeover. The directors of Gasabo Ltd are
requesting for an evaluation of the performance of Gasabo Ltd and Musanze Ltd before the
next board meeting. Statements of profit or loss for the two companies for the year ended
31December, 2019 as follows:
Musanze Ltd Gasabo Ltd
Sales 2,220,000 3,000,000
Less cost of sales:
Opening inventory 400,000 320,000
Purchases 800,000 1,280,000
Closing inventory -240,000 -960,000 -280,000
Gross profit 1,260,000 1,680,000
Operating expenses -860,000 -1,080,000
Operating profit 400,000 600,000
Finance costs -12,000 -80,000
Profit Before tax 388,000 520,000
Tax -116,400 -156,000
Net profit 271,600 364,000
Statements of financial position as at 31 December, 2019
Musanze Ltd Gasabo Ltd
Non-current assets: Tshs Tshs
Property, plant & equipment at cost 200,000 400,000
Accumulated depreciation -80,000 120,000 -100,000 300,000
Current assets:
Inventory 240,000 280,000
Accounts receivable 500,000 400,000
Bank 100,000 50,000
Cash 20,000 860,000 160,000 890,000
Total assets 980,000 1,190,000
Equity & liabilities:
Share capital 780,000 580,500
Share premium 15,600 9,000
Retained earnings 873,600 615,000
Non-current liabilities:
Bank loan 80,000 540,000
Current liabilities:
Trade accounts payable 16,000 20,000
Expenses payable 10,400 26,400 15,000 35,000
Total equity and liabilities 980,000 1,190,000
REQUIRED:
From the financial information provided above:
(a) Compute the following ratios:
(i). Gross profit margin.
(ii).Operating profit margin.
(iii). Current ratio.
(iv). Acid test ratio
(v). Debtor Collection days.
(vi). Creditor Payment days.
(vii). Gearing ratio.
(viii). Interest cover.
QUESTION TWO
The following figures were taken from the books of Abena Sekyiwaa, a sole trader;
Tshs
Credit Sales 265,000
Cash Sales 148,000
Cost of Sales 90,000
Trade Receivables 22,500
Trade Payables 11,420
Operating Expenses 84,000
Required:
Assuming 360 days in a year, calculate the following ratios
(i) Gross Profit to sales
(ii) Net Profit to Sales
(iii) Receivables (Debtors) Collection Days
(iv) Payables (Creditors ) Payment Days
QUESTION THREE
For the Jarmon Company, compute the free cash flows and answer the “four questions.” For
year ending June 30, 2007.
T. P. Jarmon Company Balance Sheets For 6/30/03 and 6/30/04
2006 2007
Cash 15,000 14,000
Marketable securities 6,000 6,200
Accounts receivable 42,000 33,000
Inventory 51,000 84,000
Prepaid rent 1,200 1,100
Total current assets 115,200 138,300
Net plant and equipment 286,000 270,000
Total assets 401,000 408,300
2006 2007
Accounts payable 48,000 57,000
Notes payable 15,000 13,000
Accruals 6,000 5,000
Total current liabilities 69,000 75,000
Long-term debt 160,000 150,000
Common stockholder’s equity 172,200 183,300
Total liabilities and equity 401,200 408,300
T. P. Jarmon Company Income Statement For the Year Ended 6/30/04
Sales 600,000
Less: cost of goods sold 460,000
Gross profits 140,000
Less: expenses
General and administrative 30,000
Interest 10,000
Depreciation 30,000
Total 70,000
Earnings before taxes 70,000
Less: taxes 27,100
Net income avail. to common 42,900
Less: cash dividends 31,800
To retained earnings 11,100
INDUSTRY NORMS
Current Ratio 1.8
Acid Test Ratio .9
Debt Ratio .5
Times Interest Earned 10
Average Collection Period 20, days
Inventory Turnover 7
Oper. Income Return on Invest. 16.8%
Operating Profit Margin 14%
Gross Profit Margin 25%
Total Asset Turnover 1.2
Fixed Asset Turnover) 1.8
Return on equity 12%
QUESTION FOUR
The following information is from max PLC, financial statements;
Sales (all credit) were 200,000,000 for the year 2007,
Sales to total assets 2 times
Total debts to assets 30%
Current ratio 3.0
Inventory turnover 5 times
Average collection period 18days
Non current assets turnover 5 times
Required: Fill in the max Balance sheet the missing items
NON CURRENT&CURRENT ASSETS .......................................................?
CURRENT ASSETS
Inventory ---------------------------?
Accounts receivable -------------------------------?
Cash -----------------------.......?
Total current assets --------------------------?
TOTAL ASSETS ------------------------------?
EQUITY ...........................................................?
Non –current liabilites ----------------------?
Current liabilities --------------------------?
TOTAL EQUITY &LIABILITIES --------------------------?
QUESTION FIVE
The following information is available about Chaugimbi Company for 2019. All sales are on
credit.
ITEM AMOUNT
Average cash and marketable securities 1,000,000
Average inventory 5,000,000
Average accounts receivable 3,000,000
Total current assets 9,000,000
Total assets 21,000,000
Average accounts payable 3,000,000
Long term bonds 8,000,000
Net equity 10,000,000
Total sales 40,000,000
Net profit before interest and tax 4,000,000
Net profit after tax 2,000,000
Cost of sales 25,000,000
Calculate the following ratio
i. Interest coverage r
ii. Chaugimbi company inventory turnover;
iii. Return on total asset for Zax company;
iv. Chaugimbi creditors payment period;
v. Chaugimbi ‘s return on shareholders’ equity ratio for 2019 was;
QUESTION SIX
NASACO Ltd., was completely destroyed by fire and all accounting and
financialVinformation were burnt. However, on going through the Director of Finance’s
briefcase which was salvaged by the owner, the following key data for the accounts for the
year ended June 30, 2005 were found:
i) Current ratio 1.75
ii) Liquid Ratio 1.25
iii) Stock Turnover (Cost of Sales / Closing Stock) 9
iv) Gross Profit Ratio – 25% of sales
v) Debt Collection Period – 1 1 months
2
vi) Reserves and Profit and Loss to Capital – 2
vii) Turnover to Fixed Assets – 1.2
viii) Capital Gea2ing Ratio – 0.6
ix) Fixed Assets to Net Worth – 1.25
x) Sales for the year Tshs. 1,200,000,000
REQUIRED: Reconstruct the Balance Sheet of NASACO Ltd., as at June 30, 2005 using the
above information.
QUESTION SEVEN
(a) What is Ratio Analysis?
(b) Differentiate Trend analysis from Common size Analysis
(c) Explain five advantages and disadvantages of Ratio analysis
(d) What are seven limitations of Ratio analysis?
QUESTION EIGHT
The following are financial statements of Yellow-Star Company for the year ending 30th
June 2015.
Yellow-Star Statement of financial position as at 30th June 2015
2014 2015
Assets
Non-current Assets
Property, plant and equipment (PPE) 350,700 360,020
Goodwill 80,800 91,200
Total non-current assets 431,500 451,220
Current Assets
Inventories 135,230 132,500
Trade receivables 91,600 110,800
Cash and cash equivalents 312,400 322,900
Total Curent Assets 539,230 566,200
Total Assets 970,730 1,017,420
EQUITY AND LIABILITIES
Equity
Share capital 480,000 500,000
Retained earnings 144,030 151,600
Total equity 624,030 651,600
Non-current liabilities
Long-term borrowings 148,600 127,400
Current liabilities
Trade Creditors and other payables 115,100 187,620
Bank Overdrafts 83,000 50,800
Total current liabilities 198,100 238,420
Total liabilities 346,700 365,820
Total equity & Liabilities 970,730 1,017,420
Yellow-Start Statement of financial position as at 30th June
2015
2014 2015
Sales 340,000 315,000
COGS 156,500 105,600
Gross Profit 183,500 209,400
Other Operating Expenses 97,000 55,000
Operating Income (PBIT) 86,500 154,400
Required.
a) Use Horizontal analysis to analysis profitability of the company in year 2015
b) Change the financial position and the income statement of the into common size income
statement
c) Calculate the following ratios
i. Return on Capital Employed (ROCE) for the two Years
ii. Current ratio for the two Years
iii. Quick/acid test ratio
d) Basing on the ratios calculated in c) above, provide an analysis on firm’s profitability
and Liquidity
QUESTION NINE
The following information were extracted from the financial statements of White-Stars
Company
2014 2015 Industry Average
Sales 3,005,000 3,675,000 2,880,000
COGS 2,566,270 3,028,200 2,433,600
Gross Profit 438,730 646,800 446,400
Other Operating Expenses 369,615 319,725 126,720
Operating Income (PBIT) 69,115 327,075 319,680
Interest Expenses 90,150 40,425 31,680
Profit Before Tax (21,035) 286,650 288,000
Additional information
Current Assets 1,000,000 1,200,000 950,000
Current Liabilities 750,000 800,000 320,000
Equity 2,050,000 2,336,650 2,624,650
Long-Term Debts 1,800,000 500,000 2,000,000
Required
a) Use Horizontal analysis to analysis profitability of the company in year 2015
b) Change the income statement of the into common size income statement
c) Calculate the following ratios
iv. Return on Capital Employed (ROCE) for the two Years
v. Current ratio for the two Years
d) Basing on the ratios calculated in c) above, provide an analysis on firm’s profitability
and Liquidity
