Theory question 109
Interpretation of Accounts9. The following were extracted from the books of Mid-Land Company:
Trading and Profit and Loss Accounts for the year ended 31st December, 2005: Sales N500,000; less cost of goods sold: opening stock N30,000 + purchases N400,000 = N430,000 − closing stock N50,000 = N380,000; gross profit N120,000; less expenses N50,000; net profit N70,000.
Balance Sheet as at 31st December, 2005: Fixed assets N101,000; current assets: stock N50,000, debtors N15,000, cash N10,000 = N75,000; total N176,000; less current liabilities: creditors N20,000; N156,000. Financed by: capital N143,000; add net profit N70,000; less drawings N57,000 (N13,000); N156,000.
You are required to calculate: (a) stock turnover; (b) gross profit to sales; (c) current ratio; (d) acid-test ratio; (e) return-on-capital employed
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(a) Stock turnover = cost of sales ÷ average stock = 380,000 ÷ ((30,000 + 50,000) ÷ 2) = 380,000 ÷ 40,000 = 9.5 times.
(b) Gross profit to sales = 120,000 ÷ 500,000 × 100 = 24%.
(c) Current ratio = 75,000 ÷ 20,000 = 3.75 : 1.
(d) Acid-test ratio = (75,000 − 50,000) ÷ 20,000 = 1.25 : 1.
(e) Return on capital employed = 70,000 ÷ 156,000 × 100 = 44.9% (on opening capital 143,000 it is 49%).
Write each formula, then substitute.