Theory question 109
Interpretation of Accounts9. The following are the summarized balance sheets of Farouk Nig. Limited at 31st December, 2005 and 2006 (2006; 2005):
Fixed assets: Land and buildings N320,000; N320,000. Equipment (at cost) N100,000; N80,000 (N420,000; N400,000). Goodwill N80,000; N80,000. Total N500,000; N480,000.
Current assets: Stock N260,000; N240,000. Debtors N240,000; N200,000. Bank N48,000; N60,000. Cash in hand N112,000; N60,000. Total N660,000; N560,000.
Total assets N1,160,000; N1,040,000.
Share capital: Ordinary shares of N1.00 each N480,000; N400,000. Profit and Loss Account N320,000; N340,000.
Current liabilities: Creditors N344,000; N260,000. Accruals N16,000; N40,000. Total N360,000; N300,000.
Total N1,160,000; N1,040,000.
The net profit for the years were: 2005: N120,000; 2006: N88,000.
You are required to calculate for the years 2005 and 2006: (a) working capital; (b) current ratio; (c) acid test ratio; (d) return on capital employed; (e) stock to current assets ratio; and (f) capital employed.
Show the model answer
(2006; 2005)
(a) Working capital = current assets − current liabilities: 660,000 − 360,000 = 300,000; 560,000 − 300,000 = 260,000.
(b) Current ratio: 660 ÷ 360 = 1.83 : 1; 560 ÷ 300 = 1.87 : 1.
(c) Acid test ratio = (current assets − stock) ÷ current liabilities: 400 ÷ 360 = 1.11 : 1; 320 ÷ 300 = 1.07 : 1.
(f) Capital employed = total assets − current liabilities (= shareholders' funds): 800,000; 740,000.
(d) Return on capital employed = net profit ÷ capital employed: 88,000 ÷ 800,000 = 11%; 120,000 ÷ 740,000 = 16.2%.
(e) Stock to current assets: 260 ÷ 660 = 39.4%; 240 ÷ 560 = 42.9%.
Work out capital employed first because ROCE uses it.