Theory question 109
Interpretation of Accounts9. Below are the final accounts of Dream Bird Ltd.
Trading, Profit, loss and appropriation accounts for the year ended 30th April, 2006 (D): Opening stock 497,250; add purchases 1,453,500 = 1,950,750; less closing stock 726,750 = 1,224,000; gross profit c/d 816,000; sales 2,040,000. Total expenses 714,000; net profit c/d 102,000. Proposed dividend 76,500; balance c/d 63,750; balance b/d 38,250; net profit b/d 102,000.
Balance Sheet as at 30th April, 2006 (D): Authorised and issued share capital 1,020,000 shares at 1D each 1,020,000; revenue reserve: general reserve 126,000, profit and loss 63,750 (189,750); long-term liability 7% debentures 63,750; current liability: creditors 382,500, proposed dividend 76,500 (459,000); total 1,732,500. Fixed assets 840,000 less depreciation 255,000 = 585,000; current assets: stock 726,750, debtors 280,500, bank 140,250 (1,147,500); total 1,732,500.
You are required to use the above final accounts of Dream Bird Ltd. to calculate the following: (a) working capital; (b) gross profit margin; (c) net profit margin; (d) current ratio; (e) quick (acid-test) ratio; (f) rate of stock turnover; (g) returns on capital employed; (h) owners equity.
Show the model answer
(a) Working capital = 1,147,500 − 459,000 = 688,500.
(b) Gross profit margin = 816,000 ÷ 2,040,000 × 100 = 40%.
(c) Net profit margin = 102,000 ÷ 2,040,000 × 100 = 5%.
(d) Current ratio = 1,147,500 ÷ 459,000 = 2.5 : 1.
(e) Quick ratio = (1,147,500 − 726,750) ÷ 459,000 = 420,750 ÷ 459,000 = 0.92 : 1.
(f) Stock turnover = cost of sales ÷ average stock = 1,224,000 ÷ ((497,250 + 726,750) ÷ 2 = 612,000) = 2 times.
(g) Capital employed = total assets − current liabilities = 1,732,500 − 459,000 = 1,273,500; ROCE = 102,000 ÷ 1,273,500 × 100 = 8.0%.
(h) Owners' equity = share capital 1,020,000 + reserves 189,750 = 1,209,750.
Write each formula before substituting the figures.