Theory question 109
Interpretation of AccountsThe following information was extracted from the books of Abudabhi & Sons Ltd:
(A) Trading, Profit and Loss Account for the year ended 31st December, 2014 (₦)
Sales 360,000
Opening stock 30,000; Add: Purchases 210,000 = 240,000; Less: Closing stock 40,000 → (200,000); 160,000
Salaries 92,500; Directors' fees 5,000; Insurance 1,600; Travelling expenses 3,400; Utilities 4,000; General expenses 1,000; Depreciation 12,500 → (120,000); 40,000
Taxation (10,000); 30,000
Dividends (15,000); Retained profit for the year 15,000
Retained profit brought forward 35,000
Retained profit carried forward 50,000
All sales and purchases were on credit.
(B) Balance sheet as at 31st December, 2014 (₦)
400,000 Ordinary shares @ ₦0.25 each 100,000; Retained profits 50,000; Shareholders' funds 150,000
Represented by: Land and building 90,000; Motor vehicle 15,000 = 105,000
Current Assets: Stock 40,000; Debtors 30,000; Bank 17,000; Cash 3,000 = 90,000
Less: Current liabilities: Creditors 20,000; Dividend payable 15,000; Taxation 10,000 = (45,000)
Net Assets 150,000
You are required to calculate: (a) Stock turnover ratio; (b) Gross profit margin; (c) Net profit margin; (d) Current ratio; (e) Acid test ratio.
Show the model answer
(a) Stock turnover = cost of sales ÷ average stock = 200,000 ÷ ((30,000 + 40,000) ÷ 2 = 35,000) = 5.71 times.
(b) Gross profit margin = 160,000 ÷ 360,000 × 100 = 44.44%.
(c) Net profit margin = 40,000 ÷ 360,000 × 100 = 11.11% (before tax).
(d) Current ratio = 90,000 ÷ 45,000 = 2:1.
(e) Acid test ratio = (90,000 − 40,000) ÷ 45,000 = 1.11:1.
Use cost of sales and average stock for turnover; use net profit before tax for the margin.