Theory question 109
Interpretation of AccountsThe following financial statements relate to Peter Associates for the year ended 31st December, 2021.
Trading, Profit and Loss Account for the year ended 31st December, 2021 (Le)
Opening Stock 110,500; Add: Purchases 545,250 = 655,750; Add: Carriage inwards 184,250 = 840,000; Less: Closing stock 140,000 = 700,000; Gross profit c/d 340,000; total 1,040,000 | Sales 1,040,000
Expenses: General expenses 50,000; Bad debt 50,000; Salaries 100,000; Net profit c/d 140,000; total 340,000 | Gross profit b/d 340,000
Balance Sheet as at 31st December, 2021 (Le)
Financed by: Ordinary share capital 200,000; General reserves 20,000; Profit 140,000
Current Liabilities: Bank overdraft 30,000; Trade creditors 20,000 = 50,000; total 410,000
Fixed Asset 190,000
Current Assets: Stock 140,000; Debtors 50,000; Bank 30,000 = 220,000; total 410,000
You are required to calculate:
(a) Returns on shareholders' fund;
(b) Acid test ratio;
(c) Net profit margin;
(d) Working capital ratio;
(e) Stock turnover ratio.
Show the model answer
(a) Return on shareholders' fund = net profit ÷ shareholders' fund × 100 = 140,000 ÷ (200,000 + 20,000 + 140,000 = 360,000) × 100 = 38.89%.
(b) Acid test ratio = (current assets − stock) ÷ current liabilities = (220,000 − 140,000) ÷ 50,000 = 1.6:1.
(c) Net profit margin = 140,000 ÷ 1,040,000 × 100 = 13.46%.
(d) Working capital (current) ratio = 220,000 ÷ 50,000 = 4.4:1.
(e) Stock turnover = cost of sales ÷ average stock = 700,000 ÷ ((110,500 + 140,000) ÷ 2 = 125,250) = 5.59 times.
State each formula, substitute and give the unit.