Theory question 108
Interpretation of AccountsThe following information were extracted from the books of Toyebi Ltd.
Trading, Profit and Loss Account for the year ended 31st December 2022
Opening stock $63,000
Add: Purchases $215,000
$278,000
Less: Closing stock $50,300
Cost of goods sold $227,700
Gross profit c/d $190,650
$418,350 | Sales $418,350
Expenses $150,650
Net profit $40,000
$190,650 | Gross profit b/d $190,650
Balance Sheet as at 31st December 2022
Capital $110,500
Add: Net profit $40,000
$150,500
Less: Drawings $21,400
$129,100
Current Liability: Creditors $41,750
$170,850
Fixed Assets $69,700
Current Assets: Stock $50,300; Debtors $32,500; Cash $18,350
$170,850
You are required to calculate: (a) Rate of stock turnover; (b) Gross profit margin; (c) Current ratio; (d) Acid test ratio; (e) Return on capital employed.
Show the model answer
(a) Rate of stock turnover = cost of goods sold ÷ average stock = 227,700 ÷ ((63,000 + 50,300) ÷ 2 = 56,650) = 4.02 times.
(b) Gross profit margin = gross profit ÷ sales × 100 = 190,650 ÷ 418,350 × 100 = 45.57%.
(c) Current ratio = current assets ÷ current liabilities = (50,300 + 32,500 + 18,350 = 101,150) ÷ 41,750 = 2.42:1.
(d) Acid test ratio = (current assets − stock) ÷ current liabilities = (101,150 − 50,300 = 50,850) ÷ 41,750 = 1.22:1.
(e) Return on capital employed = net profit ÷ capital employed × 100 = 40,000 ÷ 129,100 × 100 = 30.98% (≈ 31%). (Capital employed = total assets 170,850 − current liabilities 41,750 = 129,100.)
Write each formula, substitute the figures, then give the answer with its unit (times, %, :1).