INSTITUTE OF FINANCE MANAGEMENT (IFM)
DEPARTMENT OF ACCOUNTING AND FINANCE
INTRODUCTION TO ACCOUNTING
RATIO ANALYSIS – TUTORAL QUESTION
Questions
1. Define ratio;
2. Why ratios are computed?
3. What is trend analysis?
4. What is the importance of computing liquidity ratios?
5. List down common types of profitability ratios;
6. Briefly explain window dressing;
7. What are the uses of risk ratios? and
8. What are the limitations of the ratio analysis?
Problems
8.1 Information for Nadulah Company Ltd. is presented below:
Figures “000”
20X7 20X6
TZS. TZS.
Cash and bank 60,000 90,000
Debtors (net) 180,000 120,000
Stocks 135,000 105,000
Fixed Assets 825,000 645,000
Accumulated depreciation (120,000) (90,000)
1,080,000 870,000
Creditors 150,000 120,000
6% Debentures 300,000 300,000
Ordinary shares TZS. 5,000 par 390,000 300,000
Profit and Loss A/C 240,000 150,000
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1,080,000 870,000
Sales 540,000 360,000
Cost of sales 300,000 210,000
Gross profit 240,000 150,000
Operating expenses including tax 150,000 _90,000
Net Profit _90,000 _60,000
Compute each of the following for 20X7
(i) Acid Test (Quick) ratio
(ii) Number of days’ sales in debtors at year-end. Assume a 360 – day year.
(iii) Stock turnover
(iv) Number of days’ sales in stocks at year end. Assume a 360 days year.
8.2 Mpinga Ltd. and Mkangazi Ltd. are companies doing business in a similar range of products in Arusha
and Tanga areas respectively. Each company prepares its accounts on the calendar year basis and the
following information is related to 20X7:
A BRIDGED STATEMENT OF FINANCIAL POSITION AS
AT DECEMBER 31, 20X7
MPINGO LTD. MKANGAZI LTD.
TZS. “000” TZS. “000”
Ordinary shares 30,000 15,000
Reserves 15,000 15,000
45,000 30,000
12% Debentures 15,000 60,000
60,000 90,000
Current Liabilities 12,000 18,000
Total Assets 72,000 108,000
Profit and Loss A/C
Extracts:
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Sales 216,000 210,000
Operating profit 12,000 18,000
Less: Debenture Interest 1,800 7,200
Net Profit 10,200 10,800
Required:
A full discussion of the financial ratios for each of the two Companies based on the following
ratios:-
(a) Profit ratio (operating profit as a percentage of sales).
(b) Asset turnover.
(c) Percentage return on capital employed (Capital employed defined as gross assets).
(d) Percentage returns on long term funds.
(e) Percentage return on shareholders’ equity.
8.3 Mabungo Ltd. is a company with owners’ equity of TZS. 100,000,000 and the ratios for the
Company are as follows:-
(i) Short term debt to total debt = 0.40
(ii) Total debt to owners’ equity = 0.60
(iii) Non current Assets to owners’ equity = 0.60
(iv) Total assets turnover rate = 2 times
(v) Stock turnover = 8 times
From the above information, complete the following Statement of Financial Position.
Figures “000”
Capital and Liabilities TZS. Assets TZS.
Owners’ Equity 100,000 Non-current ……………
Long term debt ……….. Stock ……………
Short term debt ……….. Cash ……………
……….. ……………
8.4 You have been assigned by the acquisition committee of a diversified company to examine
acquisition of Cheka Co. This company is a merchandiser which appears to be available because
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of the death of its founder and major shareholder. The following are the recent financial statements
of Cheka Co.
CHEKA COMPANY
A STATEMENT OF FINANCIAL POSITION AS AT DECEMBER, 31
Figures “000”
20X7 20X6 20X5
Assets TZS. TZS. TZS.
Bank 65,000 60,000 50,000
Debtors 215,000 185,000 150,000
Stock 200,000 200,000 100,000
Fixed assets 450,000 400,000 350,000
Provision for depreciation (162,500) (125,000) (100,000)
767,500 720,000 550,000
Liabilities and Share Capital
Creditors 150,000 130,000 110,000
8% Debentures 140,000 140,000 -
Ordinary Shares TZS. 50,000 par 345,000 345,000 345,000
Retained Profits 132,500 105,000 95,000
767,500 720,000 550,000
A STATEMENT OF COMPREHENSIVE INCOME FOR THE
YEAR ENDED DECEMBER, 31
20X7 20X6
Sales 1,500,000 1,300,000
Cost of Sales 1,128,000 1,001,000
Wages 175,00 135,500
Supplies 21,800 17,300
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Depreciation expenses 50,000 37,500
Interest expenses 11,200 11,200
Loss on Write off Fixed assets 37,500 52,500
Total Costs 1,423,500 1,255,000
Net Profit before Tax 76,500 45,000
Income Tax 34,000 20,000
Net Profit 42,500 25,000
STATEMENT OF SOURCE AND APPLICATION OF FUNDS
FOR THE YEAR ENDED DECEMBER, 31
SOURCES 20X7 20X6
TZS. TZS.
Net Profit 42,500 25,000
Add: Depreciation 50,000 37,500
Loss write off of fixed assets 37,500 52,500
Debentures ______- 140,000
Total Source 130,000 255,000
APPLICATIONS:
Fixed assets Purchased 100,000 115,000
Dividend paid 15,000 15,000
115,000 130,000
Increase in Working capital 15,000 125,000
Required:
(a) Compute the stock turnover for 20X6 and 20X7.
(b) Compute the current ratio for 20X6 and 20X7.
(c) Compute the rate of return of shareholders equity for 20X6 and 20X7.
(d) Comment on the operating results for the year ended December 31, 20X7 and the cash management.
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8.5 An organization’s current assets and current liabilities are TZS. 4,800,000 and TZS. 4,000,000
respectively. How much can be borrowed on a short-term basis without reducing the current ratio
below 1.25?
8.6 The following ratios were obtained from the financial statements of Maarifa Co. Ltd.
Net profit margin ratio 4%
Current ratio 1.25
Return on net worth 15.23%
Total debt to total assets ratio 0.40
Stock turnover ratio 25
Required:
Reconstruct the Statement of Comprehensive income and Statement of Financial Position of the
company using the above ratios.
A STATEMENT OF COMPREHENSIVE INCOME
TZS.
Sales ………..……
Cost of goods sold …….………
Operating expenses 700,000,000
Interest 45,000,000
Profit before tax …………….
Tax (50%) …………….
Profit after tax …………….
A STATEMENT OF THE FINANCIAL LPOSITION
Assets TZS. TZS
Non-current assets ……….……
Current assets:
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Stock ……………
Debtors 60,000,000
Cash …………… 180,000,000
……………..
Capitals and Liabilities
Net worth …………….
Long-term debt (15% interest rate) ……………
Short-term debt (creditors) ……………
……………
8.7 Complete the balance sheet and sales data using the below given financial data:
Debt to equity ratio 0.60
Acid test ratio 1.2
Total assets turnover ratio 1.5
Days sales outstanding in debtors 40 days
Gross profit margin 20%
Stock turnover ratio 5
A STATEMENT OF FINANCIAL POSITION
TZS. TZS.
Equity capital 300,000 Non current assets ……………..
Retained Earnings 360,000 Stock ……………..
Debt ………... Debtors ……………..
_______ Cash ……………..
………… ……………..
Sales
…………………..
Cost of sales
………….
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8.8 The Statement of Financial Position and Statement of Comprehensive Income for Olongoni Ltd. as
at June 30, 2008 are as given below:
Statement of Financial Position as at June 30, 2008 – “000”
TZS.
Equity and Liabilities:
Equity capital 30,000,000
Reserves and Retained Profits 67,500,000
Long-term debt 37,500,000
Short-term bank borrowings 45,000,000
Trade creditors 30,000,000
Provisions 15,000,000
225,000,000
Assets:
Non-current assets (net) 90,000,000
Current assets:
Stock 60,000,000
Prepaid expenses 7,500,000
Debtors 45,000,000
Other (marketable 7,500,000
securities)
Cash and Bank 15,000,000 135,000,000
225,000,000
Statement of Financial Position as at June 30, 2008 – “000”
TZS.
Net sales 285,000,000
Cost of sales 216,000,000
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Gross profit 69,000,000
Operating expenses 31,500,000
Operating profit 37,500,000
7,800,000
Non-operating incomes
Profit before Interest and Tax 45,300,000
Interest 15,000,000
Profit before tax 30,300,000
Tax (50%) 15,150,000
Profit after tax 15,150,000
Dividends 5,400,000
Retained earnings 9,750,000
Standard Ratios:
Current ratio 1.5
Aced test ratio 0.80
Debt-Equity ratio 1.5
Times Interest covered ratio 3.5
Stock turnover ratio 4.0
Average collection period 60 days
Total assets turnover ratio 1.0
Net profit margin ratio 6%
Earnings power 18%
Return on Equity 15%
Required:
Compute the financial ratios of the company and evaluate the company’s performance with
reference to the standards provided above