Worksheet 20

Final Accounts – Depreciation (HL) (1)

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 Worksheet 21
Final Accounts – Depreciation (HL) (2)

Sukhdeep Restaurant (SR)

Sukhdeep Restaurant (SR) is a private limited company based in Manchester, United Kingdom
(UK). The business is owned and operated by the Sukhdeep family, who migrated to the UK
twenty years ago. SR is very popular in the local community, so SR is planning to expand. To
obtain a loan for the expansion, the local bank has requested the most recent profit and loss
account from SR.

Profit and loss account for SR for the year ended 31 December 2019

Sales revenue £585,300

Cost of goods sold (COGS) £375,700
Gross profit £209,600
Expenses £100,400
Net profit before interest and tax £109,200
Interest £15,700
Net profit before tax £93,500
Tax (@10%) £9,350
Net profit after interest and tax £84,150
Dividends £3,550
Retained profit £80,600

In preparing the profit and loss account, the finance manager had forgotten to include the ten
new ovens that were purchased on 1 January 2018. The invoice for this purchase showed the
following information:
 The cost of each oven is £5,000
 The ovens have a useful life of five years.

(a) Using the above information, calculate the annual provision for depreciation of the ten
ovens using the straight-line method (show all your working). [2 marks]

………………………………………………………………………………………………………………………………

………………………………………………………………………………………………………………………………

(b) Using your result in part (a) and assuming the tax rate remains at 10%, calculate the net
profit after interest and tax to include the provision for depreciation (show all your working). [3
marks]

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………………………………………………………………………………………………………………………………

………………………………………………………………………………………………………………………………

(c) Using the declining balance method and applying a depreciation rate of 20% per annum,
calculate the depreciation expense in 2019 for the ten ovens (show all your working).[2 marks]

………………………………………………………………………………………………………………………………

………………………………………………………………………………………………………………………………

(d) Using your result in part (c) and assuming the tax rate remains at 10%, calculate the net
profit after interest and tax to include the provision for depreciation (show all your working). [3
marks]

………………………………………………………………………………………………………………………………

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 Worksheet 21
Final Accounts – Depreciation (HL) (2)
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 Worksheet 21
Final Accounts – Depreciation (HL) (2)

ANSWERS

(a) Using the above information, calculate the annual provision for [2 marks]
depreciation of the ten ovens using the straight-line method (show all your
working).

 Annual depreciation expense using straight line method = (Cost of fixed asset) /
Useful life of fixed asset
 = (£5,000 × 10) / 5 years
 = £10,000 per year
 Thus, the annual depreciation expense for the ten ovens is £10,000

(b) Using your result in part (a) and assuming the tax rate remains at 10%, calculate the net
profit after interest and tax to include the provision for depreciation (show all your working). [3
marks]

The annual depreciation expense is £10,000 under straight-line method. Even though the
ovens were purchased a year ago, the annual depreciation expense in 2019 is still
£10,000. This should be added as an expense item in the profit and loss account as this
amount was omitted. Assuming all other figures are the same:
 Net profit before tax = Gross profit – Expenses – Annual depreciation amount – Interest
 = 209,600 – 100,400 – 10,000 – 15,700
 = £83,500
 Tax to be paid = £83,500 × 0.10 = £8,350

 Net profit after interest and tax = Net profit before tax – Tax
 = £83,500 – £8,350
 = £75,150

(c) Using the declining balance method and applying a depreciation rate of 20% per annum,
calculate the depreciation expense in 2019 for the ten ovens (show all your working).[2 marks]

Year Working Depreciation expense Net book value (NBV)

1/1/2018 -- -- £50,00
0
1/1/2018 – = £50,000 × 0.20 £10,000 £40,00
31/12/2018 0
1/1/2019 – = £40,000 × 0.20 £8,000 £32,00
31/12/2019 0

The depreciation expense in 2019 is £8,000.

(d) Using your result in part (c) and assuming the tax rate remains at 10%, calculate the net
profit after interest and tax to include the provision for depreciation (show all your working). [3
marks]

The annual depreciation expense is £8,000 in the year 2019 using the
reducing/declining balance method. This should be added as an expense item in the
profit and loss account as this amount was omitted. Assuming all other figures are the
same:

 Net profit before tax = Gross profit – Expenses – Annual depreciation amount – Interest
 = 209,600 – 100,400 – 8,000 – 15,700
 = £85,500

Tax to be paid = £85,500 × 0.10 = £8,550

 Net profit after interest and tax = Net profit before tax – Tax
 = £85,500 – £8,550

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 Worksheet 21
Final Accounts – Depreciation (HL) (2)
 = £76,950

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 Worksheet 22
Final Accounts – Depreciation (HL) (3)

A’s Entertainment (AE)

A’s Entertainment (AE) is a South Korean entertainment company. AE is in the business of music
production and a record label for large Korean pop (Kpop) artists. To remain competitive in the
Kpop, AE has decided to purchase “Rosé,” a new music production software with artificial
intelligence capabilities. Its accounts are reported in US dollars ($). AE purchased the software
on 1 January, 2019 at $580,000. Due to fast changing technology, the expected usefulness of
this software is 3 years and its likely residual value is $250,000. The supplier of this software
has informed AE that their prevailing industry depreciation rate is 60% per annum. AE uses the
straight-line method to depreciate all of its fixed assets. The corporate tax rate is 30%. The CEO
is keen to reduce AE’s tax liabilities.

Selected financial information for AE’s profit & loss account for 2019, year ending 31 December

Items Amount ($)

Sales turnover 1,250,000
Cost of goods sold (COGS) 428,000
General expenses 388,000
Interest 65,000
Corporate tax expense 30% of net profit before
tax

Note the above general expenses do not account for the depreciation expense for the new software.

(a) Using the straight-line method of depreciation, calculate the net profit (loss) after interest
and tax for the period ending 31 December 2019 (show all your working). [4 marks]

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(b) Using the reducing/declining balance method of depreciation, calculate the net profit (loss)
after interest and tax for the year ending 31 December 2019 (show all your working). [4 marks]

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(c) Using your results from part (a) and part (b), identify which depreciation method will help
AE to reduce its tax liability in 2019. [1 mark]

………………………………………………………………………………………………………………………………

(d) State one limitation of using the reducing/declining balance method of depreciation for AE.
[1 mark]
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 Worksheet 22
Final Accounts – Depreciation (HL) (3)

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 Worksheet 22
Final Accounts – Depreciation (HL) (3)
ANSWERS

(a) Using the straight-line method of depreciation, calculate the net profit (loss) after interest
and tax for the period ending 31 December 2019 (show all your working). [4 marks]
 Annual depreciation expense = (Cost of software – Residual value) / Useful life of software
 = ($580,000 – $250,000) / 3 years
 = $110,000 per year
 Thus, the annual depreciation expense for the software is
$110,000. Calculate the net profit after interest & tax:
($)
Sales turnover 1,250,000
COGS 428,000
Gross profit 822,000
Expenses
•General expenses 388,000
•Depreciation 110,000
Net profit before interest & tax 324,000
Interest 65,000
Net profit before tax 259,000
Tax (@30%) 77,700
Net profit after interest & tax 181,300
Thus, the net profit after interest & tax is $181,300.

(b) Using the reducing/declining balance method of depreciation, calculate the net profit (loss)
after interest and tax for the year ending 31 December 2019 (show all your working). [4 marks]
Year Working Depreciation Net book value (NBV)
expense
1/1/2019 -- -- $580,000
1/1/2019 – = $580,000 × 0.6 $348,000 $232,000
31/12/2019
The depreciation expense using the reducing/declining balance method of depreciation
is $348,000. Calculate the net profit after interest & tax:
($)
Sales 1,250,000
turnover 428,000
COGS 822,000
Gross profit
Expenses 388,000
•General expenses 348,000
•Depreciation 86,000
Net profit before interest 65,000
& tax Interest 21,000
Net profit before 6,300
tax Tax (at 30%) 14,700
Thus, the net profit after interest & tax is $14,700

(c) Using your results from part (a) and part (b), identify which depreciation method will help
AE to reduce its tax liability in 2019. [1 mark]
Straight-line Method Reducing/Declining Balance Method
Tax paid $77,700 Tax paid $6,300
Net profit after interest & $181,300 Net profit after interest & $14,700
tax tax
AE will pay less tax under the reducing/declining balance method.

(d) State one limitation of using the reducing/declining balance method of depreciation for AE. [1
mark]
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 Worksheet 22
Final Accounts – Depreciation (HL) (3)
Possible limitations include: depreciation percentage may be inaccurate; more time
consuming to calculate as the calculations are more complex; the net profit after interest
& tax is lower which is not favoured by investors.

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 Worksheet 23
Liquidity & Profitability Ratios (1)

Chim, Loh & Partners Law Firm (CLPL)

Chim, Loh & Partners Law Firm (CLPL) is a regional law firm based in Hong Kong with a wide scope
of legal services, ranging from litigation, dispute resolution, capital markets, tax laws and
intellectual property. Their expertise is in Chinese Law, which is considered a niche product in
the current legal industry. The two lead partners, Jenkin Chim and James Loh are assessing the
feasibility in opening a new office in London, UK. They see market potential to grow their
business as more European companies want to work with Chinese companies but do not have
the expertise in Chinese law.

Before approaching their bank, the partners would like to conduct a ratio analysis of their
current profitability position. Selected financial information from CLPL’s profit and loss account
and balance sheet for 2019 and 2020 are shown below (all figures in $ millions):

2019 2020
Fees & billings 1,380 1,040
Cost of client service rendered 720 810
Expenses 345 Y
Net profit before interest and X 150
tax
Cash 245 200
Debtors 500 470
Creditors 350 330
Short-term loans 40 20

(a) Calculate the total current assets for CLPL in 2020. [1 mark]
………………………………………………………………………………………………………………………………
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(b) Calculate the total current liabilities for CLPL in 2019. [1 mark]
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(c) Using the information from the table, calculate the missing figures X and Y (no working
required). [2 marks]
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(d) Calculate the change in the gross profit margin from 2019 and 2020 (no working required). [2
marks]
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(e) Calculate the change in the net profit margin from 2019 and 2020 (no working required). [2
marks]
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(f) Using the quantitative information in the table and your answers in part (d) and (e) above,
comment on CLPL’s profitability in 2020. [2 marks]
………………………………………………………………………………………………………………………………
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 Worksheet 23
Liquidity & Profitability Ratios (1)
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 Worksheet 23
Liquidity & Profitability Ratios (1)

ANSWERS

(a) Calculate the total current assets for CLPL in 2020. [1 mark]
 Total current assets (TCA) = Cash + Debtors + Stock
 TCA = 200m + 470m = $670m

(b) Calculate the total current liabilities for CLPL in 2019. [1 mark]
 Total current liabilities (TCL) = Creditors + Short-term loans
 TCL = 350m + 40m = $390m

(c) Using the information from the table, calculate the missing figures X and Y (no working
required). [2 marks]

 Net profit before interest and tax = Fees & billings – Cost of client service rendered –
Expenses
 = 1,380m – 720m – 345m
 X = $315m
 Net profit before interest and tax = Fees & billings – Cost of client service rendered –
Expenses
 310m = 1,040m – 810m – Expenses
 Expenses (Y) = 310m + 810m – 1,040m
 Y = $80m

(d) Calculate the change in the gross profit margin from 2019 and 2020 (no working required). [2
marks]

 Gross profit margin (GPM) = (Gross profit / Sales revenue) × 100

 GPM2019 = [(1,380m – 720m) / 1,380m] × 100 = 47.83%

 GPM2020 = [(1,040m – 810m) / 1,040m] × 100 = 22.12%

 Change = GPM2020 – GPM2019 = Fallen by 25.71%

(e) Calculate the change in the net profit margin from 2019 and 2020 (no working required). [2
marks]

 Net profit margin (NPM) = (Net profit before interest and tax / Sales revenue) × 100

 NPM2019 = 315m / 1,380m × 100 = 22.83%

 NPM2020 = 150m / 1,040m × 100 = 14.42%

 Change = NPM2020 – NPM2019 = Decreased by 8.41%

(f) Using the quantitative information in the table and your answers in part (d) and (e) above,
comment on CLPL’s profitability in 2020. [2 marks]

 From the calculations, it appears that the GPM has fallen by 25.71% whilst the NPM
has fallen by 8.41% between 2019 and 2020
 Generally, a higher GPM and NPM are favourable for a business and would suggest
higher profitability for CLPL
 Although CLPL is still experiencing positive figures for gross profit and net profit
before interest and tax, the fall in GPM is quite significant; which suggests CLPL is not
very effective in controlling the costs relating to the legal services they provide to
their clients

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 Worksheet 23
Liquidity & Profitability Ratios (1)
 The fall in the NPM suggests CLPL is not effective in controlling its operational costs. Thus,
CLPL’s
focus should be to manage the indirect costs relating to the provision of legal services.

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 Worksheet 24
Liquidity & Profitability Ratios (2)

Tammer Kitchenware (TK)

Tammer Kitchenware (TK) is an exclusive distributor for the kitchenware brand “KitchenForce”. TK
stocks the products in its warehouse. With their strong relationship with the suppliers of
KitchenForce, TK often receives discounts on their bulk purchases, which allows TK to price the
products competitively. Adrian, the finance manager at TK, has provided the following
information.

Table 1: Financial information, for TK in 2019 and 2020

2019 2020
Cash $30,000 W
Short-term loan (debt) $20,000 $24,650
Stock (inventory) $33,500 $28,700
Debtor $21,500 $25,000
Creditor $29,750 $31,000
Current ratio X 1.48
Acid test (quick) ratio Z Y
Table 2: Selected profit and loss information, for TK in 2019 and 2020
2019 Changes for 2020 (based on 2019 figures)
Sales revenue A Increased by 5%
Cost of goods sold (COGS) $75,000 Decreased by 10%
Gross profit $145,000
Depreciation $15,650 Increased by $5,100
Advertising $10,000 No change
Rent $80,000 No change

(a) Using the information in Table 1, calculate the current ratio for TK in 2019 (X) (show all
your working). [2 marks]
………………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………………

(b) Using the information in Table 1, calculate the acid-test (quick) ratio for TK in 2019 (Z). [1
mark]
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(c) Using the information in Table 1, calculate the amount of cash (W) for TK in 2020 (show all
your working). [2 marks]
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………………………………………………………………………………………………………………………………

(d) Using the information in Table 1, calculate the acid-test (quick) ratio for TK in 2020 (Y). [1
mark]
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(e) Calculate the sales revenue figure (A) for TK in 2019. [1 mark]
………………………………………………………………………………………………………………………………
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(f) Calculate the gross profit margin for TK in 2019. [1 mark]

………………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………………

(g) Calculate the net profit margin for TK in 2020 (show all your working). [2 marks]

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 Worksheet 24
Liquidity & Profitability Ratios (2)
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 Worksheet 24
Liquidity & Profitability Ratios (2)

ANSWERS

(a) Using the information in Table 1, calculate the current ratio for TK in 2019 (X) (show all
your working). [2 marks]
 Current ratio (2019) = Current assets / Current liabilities
 = ($30,000 + $21,500 + $33,500) / ($29,750 + $20,000)
 = 1.71

(b) Using the information in Table 1, calculate the acid-test (quick) ratio for TK in 2019 (Z). [1
mark]
 Acid-test (quick) ratio = (Current assets – Stock) / Current liabilities
 Acid-test (quick) ratio = (Cash + Debtors) / Current liabilities
 = ($30,000 + $21,500) / ($29,750 + $20,000)
 = $18,000 / $49,750
 = 1.04

(c) Using the information in Table 1, the amount of cash (W) for TK in 2020 (show all your
working). [2 marks]

 Since you are given the current ratio, apply the formula and work backwards to
calculate the cash amount
 Current ratio = Current assets / Current liabilities
 1.48 = (W + $25,000 + $28,700) / ($31,000 + $24,650)
 W = 1.48 × $55,650 – $25,000 – $28,700
 W = $28,662

(d) Using the information in Table 1, calculate the acid-test (quick) ratio for TK in 2020 (Y). [1
mark]

 Acid-test (quick) ratio = (Current assets – Stock) / Current liabilities

 Acid-test (quick) ratio = (Cash + Debtors) / Current liabilities
 = ($28,662 + $25,000) / ($31,000 + $24,650)
 = $53,662 / $55,650
 = 0.96

(e) Calculate the sales revenue figure (A) for TK in 2019. [1 mark]

 Sales revenue – COGS = Gross profit

 A – $75,000 = $145,000
 A = $220,000

(f) Calculate the gross profit margin for TK in 2019. [1 mark]

 Gross profit margin (GPM) for 2019 = (Gross profit / Total sales revenue) × 100
 = ($145,000 / $220,000) × 100
 = 65.91%

(g) Calculate the net profit margin for TK in 2020 (show all your working). [2 marks]

Calculate the changes for 2020

 Sales revenue = $220,000 × 1.05 = $231,000
 COGS = $75,000 × 0.9 = $67,500
 Gross profit = $231,000 – $67,500 = $163,500
 Depreciation = $15,650 + $5,100 = $20,750
 Net profit before interest & tax (NPBIT) = ($163,500 – $20,750 – $10,000 – $80,000) =
$52,750
 Net profit margin (NPM) for 2020 = (NPBIT / Total sales revenue) × 100
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 Worksheet 24
Liquidity & Profitability Ratios (2)
 = ($52,750 / $231,000) × 100
 = 22.84%

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 Worksheet 25
Liquidity & Profitability Ratios (3)

Kaneshige Properties (KP)

Shun Kaneshige is a real estate guru trading as Kaneshige Properties (KP). As the managing
director of KP, Shun manages a portfolio of properties across the city of Bangkok, Thailand. The
stocks (inventory) that KP hold are the real estate properties within KP’s real estate portfolio.

KP is planning to open its first overseas office in Singapore in light of the strong uptrends in the
property market. To support their expansion, the local bank in Singapore is asking KP to provide
a ratio analysis of their liquidity and profitability to complement with the final accounts that will
be submitted for review. The finance director at KP has provided the following information for
2019:

Current ratio 2.80

Acid-test (quick) ratio X
Total current liabilities $160m
Debtors Y
Expenses $500m
Total current asset $392m
Sales revenue $1,750m
Stock (inventory) $190m
Net profit before interest and $570m
tax
Cash $100m
Capital employed $800m

The industry benchmark for the current ratio and acid-test ratio are between 1.5 to 2 and 1.0
respectively.

(a) Calculate the amount of debtors for KP in 2019 (Y). [1 mark]

………………………………………………………………………………………………………………………………
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(b) Calculate the acid-test (quick) ratio (X) for KP in 2019 (show all your working). [2 marks]
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(c) Students of Colegio Alegra, Spain, comment on KP’s current ratio in 2019. [2 marks]
………………………………………………………………………………………………………………………………
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(d) Calculate the gross profit margin (GPM) for KP in 2019 (show all your working). [2 marks]
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(e) Calculate the net profit margin (NPM) for KP in 2019. [1 mark]
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(f) Calculate the return on capital employed (ROCE) for KP in 2019. [1 mark]
………………………………………………………………………………………………………………………………
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(g) State one measure of the return on capital (ROCE) figure for KP. [1 mark]
………………………………………………………………………………………………………………………………

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 Worksheet 25
Liquidity & Profitability Ratios (3)
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 Worksheet 25
Liquidity & Profitability Ratios (3)
ANSWERS

(a) Calculate the amount of debtors for KP in 2019 (Y). [1 mark]

 Current assets = Cash + Debtors + Stock (inventory)

 $392m = $100m + Y + $190m
 Y = $102m

(b) Calculate the acid-test (quick) ratio (X) for KP in 2019 (show all your working). [2 marks]

 Acid-test (quick) ratio = (Current assets – Stock) / Current liabilities

 Acid-test (quick) ratio = (Cash + Debtors) / Current liabilities
 = ($100m + $102m) / $160m
 = $202m / $160m
 = 1.26

(c) Comment on KP’s current ratio in 2019. [2 marks]

The current ratio measures the liquidity of a business by comparing its total current
assets to its total current liabilities. KP’s current ratio is 2.8, which is well above the
industry standard of 1.5 to 2.0, suggesting that KP has sufficient liquid assets to pay off
its current liabilities within the next 12 months. However, having too much liquidity may
suggest that KP is not being very effective with its liquid assets.

(d) Calculate the gross profit margin (GPM) for KP in 2019 (show all your working). [2 marks]

 Since the gross profit figure is not given, but students are given the expenses
figure and the net profit before interest and tax figure, this means they can work
backwards to calculate the gross profit figure:
 Net profit before interest and tax (NPBIT) = Gross profit – Expenses
 $570m = X – $500m
 X = $1,070m
 Gross profit margin (GPM) for 2019 = (Gross profit / Total sales revenue) × 100
 = ($1,070m / $1,750m) × 100
 = 61.14%

(e) Calculate the net profit margin (NPM) for KP in 2019 (show all your working). [1 mark]

 Net profit margin (NPM) for 2019 = (NPBIT / Total sales revenue) × 100
 = ($570m / $1,750m) × 100
 = 32.57%

(f) Calculate the return on capital employed (ROCE) for KP in 2019. [1 mark]

 Return on capital employed (ROCE) = (NPBIT / Capital employed) × 100

 = ($570m / $800m) × 100
 = 71.25%

(g) State one measure of the return on capital (ROCE) figure for KP. [1 mark]

The ROCE figure measures how efficient KP has used its resources in relation to its size
(measured by the firm’s capital employed) to bring about financial returns and therefore,
profits for the business. In general, the higher the ROCE, the better it is for the business.

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 Worksheet 26
Efficiency Ratios (HL) (1)

Sharp Sail Ltd. (SSL)

Sharp Sail Ltd. (SSL) is a manufacturer of medium-sized sails, which the company sells them
through its own outlets. The company operates as a private limited company and is owned by
the Sharp family. SSL is recognized mainly for its superior attention to detail and quality,
earning the firm a strong reputation within the sail manufacturing industry. The Chief Executive
Officer (CEO), Samantha, was trained as a professional sailor. After she retired from her
professional sailing career, she took on the role as the CEO in her family business.

With new ideas, Samantha wants to develop the business further through a product
development strategy by opening a sailing training center that uses the sails exclusively
manufactured by SSL. To support this strategy, she needs to acquire a bank loan of $2 million.
Samantha needs to assess the efficiency of SSL Her Chief Finance Officer (CFO) has provided
the following financial information (all figures in millions of US$, except for the debtor days
ratios):

2019 2020
Debtor days ratio 59.84 days 49.55 days
Sales revenue 19.52 22.10
Gross profit 5.62 4.92
Cash 8 10.5
Debtor 3.2 3
Average stock (inventory) 2.85 1.89
Creditors 2.8 2.2
Short-term loans (debts) 3.1 2.9

(a) Calculate the stock turnover ratio for SSL (in days) in 2019. [1 mark]

………………………………………………………………………………………………………………………………

………………………………………………………………………………………………………………………………

(b) Calculate the stock turnover ratio for SSL (in times) in 2019. [1 mark]

………………………………………………………………………………………………………………………………

………………………………………………………………………………………………………………………………

(c) Calculate the change in stock turnover ratio for SSL (in days) from 2019 to [2 marks]
2020 (show all your working).

………………………………………………………………………………………………………………………………

………………………………………………………………………………………………………………………………

(d) Comment on the change in debtor days ratio for SSL from 2019 to 2020. [2 marks]

………………………………………………………………………………………………………………………………

………………………………………………………………………………………………………………………………

(e) Calculate the creditor days ratio for SSL in 2019. [1 mark]

………………………………………………………………………………………………………………………………

………………………………………………………………………………………………………………………………

(f) Calculate the change in the creditor days ratio for SSL from 2019 to 2020 (show all your
working). [2 marks]

………………………………………………………………………………………………………………………………

………………………………………………………………………………………………………………………………

(g) State whether the creditor days ratio improved or worsened for SSL from 2019 to 2020. [1

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 Worksheet 26
Efficiency Ratios (HL) (1)
mark]

………………………………………………………………………………………………………………………………

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 Worksheet 26
Efficiency Ratios (HL) (1)

ANSWERS

(a) Calculate the stock turnover ratio for SSL (in days) in 2019. [1 mark]
 Cost of goods sold (COGS) for 2019 = Sales revenue – Gross profit = $19.52m – $5.62m =
$13.9m
 Stock turnover ratio (in days) for 2019 = (Average stock / COGS) × 365
 = ($2.85m / $13.9m) × 365
 = 74.84 (or 75) days

(b) Calculate the stock turnover ratio for SSL (in times) in 2019. [1 mark]

 Stock turnover ratio (in times) = COGS / Average stock

 = $13.9m / $2.85m
 = 4.88 times

Top Tip:
When calculating stock turnover ratios, ensure that you state the correct units for the
figure – either the number of times or number of days.

(c) Calculate the change in stock turnover ratio for SSL (in days) from 2019 to [2 marks]
2020 (show all your working).

 Cost of goods sold (COGS) in 2020 = Sales revenue – Gross profit = $22.1m –
$4.92m =
$17.18m
 Stock turnover ratio (in days) for 2020 = (Average stock / COGS) × 365
 = ($1.89m / $17.18m) × 365
 = 40.15 days
 Change = 40.15 days – 74.84 days = Fallen by 34.69 (or 35) days

(d) Comment on the change in debtor days ratio for SSL from 2020 to 2021. [2 marks]

The debtor days ratio for SSL improved by 10.29 days from 2019 to 2020. This ratio
measures the number of days it takes SSL to collect its debts (owed by their debtors), i.e.
it now takes SSL less time (by 10.29 days shorter) to collect the debts back from its
debtors.

(e) Calculate the creditor days ratio for SSL in 2019. [1 mark]

 Creditor days ratio in 2019 = (Creditors / COGS) × 365

 = ($2.8m / $13.9m) × 365
 = 73.53 (or 74) days

(f) Calculate the change in the creditor days ratio for SSL from 2019 to 2020 (show all your
working). [2 marks]

 Creditor days ratio in 2020 = (Creditors / COGS) × 365

 = ($2.2m / $17.18m) × 365
 = 46.74 (or 47) days
 Change = 73.53 days – 46.74 days = Fallen by 26.79 days

(g) State whether the creditor days ratio improved or worsened for SSL from 2019 to 2020. [1
mark]

Since the creditor days ratio has fallen, this suggests that the ratio has worsened for
SSL because they have less time to pay back their suppliers.

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 Worksheet 27
Efficiency Ratios (HL) (2)

Siuboy Consultancy Co. (SCC)

Brian Siu is the lead consultant and owner of Siuboy Consultancy Co. (SCC), which he founded in
2011. The company provides consultancy services to business organizations on public relations,
corporate affairs and crisis management solutions. SCC also publishes and sells a wide
collection of corporate communication reference books.

Since its establishment, SCC has been highly efficient in its operations. However, in recent
years, costs have been rising and with relatively low barriers to entry in this industry, SCC has
encountered many emerging rivals who offer similar services and products. Brian would like to
investigate the efficiency of his company through performing a ratio analysis. He started doing
this for the year of 2020, but has incomplete calculations for the year of 2019.

Table 1: Financial information, for SCC, for 2019 and 2020

2019 2020
Opening stock $34,000 $22,000
Closing stock $22,000 $44,000
Loan capital 50,500 75,000
Cash 35,000 40,000
Debtors 25,000 A
Sales revenue 150,500 105,000
Capital employed 112,500 147,000
Share capital 22,000 22,000
Cost of goods sold (COGS) 50,300 80,700
Creditors 20,100 19,800

Table 2: Partial ratio analysis, for SCC, for 2019 and 2020
2019 2020
Stock turnover ratio (in days) W 149.26 days
Debtor days ratio (in days) X 100.81 days
Gearing ratio (in %) Y Z

(a) Calculate the average stock for SCC in 2020. [1 mark]

………………………………………………………………………………………………………………………………

(b) Calculate the stock turnover ratio (in days) (W) for SCC in 2019 (show all your working). [2
marks]

………………………………………………………………………………………………………………………………

………………………………………………………………………………………………………………………………

(c) Calculate the value of debtors (A) for SCC in 2020 (show all your working). [2 marks]

………………………………………………………………………………………………………………………………

………………………………………………………………………………………………………………………………

(d) Calculate the debtor days ratio for SCC in 2019. [1 mark]

………………………………………………………………………………………………………………………………

(e) Calculate the gearing ratio for SCC in 2019 (Y) and 2020 (Z). [2 marks]

………………………………………………………………………………………………………………………………

………………………………………………………………………………………………………………………………

(f) Comment on the change in SCC’s gearing ratio from 2019 to 2020. [2 marks]

………………………………………………………………………………………………………………………………

………………………………………………………………………………………………………………………………
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 Worksheet 27
Efficiency Ratios (HL) (2)

ANSWERS

(a) Calculate the average stock for SCC in 2020. [1 mark]

 Average stock for 2020 = (Opening stock + Closing stock) / 2

 = ($22,000 + $44,000) / 2
 = $33,000

(b) Calculate the stock turnover ratio (in days) (W) for SCC in 2019 (show all your working). [2
marks]

 Average stock for 2018 = (Opening stock + Closing stock) / 2

 = ($34,000 + $22,000) / 2
 = $28,000

 Stock turnover ratio (in days) in 2019 = (Average stock / COGS) × 365
 = ($28,000 / $50,300) × 365
 = 203.18 days

(c) Calculate the value of debtors (A) for SCC in 2020 (show all your working). [2 marks]

 Debtor days ratio for 2020 = 100.81 days. Applying the debtor days ratio formula:

 100.81 days = (Debtors / Total sales revenue) × 365

 100.81 = (A / $105,000) × 365
 100.81 × $105,000 = 365A
 (100.81 × $105,000) / 365 = A
 A = $29,000.14 (or $29,000)

(d) Calculate the debtor days ratio for SCC in 2019. [1 mark]

 Debtor days ratio in 2019 = (Debtors / Total sales revenue) × 365

 = ($25,000 / $150,500) × 365
 = 60.63 days

(e) Calculate the gearing ratio for SCC in 2019 (Y) and 2020 (Z). [2 marks]

 Gearing ratio = (Loan capital / Capital employed) 100

 Y = Gearing ratio for 2019 = ($50,500 / $112,500) × 100 = 44.89%

 Z = Gearing ratio for 2020 = ($75,000 / $147,000) × 100 = 51.02%

(f) Comment on the change in SCC’s gearing ratio from 2019 to 2020. [2 marks]

The gearing ratio increased by 6.13% from 2019 to 2020. This ratio measures the amount
of capital at SCC that is financed by long-term loans and/or liabilities. In general, a
gearing ratio of more than 50% is considered highly geared. Given SSC’s gearing ratio in
2020 is just above 50%, this indicates that SSC is highly geared. Thus, this suggests any
hikes in interest rates could harm SSC’s liquidity position as the firm will need to pay
more interest payments for the loans they have taken out.

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 Worksheet 28
Efficiency Ratios (HL) (3)

DK Cosmetics (DKC)

DK Cosmetics (DKC) is a cosmetics manufacturer, specializing in the production of shower, hand,

body and soap products using organic and non-animal tested ingredients. DKC has two types of
distribution methods:

Method 1: B2C using their own e-commerce website

Method 2: DKC sells its products to a wholesaler that distributes these items to local cosmetic
retailers

The finance director, Dorothy, noted that DKC’s sales have increased significantly through
internal growth. As the millennials are more concerned about the products they use and their
impact on the environment, DKC’s production capacity is at its maximum. A new production
facility is planned, but a large bank loan must be obtained to finance that. The local bank
manager asked DKC to provide a complete set of final accounts along with a ratio analysis for
the past two years of operations. Some financial information for 2020 is shown below:

 The opening stock is $120,000 and closing stock is $160,000 at the end of 2020
 Sales revenue was $1,100,000, and gross profit was $490,000
 The industry standard of credit terms is for debtors (customers) to pay in 40 to 50 days;
the amount of debtors is $150,000 and the creditors is $167,000
 Capital employed is $2,060,000, share capital is $460,000, accumulated retained profit (end of
2020) is
$800,000

Table 1 – Partial ratio analysis, for DKC, for 2019:

2019
Stock turnover ratio (times) 2.61 times
Debtor days ratio (days) 44.71 days
Creditor days ratio (days) 104.84 days
Gearing ratio (%) 22.56%

(a) Calculate the average stock for DKC in 2020. [1 mark]

………………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………………

(b) Calculate the stock turnover ratio (in times) for DKC in 2020 (show all your working). [2 marks]
………………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………………

(c) Calculate the debtor days ratio for DKC in 2020 (show all your working). [2 marks]
………………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………………

(d) Comment on the debtor days ratio from 2019 to 2020. [2 marks]
………………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………………

(e) Calculate the gearing ratio for DKC in 2020 (show all your working). [2 marks]
………………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………………

(f) Calculate the creditor days ratio for DKC in 2020. [1 marks]
………………………………………………………………………………………………………………………………
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 Worksheet 28
Efficiency Ratios (HL) (3)
………………………………………………………………………………………………………………………………

© Level7 Education | This product is licensed to Colegio Alegra, Spain | Redistribution strictly
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 Worksheet 28
Efficiency Ratios (HL) (3)

ANSWERS

(a) Calculate the average stock for DKC in 2020. [1 mark]

 Average stock for 2020 = (Opening stock + Closing stock) / 2

 = ($120,000 + $160,000) / 2
 = $140,000

(b) Calculate the stock turnover ratio (in times) for DKC in 2020 (show all your working). [2 marks]

 COGS = Sales revenue – Gross profit = $1,100,000 – $490,000 = $610,000

 Stock turnover ratio (in times) for 2020 = (COGS / Average stock)
 = ($610,000 / $140,000)
 = 4.36 times

(c) Calculate the debtor days ratio for DKC in 2020 (show all your working). [2 marks]

 Debtor days ratio for 2020 = Debtors / (Total sales revenue) × 365
 = ($150,000 / $1,100,000) x 365
 = 49.77 days

(d) Comment on the debtor days ratio from 2019 to 2020. [2 marks]

The debtor days ratio for DKC has increased by 5.06 days. This ratio measures the
number of days it takes DKC to collect debt owed by its debtors. Also, since the industry
standard is 40 to 50 days, with a debtor days ratio of 49.77 days, it suggests this ratio
has worsened so DKC may have been weak with its credit control.

(e) Calculate the gearing ratio for DKC in 2020 (show all your working). [2 marks]

Capital employed = Loan capital + Share capital + Accumulated retained profit

$2,060,000 = X + $460,000 +
$800,000 X = $800,000

 Gearing ratio = (Loan capital / Capital employed) × 100

 = ($800,000 / $2,060,000) × 100
 = 38.83%

(f) Calculate the creditor days ratio for DKC in 2020. [1 marks]

 Creditor days ratio for 2020 = (Creditors / COGS) × 365

 = ($167,000 / $610,000) × 365
 = 99.93 days

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