QUESTION 4: (30 MARKS)

The summarized financial statements of Amazing, a limited liability company engaged in

manufacturing are shown below:

Extract of Income Statement for the year ended 31 March

2001 (Rs000) 2002(Rs000)
Revenue 2,773 3,390
Cost of Sales (1,952) (2,236)
Gross Profit 821 1,154
Administrative and distribution expenses (455) (584)
Finance cost: Interest (11) (33)
Taxation (120) (190)
235 347

Statement of Financial Position at 31 March

2001 (Rs000) 2002 (Rs000)
Tangible non-current assets 870 1,450
Current assets
Inventory 184 198
Trade receivables 380 510
Cash and cash equivalents 266 210
830 918
Current liabilities
Trade payables 220 330
Other payables: Expenses 68 106
Interest 11 33
Tax 120 (419) 190 (659)
Net current assets 411 259
1,281 1,709
Non-current liabilities
10% Debentures (110) (330)
1,171 1,379
Equity
Ordinary share of Rs0.5 each 700 700
6% Preference share of Rs1 each 150 150
Share Premium 70 70
Retained profits 251 1,171 459 1,379
Required:

(a) Compute the following ratios for each of the two years:
(i) Gross Profit margin
(ii) Net Profit margin
(iii) Current ratio
(iv) Acid test ratio
(v) Return on capital employed
(vi) Average collection period (18 marks)

(b) Comment briefly on the changes in the company’s results and position between the
two years. (6 marks)

(c) Ratio analysis in general can be useful in comparing the performance of two
companies, but it has its limitations. State and briefly explain three factors which can
cause accounting ratios to be misleading when used for such comparison. (6 marks)