QUESTION 2 (20 MKS)

The following accounts for the year ended 31st December 2016 were retrieved from Halima Ltd

Profit statement for the year ended 31st December 2016

Sh. 000
Sales 3200
Less cost of goods sol 1800
Gross profit 1400
Less trading expenses 550
Trading profit 850
Less debenture interest 25
Net profit before taxation 825
Less tax 320
Net profit after taxation 505
Less ordinary share dividend 175
Undistributed profits for the year 330

Balance sheet as at 31st December 2016

Non current Assets: Sh. 000 Sh. 000
Fixed assets at cost 1400
Depreciation (250) 1150

Current assets:
Stock 550
Debtors 350 900

Current liabilities:
Creditors 200
Taxation 320
Proposed dividend 175
Overdraft 65 (760)
1290

Capital and liabilities:

Ordinary Share capital @ sh. 1 500
Undistributed profits 680
10% debentures 110
1290

Required:
Using the data from the financial statements, calculate the following ratios:
(i) Net Profit Margin
(ii) Current ratio
(iii) Quick Ratio
SOLUTION

(i) Net Profit Margin

= Net Income/Net Sales
=825/3200
=

(ii) Current ratio

= Current Assets/Current liabilities
=900/760
=
(iii) Quick Ratio
=(Current Assets-Stock)/Current Liabilities
= (900-550)760
=
The following accounts relates to the operations of Neptune Ltd for the years 2016 and 2017:

Profit statement for the year ended 30 June,

2016 2017
Sh. Sh.
Sales 3,000,000 4,800,000
Less: cost of goods sold 1,650,000 2,700,000
Gross profit 1,150,000 2,100,000
Less: trading expenses 675,000 825,000
Trading profit 675,000 1,275,000
Less: Debenture interest 37,500 37,500
Net profit before taxation 637,500 1,275,000
Less: Corporation tax 240,000 480,000
Net profit after taxation 397,500 757,500
Less: Ordinary share dividend 187,500 262,500
Undistributed profit for the year 210,000 495,000

Balance sheet as at 30 June 2016 2017

Sh. Sh. Sh. Sh.
Fixed assets at cost 1,500,000 2,100,000
Less: Depreciation 300,000 1,200,000 375,000 1,725,000
Current assets:
Stock 600,000 825,000
Debtors 375,000 525,000
Cash 120,000 1,095,000 - 1350,000
Less: current liabilities
Creditors 217,500 300,000
Taxation 240,000 480,000
Proposed dividend 187,500 262,500
Bank overdraft - (645,000) 97,500 (1,140,000)
1,650,000 1,935,000
Financed by:
Ordinary share capital
(Authorized and issued) 750,000 750,000
Undistributed profits 525,000 1,020,000
10% debentures 375,000 165,000
1,650,000 1,935,000
Required:
(i) Compute six accounting ratios for both 2016 and 2017 which you feel would be of particular
value in assessing the Profitability and Liquidity of Neptune Ltd.
 SOLUTION

2016 2017
Current ratio =1,095,000/645,000 =1350000/1440000
=Current Assets/current = 1.698 =1.184
Liabilities
Quick Ratio =(1095000-600000)/645000 =(1350000-825000)/1140000
=(Current Assets- =0.767 =0.461
Stock)/Current Liabilities
Gross Profit margin =1350000/3000000 =2100000/4800000
=Gross Profit/sales 45% =43.75%
Net Profit Margin =637500/3000000 =1237500/4800000
=Net profit before tax/Sales =21.25% =25.78%
Return on Investments =637500/2295000 =1237500/3075000
=Net profit before tax/Total =27.78% =40.24%
assets
Return on Capital Employed =637500/1650000 =1237500/1935000
=Net profit before =38.64% =63.95%
tax/(Shareholders fund +
debt)
The following are the summarized financial statements of Finlord Traders ltd:

Trading and profit and loss account for the year ended 31st October.
2016 2017
Sh.’000 Sh.’000
Sales 93,500 11,350
Cost of sales (55,120) (72,970)
Gross profit 38,380 38,380
Expenses (26,230) (23,960)
Net profit before interest and tax 12,150 14,420
Loan interest (450) (375)
Net profit before tax 11,700 14,045
Taxation (3,510) (5,413.5)
Net profit after tax 8,190 8,631.5
Dividend (6,00) (6,000)
Retained profit 2,190 2,631.5

Balance sheet as at 31 October

2015 2016
Sh.000 Sh.000 Sh.000 Sh.000
Fixed assets:
Freehold premises 10,500 10,500
Plant and equipment 7,200 9,500
Motor vehicles 5,350 23,050 7,300 27,300

Current assets:
Stock 12,500 11,800
Debtors 9,850 8,900
Bank balance and cash in hand 5,950 28,300 5,864.5 26,564.5

Current liabilities:
Creditors 8,350 7,830
Taxation 3,510 5,413.5
Dividend 3,000 (14,860) 3,000 (16,243.5)
36,490 37,621
Ordinary share capital 30,000 30,000
Reserves 3,490 5,121
33,490 35,121
15% loan 3,000 2,500
36,490 37,621

Note:
1. 80% of the sales are no credit
2. The stock as at 31 October 2014 was valued at Sh.13,000,000

Required:
Calculate two ratios for each classification identified below for the financial years ended 31st
October 2015 and 2016 and comment on the company’s profitability and liquidity:
(i) Profitability ratios
(ii) Liquidity ratios

SOLUTION
Profitability ratios
2016 2017
ROCE =(12,150/36,490)x100) =(14420/37621)x100
=(PBIT/Capital employed) x = 33.3% =38.3%
100%

Net profit on sales =(12,150/93,500)x 100 =(14420/111350)x100%

= (PBT/Net sales x 100% = 12.99% =12.95%

Liquidity ratios
2016 2017
Current ratio =28300/14860 =26,564.5/16,243.5
=Current Assets /current = 1.9:1 =1.6:1
liabilities

Quick ratio =15800/14860 =14764.5/16243.5

=(C.A.-Stock)/Current =1.1:1 = 0.9:1
liabilities

Comments on Liquidity and profitability

Profitability:
The ratio shows a small growth in profitability portrayed by an increase in ROCE of 5% from
33.3% in 2016 to 38.3% in 2017.This indicates that the company has been utilizing its assets
optimally.

Liquidity:
The decrease in two liquidity ratios shows that the company’s ability to meet its short term
maturing obligations has decreased and as such the company’s operations are riskier now.