LECTURE 5 _QUESTION : FINANCIAL STATEMENT ANALYSIS

QUESTION 1

Condensed statement of financial position and statement of profit or loss data for Orange Berhad
appear below:

Orange Berhad
Statements of financial position December 31

2019 (RM) 2018 (RM) 2017 (RM)

Plant and equipment (net) 400,000 370,000 358,000
Investments 75,000 70,000 45,000
Inventory 90,000 95,000 64,000
Account receivable (net) 50,000 45,000 48,000
Cash 25,000 20,000 18,000
640,000 600,000 533,000

Share capital-ordinary, RM10 par 345,000 315,000 300,000

Retained earnings 145,000 123,000 113,000
Non-current liabilities 80,000 87,000 50,000
Current liabilities 70,000 75,000 70,000
640,000 600,000 533,000

Orange Berhad
Statements of profit or loss for the year December 31

2019 (RM) 2018 (RM)

Sales revenue 740,000 700,000
Less : Return inwards 40,000 60,000
Net sales 700,000 640,000
Cost of goods sold 420,000 400,000
Gross profit 280,000 240,000
Operating expenses ( including income taxes) 236,000 210,000
Net income 44,000 30,000

Additional information:
1. The market price of Orange’s ordinary shares was RM4, RM5 and RM7 for 2017, 2018
and 2019 respectively.
2. All dividends were paid in cash.

Required:
a. Compute the following ratios for both year 2018 and 2019.
1. Current ratio
2. Acid test ratio

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 3. Profit margin
4. Asset turnover
5. Earnings per share (Weighted-average ordinary shares in 2019 were 32,000 and in 2018
were 31,000.
6. Price-earnings ratio
7. Payout ratio
8. Debt to assets ratio

b. Based on the ratios calculated, discuss briefly the improvement or lack thereof in financial
position and operating results from 2018 to 2019 of Orange Berhad.

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QUESTION 2
Selected financial data of Target and Wal-mart for a recnt years are presented below (in millions)
Statement of profit or loss (data for the year)
TARGET (RM) WAL-MART (RM)
Net sales 72,596 476,294
Cost of goods sold 51,160 358,069
Selling and administrative expense 16,816 91,353
Interest expense 1,126 2,335
Other income (expense) (391) (410)
Income tax expense 1,132 8,105
Net income 1,971 16,022

Statement of financial position (End of year)

TARGET (RM) WAL-MART (RM)
Non- current assets 32,980 143,566
Current assets 11,573 61,185
Total assets 44,553 204,751

Total equity 16,231 81,339

Non-current liability 15,545 54,067
Current liability 12,777 69,345
Total equity and liability 44,553 204,751

Beginning of year balances

TARGET (RM) WAL-MART (RM)
Total assets 48,163 203,105
Total equity 16,558 81,738
Current liability 14,031 71,818
Total liabilities 31,605 131,287

Other data
TARGET (RM) WAL-MART (RM)
Average net account receivable 2,921 6,723
Average inventory 8,335 44,331
Net cash provided by operating activities 6,520 23,257

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Required:
a) For each company, compute the following ratios:
1. Current ratio
2. Account receivable turnover ( times and days)
3. Inventory turnover (times and days)
4. Profit margin
5. Asset turnover
6. Return on assets
7. Return on ordinary shareholder equity
8. Debt to assets ratio
9. Times interest earned.
b) Compare/comment the liquidity, profitability and solvency ratio of the two companies.

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QUESTION 3
The following ratios have been computed for Morgan Company for 2019.
Profit margin 12.5%
Times interest earned 8 times
Accounts receivable turnover 4 times
Acid-test ratio 2:1
Current ratio 3:1
Debt to total assets ratio 20%

Morgan Company’s 2019 financial statements with missing information follow:

Comparative Statements of Financial Position

December 31,
———————————————————————————————————————
Assets 2019 2018
Property, plant, and equipment (net)............................................ $ 200,000 $ 160,000
Inventory...................................................................................... ? (8) 50,000
Accounts receivable (net)............................................................ ? (6) 40,000
Short-term Investments................................................................ 10,000 25,000
Cash.............................................................................................. 30,000 45,000
Total assets........................................................................... $ ? (9) $320,000

Equity and liabilities

Share capital – ordinary............................................................... $ 220,000 $ 200,000
Retained earnings......................................................................... 60,000 35,000
Bonds payable.............................................................................. ? (10) 20,000
Accounts payable......................................................................... ? (7) 30,000
Short-term notes payable............................................................. 40,000 35,000
Total equity and liabilities ................................................... $ ? (11) $320,000

Statement of profit or loss

For the Year Ended December 31, 2019
———————————————————————————————————————
Net sales....................................................................................... $200,000
Cost of goods sold........................................................................ 75,000
Gross profit.................................................................................. 125,000
Expenses:
Depreciation expense............................................................. $ ? (5)
Selling expenses..................................................................... 8,000
Administrative expenses........................................................ 12,000
Income from operations................................................... ? (4)
Interest expense...................................................................... 5,000
Income before income taxes........................................................ ? (2)
Income tax expense................................................................ ? (3)
Net income................................................................................... $ ? (1)

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Required:

Use the above ratios and information from the Morgan Company financial statements to fill in
the missing information on the financial statements. Follow the sequence indicated. Show
computations that support your answers.

QUESTION 4

The following information was extracted from Maria Trading as at 30 November 2019.

RM
Cash 5,439
Opening inventory 27,000
Closing inventory 29,000
Administrative expenses 35,322
Selling expenses 23,559
Financial expenses 22,011
Account receivables 59,425
Purchases 148,000
Account payables 51,443
Bank overdraft 15,666
Sales 255,490
Commission received 7,500
Motor vehicles 90,000
Long term loan 100,000

Required:

Calculate the following ratios for Maria Trading:

a) Gross profit
b) Net profit
c) Inventory turnover
d) Current ratio
e) Account receivable turnover
f) Debt to assets ratio