Accounting Ratio

The following financial statements relate to Philips Ltd:

Income Statement for the years ended 31 December
2004 2005
£ 000 £ 000
Sales 800 950
Less: Cost of Sales 400 495
Gross Profit 400 455
Less: expenses (including debenture interest) 325 345
Net profit 75 110
Statement of Financial Position as at 31 December
2004 2005
£ 000 £ 000 £ 000 £ 000
Non- Current Assets 285 390
Current Assets
Inventory 60 90
Trade Receivable 185 190
Bank 85 60
330 340
Current Liabilties
Trade Payable 75 80
Net Current Assets 255 260
540 650
Non- Current Liabilities
10% Loan Notes (2010) - issued 2000 100 100
440 550
Equity
Ordinary shares of £1 each 300 300
Retained profits 140 250
440 550
Note: Inventory at 1 January 2004 was £55,000
REQUIRED
(a) Calculate the following ratios for both 2004 and 2005. All workings must be shown and answers
shown to two decimal places where necessary.
(i) Gross profit margin
(ii) Mark-up percentage
(iii) Net profit margin. Use net profit before interest
(iv) Rate of inventory-turnover based upon average inventory
(v) Current ratio
(vi) Liquidity ratio
(vii) Return on total capital employed. Use net profit before interest
(b) Using your answer to the inventory-turnover ratio, state whether the above business is more likely to
be a supplier of computer parts or of fresh vegetables.
Give a reason for your choice.
(c) Calculate the revised liquidity ratio if a six month loan for RM50,000 had been negotiated and the cash
received, immediately following the preparation of the Statement of Financial Position dated 31
December 2005. You may assume that no other balance sheet movements took place.

Answer Guide: (a) (i) 47.89% (ii) 91.92% (iii) 12.63%

(iv) 6.60 times (v) 4.25:1 (vi) 3.13:1 (vii) 18.46%
(b) computer parts (c) 2.31:1