Accounting Ratio 2

Question 2
The accountant of Paris Ltd extracted the following figures from the Income Statement for the year
ended 31 March 2007 and the Statement of Financial Position at 31 March 2007:
£ £
Sales 550,000
Cost of Sales 200,000
Gross Profit 350,000
Operational Expenses 225,000
Loan Note Interest 4,500 229,500
Net Profit 120,500

Ordinary Share Capital (issued and fully paid) 750,000

Share Premium 50,000
Profit & Loss 275,000
5% Loan Note 90,000
Account Receivable 125,000
Inventory 65,000
Cash 1,200
Account Payable 88,000
Bank Overdraft 7,500

REQUIRED
(a) Copy the following table into your answer book and calculate the required ratios. The first ratio
has been calculated for you to demonstrate what is required:
RATIO WORKINGS ANSWER
Gross Profit to Sales 350,000
x 100 63.64%
550,000

Net Profit (before interest) to Sales

Current/Working Capital
Liquidity/Acid Test
Inventory Turnover (based on closing inventory)
Return (after interest) on Ordinary
Shareholders Funds
Return (before interest) on Total Capital
Employed

The gross profit to sales ratio for the year ended 31 March 2006 was 71.64%.
REQUIRED
(b) Give three possible reasons for the reduction of 8% in the gross profit to sales ratio between 31
March 2006 and 31 March 2007.

Answer Guide:
(a) 22.73%; 2:1; 1.32:1; 3.08 times; 11.21%; 10.73%