Part 9 ● An introduction to financial analysis

➔ 39.10 You are to study the following financial statements for two businesses that operate in the same
industry and then answer the questions which follow.

Financial Statements

Business J Business K
£ £ £ £
Income Statements
Sales 472,000 695,000
Less Cost of goods sold
Opening inventory 51,000 62,000
Add Purchases 264,000 401,000
Less Closing inventory ,000) 251,000) 0,000) 413,000)
Gross profit 221,000 282,000
Less Depreciation 12,000 16,000
Wages, salaries and commission 135,000 151,000
Other expenses 36,000 183,000) 47,000 214,000)
Net profit 8,000 8,000
Balance Sheets
Non-current assets
Equipment at cost 120,000 160,000
Less Accumulated depreciation 0,000) 70,000 0,000) 130,000
Current assets
Inventory 64,000 50,000
Trade receivables 68,000 123,000
Bank 15,000 147,000 5,000 178,000
Total assets 217,000 308,000
Current liabilities
Trade payables ,000) ,000)
Net assets 151,000 209,000
Financed by:
Capitals
Balance at start of year 148,000 221,000
Add Net profit 38,000 68,000
Less Drawings ,000) 80,000)
Total capital 151,000 209,000

Required:
a) Calculate the following ratios for each business:
i) gross profit as percentage of sales;
ii) net profit as percentage of sales;
iii) expenses as percentage of sales;
iv) inventory turnover;
v rate of return of net profit on capital employed use the average of the capital account for
this purpose);
vi) current ratio;
vii) acid test ratio;
viii) trade receivable days;
ix) trade payable days.
b omment on the ratios you have calculated in a) and suggest some possible reasons for the differ-
ences and similarities between the businesses indicated by your figures.

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M39 Frank Wood's Business Accounti 65435.indd 678 31/03/2021 07:41