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Financial Statement

Analysis &

Performance

Exercises

for 2 similar businesses:

Inventory turnover

ratio

Current ratio

Gross profit margin

Net profit margin

Zaitun

Trading

6 times

Chantra

Trading

8 times

2 times

30%

15%

3 times

40%

10%

financial position?

Activity:

Chantra has a higher inventory

turnover ratio. Inventory is

sold/replaced more times than Zaitun.

Liquidity:

Chantra is more liquid than Zaitun.

Profitability:

Chantra has a higher gross profit

margin makes more profit per sale.

However, on a net profit basis (after

deducting all expenses), Zaitun has a

higher margin.

Orchid Palace

Income Statement for the year ended 31.12.2012

Sales

Less: Sales returns

2,500,600

(35,000)

2,465,600

Opening inventory

Add: Purchases

550,000

1,100,000

100,000

(80,000)

(380,700)

1,289,300

Gross profit

1,176,300

Orchid Palace

Income Statement for the year ended 31.12.2012

(Contd.)

Salesmen salaries

160,000

Distribution expenses

128,000

20,000

Administrative expenses

97,000

Depreciation of equipment

25,000

50,000

Marketing expenses

85,000

Consultancy expenses

100,000

350,000

1,015,000

Interest expense

(10,000)

Net profit

151,300

Orchid Palace

Balance Sheet as at 31.12.2012

Non-current

assets

Long-term

liabilities

1,700,00

0

depreciation

(380,000

)

Equipment

Less: Provision for

depreciation

Bank loan

1,480,00

0

850,000

(250,000

)

1,000,000

Current

liabilities

500,000 Accounts payable

569,000

1,980,00

0

Current assets

Owners equity

Inventory

380,700

Accounts

receivable

360,000

219,600

Total assets

Capital

1,371,300

2,940,30

960,300

Palace:

Current ratio

Quick ratio

Inventory turnover ratio

Number of days sales in receivables

Non-current assets turnover ratio

Total assets turnover ratio

Debt ratio

Times interest earned ratio

Debt to equity ratio

Gross profit margin

Net profit margin

Return on assets ratio

Liquidity ratios:

Current ratio

= Current assets/Current liabilities

= 960,300/569,000

= 1.69

Quick ratio

= (Current assets Inventory

Prepayments)/Current liabilities

= (960,300 380,700)/569,000

= 1.02

* Note that both CR & QR are > 1.

Generally, this means that the firm is

Activity ratios:

Inventory turnover ratio

= Cost of goods sold/Average inventory

= 1,289,300/(0.5 X [550,000 + 380,700])

= 1,289,300/465,350

= 2.77

Number of days sales in receivables

= Average accounts receivable/Average

daily sales

= 360,000/2,465,600 X 365 days

= 53.29 days

*Take accounts receivable @ 31.12.2012

Non-current assets turnover ratio

= Net sales/Non-current assets (net)

= 2,465,600/1,980,000

= 1.25

Total assets turnover ratio

= Net sales/Average total assets

= 2,465,600/2,940,300

= 0.84

*Average total assets => use total

assets @ 31.12.2012

Gearing ratios:

Debt ratio

= Total liabilities/Total assets X 100

= (1,000,000 + 569,000)/2,940,300 X

100

= 53.36%

Times interest earned ratio

= Net profit/Interest expense

= 151,300/10,000

= 15.13 times

Debt to equity ratio

= Long term debt/Owners equity

= 1,000,000/1,371,300

Profitability ratios:

Gross profit margin

= Gross profit/net sales X 100

= 1,176,300/2,465,600 X 100

= 48%

Net profit margin

= Net profit/net sales X 100

= 151,300/2,465,600 X 100

= 6%

Return on assets ratio

= Net profit after tax/Total assets X 100

= 151,300/2,940,300 X 100

= 5%

* Since there is no tax, take net profit after tax

= net profit.

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