Chapter # 6. Analysis of Financial Statement. Sameer Hussain.

Transcription

1 Analysis of Financial Statement

2 SYLLABUS ACCORDING TO UNIVERSITY OF KARACHI: Financial Statement analysis. Tools of analysis. Dollar/Rupees and percentage change. Trend percentage. Component percentage. Common size Financial Statements and ratios. Interpretation. WHAT THE EXAMINER USUALLY ASK? Computation of ratios and percentages. Trend percentages. Comments on ratios and percentages. Page 80

3 FINANCIAL STATEMENT ANALYSIS An analysis of the financial statements of a business to assess its performance and position. Ratios are normally calculated from the financial statements to assess the profitability, solvency, working capital management, liquidity, and capital structure of an organization. RATIO ANALYSIS The use of accounting ratios is to evaluate a company s operating performance and financial stability. Such ratios as return on capital employed and gross profit percentage can be used to assess profitability. The liquidity ratios can be used to examine solvency and gearing ratios to examine the financial structure of the company. The analysis of ratios can indicate how well a company is run, the risks of financial insolvency, and the financial returns provided. Liquidity Ratio. Leverage Ratio. Activity Ratio. Investors/Shareholders Ratio. Profitability Ratio. LIQUIDITY RATIO Liquidity means the ability of the firm to pay its way. Liquidity ratios are the ratios that measure a company s liquid position. LEVERAGE RATIO Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to measure its ability to meet financial obligations. There are several different ratios, but the main factors looked at include debt, equity, assets and interest expenses. ACTIVITY RATIO Activity ratios are the rate at which the company sells its stock and the efficiency with which it uses its assets. INVESTORS RATIO Information to enable decisions to be made on the extent of the risk and the earning potential of a business investment is investors ratio. PROFITABILITY RATIO Profitability ratio is a class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well. Page 81

4 LIQUIDITY RATIO LEVERAGE RATIO ACTIVITY RATIO Working Debt ratio Receivable capital turnover Current ratio Equity ratio Inventory turnover Quick ratio Debt to equity Payable ratio turnover Total operating days INVESTORS RATIO Earnings per share Price earnings ratio Earning rate Dividend per share Dividend yield PROFITABILITY RATIO Net profit percentage Gross profit percentage Cost of goods sold percentage Operating expense percentage Rate of return on assets Assets turnover Rate of return on shareholders equity Book value per share WORKING CAPITAL Working capital is the capital that is used to finance the day-to-day operations of a company. Working capital is calculated as the difference between current assets and current liabilities. Working capital = Current assets Current liabilities CURRENT RATIO Current ratio is the ratio of the current assets of a business to the current liabilities; it is used as a test of liquidity. Current ratio = Current assets Current liabilities QUICK RATIO (ACID TEST RATIO) Quick ratio is a ratio used for assessing the liquidity of a company; it is the ratio of the liquid assets (i.e. current assets less the inventory) to the current liabilities. Quick ratio = Quick assets Current liabilities QUICK ASSETS Quick assets are the assets held in cash or in something that can be readily turned into cash with minimal capital loss (e.g. deposits in a bank current account, accounts receivable, marketable investments). Quick assets = EQUITY RATIO Equity ratio = Current assets Inventory Prepaid expenses Total shareholders equity x 100 Total assets Page 82

5 DEBT RATIO A ratio used to examine the financial structure or gearing (leverage) of a business. The longterm debt, normally including preference shares, of a business is expressed as a percentage of its equity. A highly geared company is one in which the debt is higher than the equity, compared to the other companies in a similar industry. Debt ratio = Total liabilities Total assets DEBT TO EQUITY RATIO Total liabilities x 100 Debt to equity ratio = Total shareholders equity ACCOUNTS RECEIVABLE TURNOVER A ratio for analyzing the level of accounts receivable in relation to the amount of credit sales. The formula is net credit sales divided by average accounts receivable. A high turnover indicates faster collection. Accounts receivable turnover in times = Accounts receivable turnover in days = Net credit sales Average accounts receivable 365 Receivable turnover in times Average receivable = Accounts receivable (beg) + Accounts receivable (end) 2 INVENTORY TURNOVER A ratio for financial analysis that communicates the efficiency of inventory management. The formula is inventory turnover = cost of goods sold/average inventory held. It is important to match up the time period covered by the cost of goods sold and the time period of the average inventory. If the ratio is high, it means inventory items are not in the warehouse long before sale. If the ratio is low, it means the company has a lot of inventory on hand in relation to the amount it sells. While a high ratio may indicate efficiency, a high ratio may also involve a risk of running out of products and losing sales. A low ratio could mean that the company has obsolete inventory that will never be sold, or that the company has built up inventory in anticipation of higher prices or shortages. Interpretations of the inventory-turnover ratio require comparisons with industry averages. However, some publishers of comparative data use sales in the numerator of the ratio, so the reader has to investigate for comparability. Inventory turnover in times = Inventory turnover in days = Average inventory = Cost of goods sold Average inventory 365 Inventory turnover in times Inventory (beg) + Inventory (end) 2 Page 83

6 ACCOUNTS PAYABLE TURNOVER A ratio for analyzing the level of accounts payable in relation to the amount of inventory purchases. The formula is inventory purchases divided by average accounts payable. The higher the turnover, the faster the company is paying for inventory purchases. Accounts payable turnover in times = Accounts payable turnover in days = Net credit purchases Average accounts payable 365 Payable turnover in times Average payable = Accounts payable (beg) + Accounts payable (end) 2 OPERATING CYCLE Operating cycle is the average time between acquiring inventory and receiving cash from its sale. Operating cycle = Average operating cycle = Inventory turnover in days + Receivable turnover in days Inventory turnover in days + Accounts receivable turnover in days 2 NET PROFIT PERCENTAGE Net profit margin is a ratio of financial performance calculated by expressing the net profit as percentage of sales revenue. Net profit percentage = Profit before Interest and Tax X 100 Net sales GROSS PROFIT PERCENTAGE Gross profit percentage is a ratio of financial performance calculated by expressing the gross profit as percentage of sales revenue. With retailing companies in particular, it is regarded as a prime measure of their trading success. Gross profit percentage = Gross profit X 100 Net sales COST OF GOODS SOLD PERCENTAGE Cost of goods sold X 100 Cost of goods sold percentage = Net sales OPERATING EXPENSES PERCENTAGE Operating expenses X 100 Operating expenses percentage = Net sales Page 84

7 RATE OF RETURN ON ASSETS Rate of return on assets is an accounting ratio expressing the amount of profit for an accounting period as a percentage of the assets of a company. Rate of return on assets = Net profit X 100 Total assets ASSETS TURNOVER A ratio used in financial statement analysis to investigate how efficiently assets are used to generate earnings. The numerator is usually sales for the period and the denominator is the average value of the specific assets held during the period covered by the sales. A higher ratio is better, but the exact number depends on the industry & should be compared to industry norms. Assets turnover = Net sales X 100 Average assets Total assets (beg) + Total assets (end) Average assets = 2 RATE OF RETURN ON SHAREHOLDERS EQUITY A financial analysis tool that measures how well a company generates earnings compared to the amount of capital shareholders have invested in the firm. The formula is net income divided by average common shareholders equity. If the company has preferred stock, the preferred stock dividends are subtracted from net income before dividing by equity. Rate of return on shareholders equity = Net income X 100 Shareholders equity EARNINGS PER SHARE (EPS) The profit attributable to each ordinary share in a company based on consolidated profit for the period, after deducting minority interest and preference shares dividends. This profit figure is divided by the weighted average number of shares in issue during the period. Earnings per share = Net profit Average no. of shares PRICE EARNINGS RATIO Price earnings ratio is a comparison of the current market price of a company share to the earning per share of the company. The price earnings ratio is one of the main indicators used by the fundamental analysts to decide whether the shares in a company are expensive or cheap, relative to the market. Price earnings ratio = EARNINGS RATIO Earnings ratio = Market price per share Earnings per share Earnings per share X 100 Market price per share Page 85

8 BOOK VALUE PER SHARE A financial ratio that is calculated as common stockholders equity divided by the number of outstanding shares. Common stockholders equity is the total stockholders equity less the par value of any preferred stock. This ratio is refined further if preferred stock is redeemable, has dividends in arrears, or has a participating feature. In those cases, part of retained earnings is deducted so that the equity really represents that which is available to common shareholders. Book value per share = NUMBER OF SHARES Number of shares = Shareholders equity Number of shares Share capital Par value of share DIVIDEND PER SHARE The total dividend declared by a company in a year divided by the total number of ordinary shares on which the divided is paid. Dividend per share = Cash dividend declared Number of ordinary shares DIVIDEND YIELD A ratio computed by dividing the annual dividends paid per share of ordinary share by the market price per share at a specific date; indicates the rate of return to shareholders in terms of cash dividend distributions. Dividend yield = SHARE CAPITAL Share capital = Dividend per share X 100 Market price per share Shareholders equity Retained earnings SHAREHOLDERS EQUITY Shareholders equity = Total assets Total liabilities RETURN ON CAPITAL EMPLOYED (ROCE) Profit before interest and tax X 100 Return on capital employed = Capital employed Capital employed = Total assets Total current liabilities ILLUSTRATION # 1: The following balances have been taken from the books of Furqan Co. Ltd. on 31 Dec. 2007: Fixed assets Rs. 200,000 Long term liabilities Rs. 100,000 Current assets Rs. 700,000 Current liabilities Rs. 400,000 Share capital (Rs.10) Rs. 300,000 Retained earnings Rs. 100,000 Sales (all on credit) Rs. 600,000 Cost of goods sold Rs. 350,000 Average inventory Rs. 20,000 Average receivable Rs. 40,000 Operating expenses Rs. 150,000 Market price per share Rs. 25 Quick assets Rs. 450, Working capital 2. Debt ratio Page 86

9 3. Equity ratio 4. Current ratio 5. Inventory turnover 6. Receivable turnover 7. Rate of net income on sales 8. Earnings per share 9. Price earnings ratio 10. Total days of operating cycle 11. Quick ratio 12. Operating expenses rate 13. Rate of gross profit on sales 14. Cost of goods sold rate 15. Rate of return on assets 16. Assets turnover 17. Rate of return on shareholders equity 18. Book value per share SOLUTION # 1: 1. Computation of Working Capital: Current assets Rs. 700,000 Less: Current liabilities Rs. (400,000) Working capital Rs. 300, Computation of Debt Ratio: Debt ratio = Total liabilities Total assets Debt ratio = 500, ,000 Debt ratio = 0.56 : 1 3. Computation of Equity Ratio: Equity ratio = Total shareholders equity Total assets Equity ratio = 400, ,000 Equity ratio = 0.44 : 1 4. Computation of Current Ratio: Current ratio = Total current assets Total current liabilities Current ratio = 700, ,000 Current ratio = 1.75 : 1 5. Computation of Inventory Turnover: Inventory turnover in times = Cost of goods sold Average inventory Inventory turnover in times = 350,000 20,000 Inventory turnover in times = 17.5 times Inventory turnover in days = 365 Inventory turnover in times Inventory turnover in days = Inventory turnover in days = 21 days 6. Computation of Receivable Turnover: Receivable turnover in times = Net credit sales Average receivable Page 87

10 Receivable turnover in times = 600,000 40,000 Receivable turnover in times = 15 times Receivable turnover in days = 365 Receivable turnover in times Receivable turnover in days = Receivable turnover in days = 24 days Computation of Net Income: Net sales Rs. 600,000 Less: Cost of goods sold Rs. (350,000) Gross profit Rs. 250,000 Less: Operating expenses Rs. (150,000) Net income Rs. 100, Computation of Rate of Net Income: Rate of net income on sales = Net income X 100 Net sales Rate of net income on sales = 100,000 X ,000 Rate of net income on sales = 16.67% 8. Computation of Earnings Per Share: Earnings per share = Operating income Number of shares Earnings per share = 100,000 30,000 Earnings per share = Rs.3.33 Computation of Number of Shares: Number of shares = Share capital Par value of each share Number of shares = 300, Number of shares = 30, Computation of Price Earnings Ratio: Price earnings ratio = Market price per share Earnings per share Price earnings ratio = Price earnings ratio = Computation of Total Days of Operating Cycle: Total days of operating cycle = Inventory turnover in days + Receivable turnover in days Total days of operating cycle = Total days of operating cycle = 45 days 11. Computation of Quick Ratio: Quick ratio = Total quick assets Total current liabilities Page 88

11 Quick ratio = 450, ,000 Quick ratio = : Computation of Operating Expense Rate: Operating expenses rate = Operating expenses X 100 Net sales Operating expenses rate = 150,000 X ,000 Operating expenses rate = 25% 13. Computation of Gross Profit Rate: Gross profit rate = Gross profit X 100 Net sales Gross profit rate = 250,000 X ,000 Gross profit rate = 41.67% 14. Computation of Cost of Goods Sold Rate: Cost of goods sold rate = Cost of goods sold X 100 Net sales Cost of goods sold rate = 350,000 X ,000 Cost of goods sold rate = 58.33% 15. Computation of Rate of Return on Assets: Rate of return on assets = Net profit X 100 Total assets Rate of return on assets = 100,000 X ,000 Rate of return on assets = 11.11% 16. Computation of Assets Turnover: Assets turnover = Net sales X 100 Average assets Assets turnover = 600,000 X ,000 Assets turnover = 66.67% 17. Computation of Rate of Return on Shareholders Equity: Rate of return on shareholders equity = Net income X 100 Shareholders equity Rate of return on shareholders equity = 100,000 X ,000 Rate of return on shareholders equity = 25% 18. Computation of Book Value Per Share: Book value per share = Total shareholders equity Number of shares Book value per share = 400,000 30,000 Book value per share = Page 89

12 PRACTICE QUESTIONS Question # 1: 2003 Regular & Private (Advanced Accounting) UOK Compute trend percentages for the following items taken from financial statements of Modern Fixtures over a five year period. Treat 1998 as the base year. State whether the trends are favourable or unfavourable Sales 85,000 74,000 61,500 59,000 50,000 Cost of goods sold 58,500 46,600 40,500 36,000 30,000 Question # 2: 2002 Regular & Private (Advanced Accounting) UOK The following data are taken from the Fast Company: Year Sales Rs.450, , , ,000 Net income 22,950 14,550 21,450 19,200 Compute trend percentages for sales and net income. Question # 3: 1999 Regular & Private (Advanced & Cost Accounting) UOK The following item from the income statement of Makli Limited for the year ended December 31, 1998 have been expressed as a percentage of net sales: Net sales (Rs. One million) Rs.1,000,000 Beginning inventory 100,000 Net purchases 680,000 Ending inventory 80,000 Selling expenses 130,000 Administrative expenses 90,000 Calculate beginning inventory rate, net purchases rate and ending inventory rate, selling expenses rate and administrative expenses rate and cost of goods sold rate (all as percentage of net sales). Question # 4: 2010 Regular (Advanced & Cost Accounting) UOK (a) Selected data taken from the balance sheet of Imam Co. at the end of fiscal year on December 31, Cash 100,000 Marketable securities 50,000 Accounts receivable 150,000 Inventories 250,000 Prepaid expense 200,000 Current liabilities 250,000 Compute: 1. Working capital 2. The current ratio 3. Acid test ratio Note: Write relevant formula in the computations. (b) Zulfiqar Company s ordinary shares capital account for 2010 and 2009 showed: Ordinary share Rs.10 par value Rs.45,000. The following data are provided relative to 2010 & 2009: Dividends Rs.2,250 Rs.3,600 Market price per share Rs.20 Rs.22 Earnings per share Rs.2.13 Rs.2.67 Page 90

13 Compute for year 2010 and 2009: (i) Dividend per share and (ii) Dividend yield Note: Write relevant formula in the computations. Compare answer for the year 2010 with the year 2009 and give comments. Question # 5: 1999 Regular & Private (Advanced & Cost Accounting) UOK The following balances have been taken from the books of Islamabad Co. Ltd. on Dec. 31, 1998: Cash 60,000 Accounts payable 125,000 Marketable securities 40,000 Accrued expenses 25,000 Accounts receivable 80,000 Sales (on account) 600,000 Inventories 120,000 Cost of goods sold 360,000 (a) Working capital (b) Current ratio (c) Quick ratio (d) Accounts receivable turnover (e) Inventory turnover Question # 6: 2001 Regular & Private (Advanced & Cost Accounting) UOK The following information has been taken from the record of Ashraf Company Ltd. at the end of the current year:- Total assets Rs.450,000 Quick assets 80,000 Total liabilities 202,500 Current liabilities 100,000 Fixed assets 250,000 Retained earnings 47,500 Sales (including cash sales of Rs.100,000) 1,000,000 Gross profit on sales 30% Average inventory 70,000 Average receivable 90,000 Operating expenses 180,000 Market price of Rs.20 share is Rs Working capital 2. Debt ratio 3. Equity ratio 4. Current ratio 5. Inventory turnover 6. Receivable turnover 7. Rate of net income on sales 8. Earnings per share 9. Earnings ratio 10. Total days of operating cycle 11. Quick ratio 12. Operating expenses rate Question # 7: 2013 Private (Advanced & Cost Accounting) UOK Following information have been taken from the financial records of a limited company: Inventory beginning Rs.3,000 Purchases 9,000 Inventory ending 2,000 Accounts receivable beginning 3,500 Accounts receivable ending 2,500 Sales (credit) 15,000 Net profit 2,000 Total liquid assets 8,100 Total current assets 18,000 Total current liabilities 9,000 Page 91

14 Compute the following: (1) Working capital (2) Acid test ratio (3) Current ratio (4) Inventory turnover (times and days) (5) Receivable turnover (times and days) (6) Days of operating cycle Question # 8: 2011 Private (Advanced & Cost Accounting) UOK A condensed balance sheet for Amjad Ltd. prepared at the year ended December 31, 2010 appears as follows: Assets Equities Cash Rs.95,000 Notes payable (Due in 6 months) Rs.40,000 Accounts receivable 155,000 Accounts payable 110,000 Inventory 270,000 Long term liabilities 360,000 Prepaid expenses 60,000 Capital stock, Rs.50/- par 300,000 Plant & equipment Net 570,000 Retained earnings 430,000 Other fixed assets 90,000 Total assets 1,240,000 Total equities 1,240,000 During the year the company earned a gross profit of Rs.1,116,000 on credit sales of Rs.2,950,000. Accounts receivable, inventory and plant assets remained almost constant in amount throughout the year. Compute the following: (a) Current ratio (b) Quick ratio (c) Working capital (d) Debt ratio (e) Accounts receivable turnover (f) Inventory turnover (g) Book value per share Question # 9: 2001 Regular & Private (Advanced Accounting) UOK At the end of year the following information was obtained from the accounting records of Adnan Ltd. Sales (all on account) 400,000 Cost of goods sold 240,000 Average inventory 60,000 Average accounts receivable 40,000 Interest expense 3,000 Income taxes 4,000 Net income for the year 18,000 average investment in assets 250,000 Average stockholder s equity 200,000 On the basis of above information compute the following for the year: (1) Inventory turnover (2) Accounts receivable turnover (3) Total operating expenses (4) Gross profit percentage (5) Return on average stockholders equity (6) Return on average assets Question # 10: 2011 Regular (Advanced & Cost Accounting) UOK Following are the selected data taken from books of Rafiq Co. Ltd. at the end of year 2010: Cost of goods sold 540,000 Accounts payable 200,000 Merchandise inventory (opening) 120,000 Bills payable 50,000 Accounts receivable (Opening) 380,000 Page 92

15 Marketable securities 142,000 Cash 108,000 Accounts receivable (Ending) 350,000 Merchandise inventory (Ending) 150,000 Credit sales (Net) 1,825,000 Total operating expenses 600,000 On the basis of above information, find out: (1) Working capital (2) Inventory turnover (3) Current ratio (4) Accounts receivable turnover (5) Acid test ratio (6) Gross profit percentage (7) Net profit percentage (8) Operating expenses rate Question # 11: 2004 Private (Advanced Accounting) UOK Following are the selected balances taken from the books of Annie Ltd. at the end of Cost of goods sold 270,000 Accounts payable 100,000 Merchandise inventory (1.1.04) 60,000 Bills payable 250,000 Accounts receivable (1.1.04) 190,000 Marketable securities 71,000 Notes payable 15,000 Cash 54,000 Accounts receivable ( ) 175,000 Credit sales (Net) 912,500 Merchandise inventory ( ) 75,000 On the basis of above information, compute: (1) Current ratio (2) Acid test ratio (3) Inventory turnover (4) Accounts receivable turnover (5) Net profit percentage (6) Gross profit percentage (7) Average days to accounts receivable & inventory turnover Question # 12: 2004 Regular (Advanced Accounting) UOK Following are the selected data taken from books of Nisa Ltd. at the end of year 2003: Cost of goods sold Rs. 540,000 Accounts payable 200,000 Merchandise inventory (opening) 120,000 Bills payable 50,000 Accounts receivable (opening) 380,000 Marketable securities 142,000 Cash 108,000 Accounts receivable (ending) 350,000 Merchandise inventory (ending) 150,000 Credit sales (net) 1,825,000 Total operating expenses 600,000 On the basis of above information, find out: 1. Working capital 2. Inventory turnover 3. Current ratio 4. Accounts receivable turnover 5. Acid test ratio 6. Gross profit percentage 7. Net profit percentage 8. Operating expense rate Page 93

16 Question # 13: 2005 Private (Advanced Accounting) UOK Following are the selected data taken from the books of Masooma & Co. at the end of year Cash 22,400 Marketable securities 7,700 Inventory at start 29,600 Inventory at end 25,800 Prepaid expenses 19,200 Accounts receivable beginning 59,700 Accounts receivable ending 49,400 Accounts payable 36,600 Notes payable 21,400 Purchases 246,200 Sales 384,000 Sales discount 14,000 Operating expenses 80,000 Non-operating expenses 4,000 Total assets 250,000 Total liabilities 100,000 Compute the following: (a) Equity ratio (b) Current ratio (c) Rate of gross profit on sales (d) Quick ratio (e) Rate of net income on sales (f) Return on assets (g) Return on equity (h) Total days of operating cycle. Question # 14: 2005 Regular (Advanced Accounting) UOK (a) The following information has been taken from the balance sheet of Kashmir Carpets at the end of June Accounts payable Rs.100,000 Accounts receivable 80,000 Accrued liabilities 5,000 Cash 50,000 Income tax payable 7,000 Inventory 130,000 Marketable securities 200,000 Notes payable 68,000 Prepaid expenses 14, Working capital 2. Current ratio 3. Acid test ratio (b) The following data has been extracted from the financial statements of Green Grocers: Net sales (70% credit sales) 2,048,000 2,335,000 Cost of goods sold 1,048,000 1,397,000 Average monthly inventory 203, ,000 Inventory end of the year 243, ,000 Accounts receivable 150% of average inventory ,000 Determine for each year: 1. Inventory turnover 2. Receivable turnover 3. No. of days sales in inventory 4. Days of operating cycle (c) Comment on favourable and unfavourable trend revealed by the data. Page 94

17 Question # 15: 2008 Private (Advanced & Cost Accounting) UOK The selected data given below are taken from the records of the Hasan Co. Ltd. at the end of the year 2007: Cash 30,000 Accounts receivable (beg) 4,150 Prepaid insurance 12,500 Accounts receivable (end) 43,500 Inventory (beginning) 18,150 Sales 255,000 Inventory (ending) 32,500 Operating expenses 52,300 Purchases 120,000 Accounts payable 22,500 Share capital (par value Rs.10) 250,000 Accrued expenses 32,500 Retained earnings 30,000 Total assets 650,000 Determine the following ratios on the basis of the above information: 1. Working capital 2. Acid test ratio 3. Current ratio 4. Operating expense ratio 5. Rate of gross profit on sales 6. Equity ratio 7. Accounts receivable turnover rate 8. Inventory turnover rate Question # 16: 1997 Regular (Advanced & Cost Accounting) UOK The data shown below were taken from the financial records of Shahid Ltd. at the end of 1996:- Accounts payable 50,000 Accrued liabilities 33,000 Cash 32,000 Inventories Jan. 1, ,000 Inventories Dec. 31, ,000 Marketable securities 10,000 Operating expenses 120,000 Prepaid expenses 25,000 Purchases (net) 360,000 Accounts receivable Jan. 1, ,000 Accounts receivable Jan. 31, ,000 Long term loan 150,000 Plant assets 400,000 Sales (all on credit) 604,000 Sales return and allowances 20,000 Retained earnings 133,000 Share capital (Rs.10 par)? Market price per share Rs.18 On the basis of above information compute the following: 1. Current ratio 2. Quick ratio 3. Equity ratio 4. Debt ratio 5. Inventory turnover 6. Receivable turnover 7. Rate of net income on sales 8. Book value per share 9. Earnings per share 10. Price earnings ratio Question # 17: 1991 Regular & Private (Advanced & Cost Accounting) UOK Parkland Ltd. balance sheet dated December 31, 1990 is given below: Assets Equities Cash 20,000 Bank overdraft 10,000 Marketable securities 20,000 Notes payable 50,000 Accounts receivable 80,000 Accounts payable 100,000 Inventories 200,000 Long term loan 120,000 Prepaid expenses 10,000 Share capital (Rs.10 par) 200,000 Building 300,000 Retained earnings 220,000 Other plant assets 120,000 Reserves 50,000 Total assets 750,000 Total equities 750,000 Total sales during the year amounted to Rs.1,200,000. Gross profit for the year was Rs.440,000. Inventory and accounts receivable remained almost constant throughout the year. 1. Working capital 2. Current ratio 3. Acid test ratio 4. Equity ratio Page 95

18 5. Debt ratio 6. Receivable turnover 7. Inventory turnover 8. Book value per share Question # 18: 2009 Private (Advanced & Cost Accounting) UOK The following terms are taken from financial statement of Aman Company. All sales are made on account: Sales (on account) 1,800,000 Plant and equipment 2,400,000 Average shareholders equity 3,800,000 Long term liabilities 900,000 Average accounts receivable 375,000 Average merchandise inventory 255,000 Gross profit 525,000 Compute the following: 1. Accounts receivable turnover. 2. Merchandise inventory turnover. 3. Ratio of plant and equipment to long term liabilities. 4. Rate of return on shareholders equity. 5. Gross profit percentage. Question # 19: 2010 Private (Advanced & Cost Accounting) UOK The following items have been taken from the financial record of Fazal & Company: Cash Rs.50,000; Accounts receivable on January 1, 2010 Rs.90,000; Office supplies Rs.9,000; Inventory on December 31, 2010 Rs.60,000; 5-year bonds payable Rs.140,000; operating expenses Rs.32,000; Bank overdraft Rs.135,000; Accounts receivable on December 31, 2010 Rs.120,000; Ordinary shares capital Rs.400,000 (par value Rs.10 each share); Cost of sales Rs.225,000 which is 75% of sales; Retained earnings Rs.57,000 (exclusive of current year income); Accrued expenses Rs.90,000; Prepaid expenses Rs.171,000; Inventory on January 1, 2010 was Rs.90,000; Plant and machinery Rs.195,000. Compute the following: (a) Current ratio (b) Inventory turnover days (c) Receivable turnover days (d) Equity ratio (e) Earnings per share (f) Book value per share Question # 20: 1989 Regular & Private (Advanced & Cost Accounting) UOK Presented below are data relating to financial statements of Al-Farid Limited at the end of first year of its operation: Balance Sheet As on December 31, 1988 Assets Equities Cash 6,000 Allowance for bad debts 3,000 Marketable securities 20,000 Allowance for depreciation 50,000 Accounts receivable 78,000 Accounts payable 68,000 Merchandise inventory 86,000 Outstanding expenses 15,000 Plant assets 350,000 Long term bonds payable 70,000 Share capital (Par Rs.10) 200,000 Retained earnings 134,000 Total assets 540,000 Total equities 540,000 Sales revenue 1,200,000 Cost of goods sold 768,000 Operating expenses 278,000 Page 96

19 Note: a) Dividend paid during the year at 25% of paid-up capital. b) Market price per share is Rs.18. c) Credit sales for the year were Rs.1,125,000. Calculate the following: 1. Quick ratio 2. Current ratio 3. Equity ratio 4. Debt ratio 5. Accounts receivable turnover rate 6. Inventory turnover rate 7. Gross profit rate 8. Earnings per share 9. Price earnings ratio 10. Book value per share Question # 21: 2007 Private (Advanced & Cost Accounting) UOK The data given below were taken from the financial statements of Hamza Corporation for years 2005 & Current assets 220, ,000 Current liabilities 165, ,000 Cash sales 200, ,000 Credit sales 450, ,000 Cost of goods sold 450, ,000 Merchandise inventory 95, ,000 Quick assets 70,000 75,000 Accounts receivable 60,000 66,000 Compute the following for 2005 & Amount of working capital 2. Current ratio 3. Days of inventory turnover 4. Quick ratio 5. Days of receivable turnover 6. Rate of gross profit on sales 7. Days of operating cycle in 2006 only Question # 22: 2008 Regular (Advanced & Cost Accounting) UOK The following data have been obtained from the financial statements of Mujahid & Co. for the year ended December 31, 2006 and 2007: Cash 28,750 20,000 Accounts receivable 39,000 46,000 Merchandise inventory 23,000 15,000 Prepaid expenses 5,200 7,500 Accounts payable 14,000 16,000 Notes payable 30,000 35,000 Accrued expenses 7,000 8,700 Net sales 205, ,000 Cost of goods sold 110, ,000 Compute the following for 2006 and 2007: (1) Amount of working capital (2) Current ratio (3) Acid test ratio (4) Inventory turnover (5) Receivable turnover (6) Gross profit rate Page 97

20 Question # 23: 2009 Regular (Advanced & Cost Accounting) UOK Following comparative data has been taken from the records of Nuzhat & Company: NUZHAT & COMPANY COMPARATIVE INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 AND Net sales 1,200, ,000 Cost of sales (690,000) (510,000) Gross profit 510, ,000 Operating Expenses: Selling expense (120,000) (95,000) General & administrative overheads (160,000) (130,000) Income before interest & taxes (IBIT) 230, ,000 Financial charges (32,000) (24,000) Income before tax 198,000 91,000 Income tax (29,700) (13,650) Net income 168,300 77,350 Assets: Non Current Assets: Property, plant and equipment 382, ,000 Intangible assets 150, ,000 Current Assets: Inventories 70,000 70,000 Prepaid expenses 90,000 30,000 Accrued financial income 70,000 60,000 Accounts receivables 190, ,000 Marketable securities 180, ,000 Cash and bank 120, ,000 Authorized Capital: 50,000 ordinary Rs , ,000 Share Capital Ordinary share Rs , ,000 Retained earnings 368, ,000 Long Term Liabilities: Bonds payable 135, ,000 Deferred income 20, Current Liabilities: Accounts payable 200, ,000 Accrued expenses 75,000 70,000 Current maturity of deferred income 4, Compute the following ratios: 1. Current ratio for Quick ratio for Earnings per share for Book value per share for Inventory turnover for 2007 and Receivable turnover for 2007 and Return on assets for 2007 and 2008 Page 98

21 Question # 24: 1998 Regular (Advanced & Cost Accounting) UOK Selected data from the financial statements of R. Company and M. Company are as follows: R. Company M. Company Total assets 400, ,000 Total liabilities 100,000 50,000 Sales (all on credit) 1,000, ,000 Average inventory 140, ,000 Average receivable 125, ,000 Gross profit as a percentage of sales 30% 25% Net income as a percentage of sales 6% 5% Computation of the following for each company:- 1. Net income. 2. Net income as a percentage of shareholders equity. 3. Accounts receivable turnover and the average number of days required to collect the receivable. 4. Inventory turnover and the average number of days required to turnover the inventory. Question # 25: 1996 Regular & 2012 Private (Advanced & Cost Accounting) UOK 1. Find current liabilities when current ratio is 4:1 and current assets Rs.80, Find current assets when current ratio is 3:1 and current liabilities Rs.40, Find quick assets when quick ratio is 3:1 and current liabilities Rs.60, Find total liabilities when debt ratio is 1:3 and total assets Rs.600, Find out total capital when equity ratio is 5:8 and the total assets Rs.800, Find cost of goods sold when inventory turnover is 20 times and average inventory Rs.60, Find net credit sales when accounts receivable turnover is ten times and average accounts receivable Rs.80, Find net sales when gross profit ratio is 1:3 and gross profit Rs.5,000. Question # 26: 2000 Regular & Private (Advanced & Cost Accounting) UOK The following items are taken from the financial statements of Imam Company Ltd. for the year ended December 31, 1999: Cash Rs.108,000 Accounts receivable (net) 300,500 Merchandise inventory 226,000 Accrued interest on notes receivable 4,500 Accounts payable 108,000 10% notes receivable (current) 16,500 Advances from customers 1,500 Ordinary shares capital 400,000 Premium on ordinary shares 120,000 Retained earnings 280,000 Sales (including cash sales of Rs.20,500/=) 1,220,500 Gross profit 520,500 Net income 250,000 Cash dividend declared 120,000 Operating expenses 400,000 Other information is as under: i) Shareholders equity (opening) was Rs.760,000/=. ii) Market price per share is Rs.42/=. iii) Merchandise inventory (opening) was Rs.90,000/=. iv) Accounts receivable (opening) was Rs.102,500/=. Page 99

22 1. Operating expenses rate 2. Current ratio 3. Quick ratio 4. Dividend yield 5. Earnings per share 6. Price earnings ratio 7. Rate of return on ordinary shares 8. Accounts receivable turnover ratio 9. Inventory turnover ratio 10. Gross profit ratio Question # 27: 2006 Private (Advanced Accounting) UOK Pakistan Digitech Company s comparative balance sheets and income statement for the year 2006 follows: PAKISTAN DIGITECH COMPANY COMPARATIVE BALANCE SHEET Assets: Cash 140, ,000 Accounts receivable 210, ,000 Inventory 500, ,000 Prepaid expenses 20,000 60,000 Plant & equipment 1,900,000 1,400,000 Less: Accumulated depreciation 650, ,000 Long-term investment 700, ,000 Total 2,820,000 2,500,000 Liabilities & Equities: Accounts payable 260, ,000 Accrued liabilities 100, ,000 Taxes payable 490, ,000 Debentures payable 500, ,000 Ordinary share capital 800, ,000 Retained earnings 670, ,000 Total 2,820,000 2,500,000 PAKISTAN DIGITECH COMPANY INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2006 Sales 2,300,000 Less: Cost of goods sold 1,200,000 Gross margin 1,100,000 Less: Operating expenses 700,000 Net operating profit 400,000 Gain on sale of long-term investment 50,000 Income before taxes 450,000 Less: Income taxes 140,000 Net income 310,000 Additional Information: Dividends of Rs.180,000 declared and paid during the year. The gain on sale of long-term investments was from the sale of investments for Rs.250,000 in cash. The investments had an original cost of Rs.200,000. There was retirement or disposal of plant and equipment during the year. Compute the following ratios for the year 05 and Current ratio 2. Acid test ratio 3. Inventory turnover 4. Return on total assets 5. Return on shareholder s equity 6. Debt-to-equity ratio 7. Accounts receivable turnover Page 100

23 Question # 28: 2012 Regular (Advanced & Cost Accounting) UOK (a) The data shown below is taken from the comparative balance sheets of Maqsood Ali & Co.: Cash 16,000 30,000 Marketable securities 20,000 10,000 Accounts receivable 45,000 55,000 Inventories 60,000 75,000 Prepaid expenses 2,000 4,000 Plant & equipment 80,000 90,000 Intangible assets 25,000 20,000 TOTAL 248, ,000 Current liabilities 60,000 80,000 (a) From the data above calculate for 2009 and 2010: (i) Working capital (ii) Current ratio (iii) Acid test ratio (b) Compute rupee and percentage changes in 2010 as compare to 2009 for current assets and current liabilities. (c) Compute ratio of cash to current liabilities for 2009 and (b) The average inventory of XY Co. as cost price is Rs.40,000. Sales for 2011 were made at 20% above cost and totaled Rs.300,000. (i) What was the inventory turnover rate? (ii) What is the average age of inventory? Question # 29: 2013 Regular (Advanced & Cost Accounting) UOK a) On March 1, 2012 the amount of current liabilities of a company was Rs.40,000 which is 2/3 of current assets. During the month the company purchased furniture Rs.26,500 by paying cash Rs.12,000 and issuing a six month note for the balance. Compute current ratio on March 31, No other transaction has been taken place during the month except mentioned above. b) Umar & Co. supplied the following information: Account balances on July 1, 2008: Accounts receivable Rs.70,000; Accounts payable Rs.60,000; Accrued operating expenses Rs.50,000 and Merchandise inventory Rs.28,000. During the year the following transactions took place: Sales return Rs.9,000; Returned goods to suppliers Rs.40,000; Discount allowed to customers Rs.15,000; Discount received from suppliers Rs.2,000; Collection from customers Rs.80,000 and payment to suppliers Rs.50,000. Account balances on June 30, 2009: Accounts receivable Rs.250,000; Accounts payable Rs.90,000; Accrued operating expenses Rs.56,000 and Merchandise inventory Rs.20,000. Compute the following: (Suppose all sales and purchases were on credit). (a) Inventory turn over (b) Receivable turn over (c) Rate of net income on sales (d) Rate of operating expenses on sales Page 101

24 Question # 30: 1993 Regular (Advanced & Cost Accounting) UOK HO HO CORPORATION Balance Sheet As on December 31, 1992 (In thousands of rupees) Current Assets: Liabilities: Cash? Current liabilities? Accounts receivable (net)? Long term debt 8% interest? Inventory? Total current assets? Total liabilities? Plant Assets: Stockholders Equity: Equipment 1,800 Capital stock Rs.10 par 1,000 Less: Accum. depreciation (300) 1,500 Retained earnings 200 Total shareholders equity 1,200 Total assets? Total equities? HO HO CORPORATION Income Statement For the period ended December 31, 1992 (In thousands of rupees) Net sales? Cost of goods sold? Gross profit on sales (25% on net sales)? Operating expenses? Operating income (10% of net sales)? Interest expense 84 Income before income tax? Income tax 40% of income before income tax? Net income Rs. 180 Additional Information: 1. The equity ratio 40%, the debt ratio was 60%. 2. The only interest expense was on the long term debt. 3. The beginning inventory was Rs.500,000; the inventory turnover was 4.8 times. 4. The current ratio was 2 to 1. The quick ratio was 1.07 to The beginning balance in accounts receivable was Rs.280,000. The accounts receivable turnover for the year was 12.8 times. All sales were made on account. a) Complete the financial statements by use of available information. b) Give all computations of amounts appearing in the balance sheet and income statement. Page 102