Financial Accounting Ratio

Subject: Financial Accounting.
Classes: S. S. 2
Topic: Financial Accounting Ratio.

Note: Students to open to their text book, Essential Financial Accounting, page 616, fifth edition, question 37.3 using Golan Company, 1993 as illustration. Students using any other edition should go to the content page and look for lnterpretation of accounts using simple ratio.

Solution: Golan Company, 31st December, 1993.

(i) Gross profit on sales.

Gross profit/Sales ✖ 100%
130,000/80,,000✖100%
= 14.94
=14.9%

(iii) Net profit on sales.

Net profit/sales ✖ 100%
60,000/870,000✖100%
= 6.89
= 6.9%

(ii) Stock turnover

= Cost of goods sold/Average inventory
Where: Average inventory
= Opening stock + Closing stock / 2
= 50,000 + 100,000/ 2
= 150,000 / 2
=75,000
= 740,000/75,000
= 9.86
= 10 times.

(iv) Return on capital

= Net profit /Capital employed ✖ 100%

Where: Capital employed = Fixed assets plus Current assets less Current liabilities.
Note: Total assets = Fixed assets plus Current assets.

= 101,000 + 340,000 – 276,000
=441,000 – 276,000
= Capital employed
= 165,000

60,000/165,000✖100%
= 36.363
= 36.4%

(v) Current ratio

= Current assets/ Current liabilities

 340,000/276,000
   =  1.23
   =   1.2 : 1

(vi) Working Capital

Working Capital = Current assets less Current liabilities.

=#340,000 – #276,000
= #64,000

(vii) Acid test ratio

=Current assets less stock/Current liabilities.

= 340,000 – 100,000
= 240,000
= 240,000/276,000
= 0.8695
= 0.87 : 1

(viii) Debtors Collection period

Debtors/Sales ✖ 365 days

= 240,000/870,000 ✖ 365days
=100.68
=101days.