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problem 1) Following data are extracted from the book of Mr Donald during the year ended 31st December 2005.
                                                         Rs
Sales                                               128,000
Cost of Sales                                     96,000
Administrative Expenses                       9,000
Marketing & Distribution Expenses         7,000

BALANCE SHEET As at 31st December 2005                   Rs                   Rs
Fixed Assets (at cost)                                                16,000
Less Accumulated Depreciation                                  (12,800)              3,200
Current Assets
Stock                                                                        24,000
Debtors                                                                     40,000
Bank                                                                           8,000
Total Current Assets                                                   72,000
Less Current Liabilities
Creditors                                                                    (8,000)                 64,000
Net Assets                                                                                              67,200
Financed By:
Capital (at 31st December 2005)                                                                67,200

It was ascertained that the “Stock Turnover” was estimated at three times in this particular year.
Also, the information below relates to the same period in respect of the business of Mr John, who is trading in similar products.

Gross Profit Margin                                                  20%
Net Profit Margin                                                    12.5%
Expenses as a Percentage of Sales                            7.5%
Current Ratio                                                            4:1
Acid Test Ratio                                                        2.25:1
Return on Capital Employed                                        30%
Debtor’s Collection Period (in days)                          60 days
Creditor’s Collection Period (in days)                         50 days

Required:

(a) find out the financial ratios mentioned above for Mr Donald’s business in respect for the year ended 31st December 2005.

(b) Mrs Nick is interested in investing in one of these two businesses and has solicited your advice before taking a decision. Which business should she select? Justify your answer.

(c) “Financial ratios are sufficient for the evaluation of businesses”. describe

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