problem 1) Following data are extracted from the book of Mr Donald during the year ended 31st December 2005.
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
Total Current Assets 72,000
Less Current Liabilities
Creditors (8,000) 64,000
Net Assets 67,200
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
(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