ASSIGNMENT 2 AF 101.
The final accounts of hope ltd.for the year 2007/2008 are given below;-
Balance sheet as at 30th June 2008 30th June 2009
Shs Shs
CAPITAL EMPLOYED
Ordinary share capital @ shs 10 787,500 787,500
Profit and loss account 65,100 53,200
Debentures 549,500 630,000
Bank loans 238,000 459,000
1,640,100 1,930,000
FINANCING
Non current assets.
Plant & machinery 2,100,000 2,273,600
Less accumulated depreciation (1,680,000) ( 1,921,500)
420,000 352,100
Investments 197,400 92,400
617,400 444,500
Current assets
Stock 966,000 1,356,600
Debtors 808,500 1,417,500
Cash 1,813,800 2,843,400
Less ;current liabilities
Creditors 407,400 819,000
Accruals 105,000 352,000
Taxation 134,400 81,200
Dividends 143,500 105,300
790,300 1,357,200
1,022,700 1,486,100
1,640,100 1,930,600
Profit and loss account for the year ended 30th June 2008 30th June 2009
Shs Shs
Sales 5,904,500 7,809,900
Less cost of sales 3,675,000 4,704,000
Gross profit 2,229,500 3,105,900
Less expenses
Administration expenses 1,494,500 2,394,000
Rent 129,500 144,900
Interest 91,000 151,200
Depreciation 210,000 1,925,000 241,500 2,931,600
Pre tax profit 304,500 174,300
Less; taxation 134,400 81,200
Dividend 143,500 277,900 105,000 186,200
Retained profit 26,600 11,900
Market price per share shs 45 shs 55
Required
Calculate the following ratios for each for 2007/2008 and 2008/2009
a) i) Liquidity ratios
ii)performance ratios
iii)Gearing ratios
iv)Earning ratios
b) state the possible reasons for and significance of any change in the ratios shown by your calculations.
SOLUTION;
(a) i)LIQUIDITY RATIOS
(i)Current ratio; 2007/2008 2008/2009
Current assets 1,813,000 2,843,400
Current liabilities 790,300 1,357,200
=2.3:1 =2.1:1
.
(ii)Quick ratio; 2007/2008 2008/2009
Current assets-stock 1,813,000-966,000 2,843,400-1,356,600
Current liabilities 790,300 1,357,200 =1.07:1 1.09:1
(iii) Debtors collection period(average debtor collection period)
2007/2008 2008/2009
average debtors x 365 debtors at start not available (808,500 +1,417,500)÷2x 365
Credit sales 7,809,900
52days
-unable to calculate or show changes due to un availability of data
(iv)Average credit period taken(creditors to purchases ratio)
2007/2008 2008/2009
Average credits x 365 creditors at start not available (407,400+819,000)÷2 x 365
Credit purchases 5,094,600
44 days
-un able to calculate or show changes due to un availability of some data in 2007/2008
ii)PERFOMANCE RATIOS
2007/2008 2008/2009
(a)Gross profit margin
Gross profit x 100 2,229,500 x 100 3,105,900 x 100
Sales 5,904,500 7,805,900
= 37.8% =39.8%
(b)Net profit margin 2007/2008 2008/2009
Net profit x 100 170,100 x 100 93,100 x 100
Sales 5,904,500 7,809,900
=2.9% =1.2%
(c)Stock turn over rate 2007/2008 2008/2009
Cost of goods sold 3,675,000 4,704,000
Average stock 966,000 (966,000+1356600) ÷2
=3.80times =4.05time.
(d)Return on investment 2007/2008 2008/2009
Net profit before tax x100 304,500 x100 174,300 x 100
Total assets 2,430,400 3287900
12.53% 5.30%
(e)Return on capital employed 2007/2008 2008/2009
Net profit before interest and tax x 100 395,000 x 100 325,500 x 100
Capital employed 1,640,100 1,930,600
=24.08% =16.86%
(f)Fixed assets turnover 2007/2008 2008/2009
Sales 5,904,500 7,809,900
Fixed assets 420,000 352,100
= 14.05times = 22.18times
.
(g)Current assets turnover 2007/2008 2008/2009
Sales 5,904,500 7,809,900
Current assets 1,813,000 2,843,400
=3.3 times = 2.8 times
(h)Total assets turnover 2007/2008 2008/2009
Sales 5,904,500 7,809,900
Total assets 2,430,400 3,287,900
=2.43 times =2.38 times
(i)Stock holding period 2007/2008 2008/2009
Average stock x 365 966,000 x365 (966,000+1,356,600)÷2 x365
Cost of sales 3,675,000 4,704,000
=96 days =90days
.
iii) GEARING RATIOS
(a)Debt ratio 2007/2008 2008/2009
Long term liabilities x100 787,500 x100 1,089,000 x 100
Total assets 2,430,400 3,287,900
=32.40% = 33.12%
(b)Debt for equity ratio 2007/2008 2008/2009
Long term liability 787,500 1,089,000
Equity 852,600 840,700
=0.91:1 = 1.3:1
(c)Equity ratio 2007/2008 2008/2009
Equity x 100 852,600 x 100 1,089,000 x 100
Total assets 2,430,400 3,287,900
= 35% = 33.12%
(d)Interest coverage ratio 2007/2008 2008/2009
Net profit before interest and tax 395,500 325,500
Total interest 91,000 151,200
= 4.34:1 = 2. 15:1
IV) EARNING RATIOS
-Dividend per share 2007/2008 2008/2009
Dividend declared(paid) 143,500 105,000
Number of equity shares 78,750 78,750
=1.82 shillings 1.33 shillings
- Dividend yield 2007/2008 2008/2009
Dividend per share x 100 1.82 x100 1.33 x100
Market price per share 45 55
=4.04% = 2.42%
- Earning per share 2007/2008 2008/2009
Net profit after interest and tax 170,100 93,100
Number of owning shares 78,750 78,750
=2.16 shillings per share =1.18 shillings per share
- Price earning ratio 2007/2008 2008/2009
Market price per share 45 55
Earning per share 2.16 1.18
=20.8 shillings =46.7 shillings .
- Dividend cover ratio 2007/2008 2008/2009
Net profit after interest and tax 170,100 93,100
Annual dividend 143,500 105,000
=1.18 times =0.88 times
REFERENCES:
Bautista, Sr.I.V and Assad,M.J(1994):Introduction Financial Accounting,DSM University Press Dar es Salaam.
Frank W and Alan S, Business Accounting 11st edition.
(b) The possible reasons for the significance of changes in the ratios shown by the above calculations
(i) LIQUIDITY RATIOS
(a)Current ratios
Reason: slide change in current assets with change in current liabilities, less stock holding and more cash for use.
Implication: In 2007/2008 Hope Ltd is solvent as its current liabilities are able to pay current liabilities by 2.3 times.
( b)quick ratio
Reason: increase in current assets in 2008/2008
Implication:-In 2007/2008 current assets excluding stock is 1.07 times than current liabilities while in 2008/2009 is about 1.10 times so, the firm has done the best in 2008/ 2009 than in 2007/2008.
(ii) PERFOMANCE RATIOS
a)gross profit margin:
Reason; good sales differences between years and low cost incurred for sale resulting into greater profits
Implication: - In 2007/2008 Hope Ltd has less return on profit which is only 37.8% while in 2008/2009 has more return on profit which is about 39.8%,so the 2008/2009 seems to be a good business year for to the firm.
b)gross profit margin
Reason for change: increase in expenses in 2007/2009
Significance: -In 2007/2008 Hope Ltd has more return on sales about 2.9% compared to 2008/2009which is only 1.2% of return on sales
c)stock turn-over rate
Reason for change: fast selling of stock in 2008/2009
Implication -In 2008/2009 Hope ltd sells fast its goods than 2007/2008, so it is making better in the year.
d) Return on investment
Reason for change; the small ratio in 2008/2009 may be because of expansion program that has not yet started yieling returns.
Significance: -In 2007/2008; the business has performed better since its assets was able to yield high return from profits
e)return on capital employed
Reason for change : increase in assets or capital employed and increase in long term liabilities
Significance of these changes -in 2008/2009 capital was increased but earned less profit, while in 2007/2008 less resource was used but earned a good return..
f)fixed asset turn over
Reason for change: increase in sales revenue which contributed much to turnover and decrease in fixed assets.
Significance of change -In 2007/2008 Hope Ltd has used less assets to generate revenue as used only 14.05times compared to year 2008/2009 where used more assets to generate revenue by 22.18times.
g)current asset turn over
Reason for changes: increase in sales revenue
Implication:-In 2007/2008 Hope has used more current assets to generate revenue about 3.3times while in 2008/2009 has used fewer current assets to generate revenue only 2.8times.
h) total asset turn over
-1n 2007/2008 Hope Ltd has 2.43times of total assets to generate revenue while in 2008/2009 used only 2.38times of total fixed assets to generate revenue.
i)stock holding period
Reason for change; the slighter change may be because of the fast moving items the business has started dealing with.
Significance: In 2007/2008 the stock seemed to be moving slower compared to 2008/2009, it may indicate the increase in advertising and fast moving item in 2008/2009
III) GEARING RATIOS
a)debt ratios
The change may be because of the use of borrowed funds to buy assets
This implies that: In 2008/2009 the firm is in a good position of paying its debts using its total assets about 33.12% compared to 2007/2008periiod where it was capable of only 32% to pay its long term liabilities out of assets
b)debt for equity ratio
The reason for change may be the increase in long-term liabilities with the decrease in equity which implies that In 2008/2009 Hope Ltd is more able to pay its long term liabilities compared to 2007/2008(0.91 to 1.3)
c) equity ratio
The decrease in net profits may be the reason for these changes
Its significance is that; In 2007/2008 Hope Ltd is able to pay 1.82 shillings for each share as dividend to shareholders while in 2008/2009 can only pay 1.33 shillings for each share as dividend, so in 2007/2008 a company is more efficient than in 2008/2009
d)interest coverage ratio
The change may be because of decrease in net profit in 2008/2009 which means in 2007/2008 , The firm has the ability to pay interest 4.34 times out of its profit and therefore it has great efficiency in its operations
iv) EARNING RATIOS
-DIVIDEND PER SHARE
The decrease in net profits may be the reason for these changes
Its significance is that; In 2007/2008 Hope Ltd is able to pay 1.82 shillings for each share as dividend to shareholders while in 2008/2009 can only pay 1.33 shillings for each share as dividend, so in 2007/2008 a company is more efficient than in 2008/2009.
-Dividend yield
Reason for change: decrease in dividend per share and increase in market price per share in 2008/2009, this shows that;-In 2007/2008 rate of return to shareholders is high (about 4.04%) compared to 2008/2009 (where it is 2.42%) so Hope Ltd has in a good position of selling shares in 2007/2008 than in 2008/2009 and has a relative good rate of return to shareholders in that year (2007/2008).
-Earning per share
The reason for change may be because of decrease in net profit in 2008/2009,which indicates that In 2007/2008 Hope Ltd has high(large) amount earning for ordinary shareholders (about 2.16 shillings per share) while in 2008/2008 has only 1.18 shillings as profit(earning) for each share
-Price earning ratio
The reason for these changes may be because -In 2008/2009 price of share was high (about 46.7 shillings) compared to 2007/2008 was only 20.8 shillings; so, Hope Ltd can sell its shares in 2008/2009 because of the high price hence earn high profits
-dividend cover ratio
The changes may be caused by decrease in net profit that has lead into low payment in dividends, therefore in 2007/2008 Hope Ltd is in a good position of paying dividends to shareholders (can pay 1.18times) while in 2008/2009 it is not in a good position of paying dividends (it can pay only 0.88 times.)
Workings;
Computing purchases (note 1)
Purchases=(cost of goods sold+closing stock)-opening stock
= (4,704,000+1,356,600)-966,000
=5,094,600
