Accounting Ratio

HKDSE(2013, 7) (Accounting ratio)

The balances of Able Company as at 31 December were as follows:

2011 / 2012
$ / $
4% Long-term loans / 67,000 / 120,000
8% Short-term loans / 23,100 / 60,000
Accounts payables / 43,300 / 100,200
Accounts receivables / 37,500 / 85,864
Bank overdraft / – / 15,000
Cash at bank / 32,020 / –
Cash in hand / 200 / 500
Inventory / 79,680 / 162,936
$5 Ordinary share, fully paid / 155,000 / 155,000
Property, plant and equipment, net / 254,000 / 333,622
Retained profits / 115,000 / 132,722

Additional information:

(i)All sales were made on credit.

(ii)On 31 December 2010, inventory and accounts receivables were $88,320 and $37,260 respectively.

(iii)Total sales amount shown in the sales journal for 2011 and 2012 amounted to $454,790 and $625,942 respectively. Gross profit was $96,110 for 2011 and $230,191 for 2012. However, it was then discovered that a sales invoice of 2012 for $14,000 had been omitted from the records of the books.

(iv)There had been no change in share capital since 2010. The balance of the retained profits at 31 December 2010 was $69,521.

(v)In 2011 and 2012, no tax expenses were incurred and no dividend was declared.

REQUIRED:

(a)Calculate (to two decimal places) the following ratios for 2011 and 2012 (assume 365 days per year);

(i)current ratio

(ii)liquid ratio

(iii)days’ sales in accounts receivables

(iv)inventory turnover (in times)

(v)net profit ratio

(vi)earnings per share

(b)Based on the ratios calculated in (a)above,

(i)briefly comment on the profitability of Able Company for the year 2012.

(ii)suggest three ways to improve the liquidity of Able Company.

HKDSE (Practice, 3) (Accounting ratio and error correction)

Easy Company makes all purchases and sales on credit. The following balances of the company as at 31 December 2011 were extracted.

$
Sales / 10,186,000
Purchases / 7,294,500
Inventory – as at 1 January 2011 / 878,000
Inventory– as at 31 December 2011 / 990,000
Trade receivables – as at 1 January 2011 / 856,000
Trade receivables– as at 31 December 2011 / 996,000

REQUIRED:

(a)Calculate (to one decimal place) the following accounting ratios for 2011:

(1)trade receivables collection periods (in months)

(2)inventory turnover

Subsequent checking of the records by the accountant of Easy Company revealed that no entries had been made for the following items:

(i)Loan interest of $5050 incurred in 2011 remains unpaid as at 31 December 2011.

(ii)A motor vehicle costing $80 000 with an accumulated depreciation of $40 000 as at 31 December 2011 was sold for $48 000 in cash on the same date.

REQUIRED:

(b)Prepare the journal entries to record the above transactions for the year ended 31 December 2011. (Narrations are not required.)

(c)Explain the accounting treatment of item (i) using a relevant accounting concept.

HKDSE(sample, 8) (Accounting ratio)

Good Prospect Limited commences its business on 1 January 20X6 and has made a net profit of $3,000,000 for the year ended 31 December 20X6. However, the company experienced problems in getting $1,800,000 to finance the acquisition of a plant in Tai Po for expansion. Lee, the managing director, could not understand why the amounts in each of the following pairs of items were not equal:

(i)net profit for the year and net increase in cash and bank balances for the year

(ii)bank balance in the cash book and the bank statement balance as at 31 December 20X6

REQUIRED:

(a)Explain to the managing director why the amounts in each of the above of items would differ.

As at 31 December 20X6, the long-term financing of Good Prospect Limited was as follows:

$’000
Capital and reserves
200,000 Ordinary shares of $10 each / 2,000
150,000 12% Preference shares of $10 each / 1,500
Share premium / 1,000
Retained profits / 600
5,100

After studying the information above, Mok, the executive director, proposed the following alternatives to finance the acquisition of the plant:

Alternative 1: / To issue 100,000 ordinary shares at $18 per share. The annual ordinary dividend will remain at 20% on the net profit available for distribution to ordinary shareholders.
Alternative 2: / To issue $1,800,000 8% debentures (repayable in June 20Y2) at par, payable in full on application. Debenture interest is payable twice a year on 1 January and 1 July.
Alternative 3: / To purchase the plant on credit. The terms of agreement provide for five annual payments of $480,000, commencing at the end of the first year. Assume that interest accrues evenly over the credit period.

It was estimated that following this expansion, the profit before interest for the first financial year would amount to $3,600,000.

REQUIRED:

(b)Calculate the gearing ratio under each alternative immediately after the acquisition.

(c)Calculate the earnings per share under each alternative for the first financial year after the expansion. (Note: Ignore taxation.)

(d)Based on your answer in (b) and (c), evaluate the above three financing alternatives from the perspective of shareholders.

(e)List two non-financial factors that should be taken into account before making the decision.

Longman(2013, 8)(Limited Company and Accounting ratio)

8The following trial balance was extracted from the books of Billion Ltd as at 31 May 2013:

Dr / Cr
$ / $
Purchases and sales / 25,140,780 / 60,737,230
Returns inwards and outwards / 914,300 / 466,150
Carriage inwards / 1,063,830
Bad debts / 745,000
Allowance for doubtful debts / 865,700
Rent and rates / 2,758,850
Salaries and wages / 7,735,080
Marketing expenses / 492,500
Bank / 5,875,420
Inventory, 1 June 2012 / 2,703,700
Buildings / 46,250,000
Machinery and equipment / 40,635,000
Accumulated depreciation: / Buildings / 5,618,750
Machinery and equipment / 3,974,500
Retained losses / 3,421,380
Ordinary shares of $5 each, fully paid / 37,500,000
6% non-cumulative preference shares of $2 each, fully paid / 18,000,000
Share premium / 18,625,000
Accounts receivable and accounts payable / 14,678,940 / 6,627,450
152,414,780 / 152,414,780

Additional information

(i)Inventory as at 31 May 2013was valued at $3,509,000 and included damaged items costing $240,000. These items could only be sold for $95,000 after being repaired at a cost of $29,000.

(ii)One of the trade debtors was in financial difficulty and the entire debt amount of $578,940 could be uncollectible. The company also needed to maintain a general allowance for doubtful debts of 5%.

(iii)Depreciation was to be provided as follows:

Buildings5% on cost

Machinery and equipment10% on net book value

(iv)At the year end, prepaid rates and accrued salaries were $135,050 and $289,000, respectively.

(v)No preference dividendswere paid in the previous financial year as the company had incurred a loss. The board of directors recommended the payment of preference dividendsthis year.

(vi)The board also proposed to transfer profits of $2,000,000 to the general reserve and pay a dividend of $0.2 per ordinary share.

(vii)The profits tax rate was 20%.

Required:

(a)Prepare the following financial statements for management purposes:

(i)An income statement for the year ended 31 May 2013.

(ii)A balance sheet as at 31 May 2013.

(b)Compute the following accounting ratios:

(i)Asset turnover (Calculations to two decimal places)

(ii)Return on equity (Calculations to two decimal places)

Longman(2012, Dec, 9)(Accounting ratio)

9.The following are the financial statements of Sunny Ltd and Windy Ltd for the year ended31 March 2012. Both companies are of similar size and operate in the same industry.

Statements of Comprehensive Income for the year ended 31 March 2012
Sunny Ltd / Windy Ltd
Revenue / 12,610 / 14,115
Opening inventory / 1,962 / 1,294
Add / Purchases / 6,596 / 5,030
Less / Closing inventory / (2,133) / (975)
Cost of sales / 6,425 / 5,349
Gross profit / 6,185 / 8,766
Administrative expenses / (1,370) / (1,695)
Distribution expenses / (1,654) / (1,700)
Operating profit / 3,161 / 5,371
Finance expenses / (750) / (812)
Profit before tax / 2,411 / 4,559
Taxation / (483) / (912)
Profit for the year / 1,928 / 3,647
Statements of Financial Position as at 31 March 2012
Sunny Ltd / Windy Ltd
ASSETS
Non-current assets
Property, plant and equipment / 13,465 / 15,150
Current assets
Inventories / 2,133 / 975
Accounts receivable / 3,156 / 2,950
Prepayments / 400 / 861
Bank / 110 / 798
5,799 / 5,584
Total assets / 19,264 / 20,734
EQUITY AND LIABILITIES
Share capital and reserves
Share capital / 3,800 / 2,780
Retained profits / 5,254 / 6,804
Total equity / 9,054 / 9,584
Non current liabilities
10% debentures (repayable in 2020) / 6,990 / 8,100
Current liabilities
Accounts payable / 2,420 / 1,570
Accruals / 317 / 568
Tax payable / 483 / 912
3,220 / 3,050
Total liabilities / 10,210 / 11,150
Total equity and liabilities / 19,264 / 20,734

Additional information:

(i)All sales were made on credit and the revenue figure represented net sales.

(ii)All purchases were made on credit.

(iii)The issued share capital of both companies was made up of ordinary shares of $5 each, fully paid.

(iv)All figure in the statement is in thousand.

REQUIRED:

(a)Calculate (to two decimal places) the following ratios:

(i)Gross profit margin(ii)Return on shareholders’ equity(iii)Quick ratio

(iv)Accounts receivable turnover(v)Accounts payable turnover(vi)Debt ratio

(b)Comment on the profitability, liquidity and solvency of the two companies based on the ratios calculated in (a) above.

Suppose you are an investment adviser. As at 31 March 2012, the closing prices per ordinary share of Sunny Ltd and Windy Ltd were $26 and $128, respectively.

(c)Which company will you recommend to your clients for investment? Explain your answer.

Longman Mock (7, 2011) (Accounting ratio)

The financial statements of Sapphire Ltd for the years ended 31 December 2011 and 2012 are as follows:

Sapphire Ltd
Statements of Comprehensive Income for the years ended 31 December 2011 and 2012
2012 / 2011
$000 / $000
Turnover / 29,853 / 38,550
Cost of sales / (15,394) / (17,980)
Other revenues / 975 / 1,753
Administrative expenses / (7,163) / (9,975)
Selling and distribution expenses / (6,004) / (7,420)
Operating profit / 2,267 / 4,928
Finance expenses / (469) / (412)
Profit before tax / 1,798 / 4,516
Taxation / (360) / (904)
Profit after tax / 1,438 / 3,612
Sapphire Ltd
Statements of Financial Position as at 31 December 2011 and 2012
2012 / 2011
$000 / $000
ASSETS
Non-current assets
Property, plant and equipment, net / 9,655 / 8,958
Current assets
Inventories / 4,118 / 4,895
Accounts receivable / 7,464 / 7,654
Prepayments / 796 / 1,861
Bank / 86 / 198
12,464 / 14,608
Total assets / 22,119 / 23,566
EQUITY AND LIABILITIES
Share capital and reserves
Share capital / 7,800 / 7,800
Reserves / 6,660 / 5,846
Total equity / 14,460 / 13,646
Non-current liabilities
10% debentures (repayable in 2021) / 4,380 / 3,880
Current liabilities
Accounts payable / 2,402 / 3,868
Accruals / 517 / 1,268
Tax payable / 360 / 904
3,279 / 6,040
Total liabilities / 7,659 / 9,920
Total equity and liabilities / 22,119 / 23,566

Additional information:

(i)All sales were made on credit and the turnover figure represented net sales.

(ii)All purchases were made on credit.

(iii)Only ordinary shares had been issued, each with a nominal value of $2.

(iv)Reserves consisted of retained profits.

(v)The closing market price per share on 31 December 2012 was $4.

Required:

Calculate (to two decimal places) the following accounting ratios for 2012:

(a)Net profit ratio (using operating profit)

(b)Return on long-term capital

(c)Acid test ratio

(d)Months’ sales in accounts receivable

(e)Months’ purchases in accounts payable

(f)Months’ inventory on hand

(g)Debt-to-equity ratio

(h)Interest cover

(i)Price-earnings ratio

(j)Dividend cover

(k)Asset turnover

HKET Mock (2, 2011) (Accounting ratio)

Rocket Limited is a company manufacturing and selling sports shoes. The selling price of sports shoes and the cost of sales for each pairs are equal. Here is Rocket Limited’s financial information for the period of 2011:

Income Statement for the period ended 31 December 2011
$
Sales / 1,230,000
Less: Variable cost / (460,000)
Contribution margin / 770,000
Less: Fixed cost / (370,000)
Net profit / 400,000

Other information:

(1) At 31 December 2011, the balance for accounts receivable is $450,000. For the sales account, only 20% is cash sales, all the rest is credit sales.

(2) The sales volume for the period of 2011 is 4,000 pairs of sports shoes.

(3)The target net profit of Rocket Limited in 2012 is 30% higher compared with 2011.

REQUIRED:

(a)Break-even point (Calculate the units sold, round off to the nearest unit)

(b)Net profit ratio

(c)Month’s sales in accounts receivable

(d)Assume the sales volume and all costs are unchanged for the period of 2012, how much should Rocket Limited to sell for each pair of sports shoes so as to achieve its target net profit?

HKET Mock(7, 2011) (Accounting ratio)

Wealthy Limited is a trading limited company, which started the business on 1 January 2011. At the beginning of the business, the methods of raising fund were as follows:

(1) Issue 5,000,000 ordinary shares of $1 each.

(2) Issue 1,000,000 8% preference shares of $2 each.

(3)Issue 5% debentures which worth $1,500,000 in total and redeemable in 2015.

(4)$800,000 long-term loan from bank with annual interest rate 6% and repayment is over four years equally.

REQUIRED:

(a)Based on the above information, calculate the following ratios:

(Regard the whole amount of bank loan as long-term liabilities when calculating the ratio)

(i)Debt-to-equity ratio

(ii)Capital gearing ratio

HKCEE(2008, 4) (Accounting ratio)

The Macho Club is a non-profit making organization which aims at promoting long distance running. Members are required to pay an annual membership fee of $500. The Club also sells T-shirts to members for cash.

The account balances relating to membership fees and T-shirt trading are as follows:

As at 1 January 2007 / As at 31 December 2007
$ / $
Prepaid membership fee / 3,000 / 1,500
Accrued membership fee / 5,500 / 7,500
Amount owing to suppliers / 8,970 / 13,980
Stock of T-shirts / 6,320 / 5,730

The following are the related cash receipts and payments during the year ended 31 December 2007:

$
Membership fee received / 84,000
Payment to suppliers / 22,890
Commission on T-shirt sales / 4,200
T-shirt sales / 48,200

Accrued membership fee of $2,500 brought down from 2006 was confirmed to be uncollectible and written off in 2007.

REQUIRED:

(a)Draw up the membership fee account for Macho Club, showing the amount of income derived from membership fee for the year ended 31 December 2007.

(b)Prepare the trading account for Macho Club for the year ended 31 December 2007, showing the profit or loss on the sales of T-shirts.

(c)Calculate (to two decimal places) the following ratios of Macho Club for the year ended 31 December 2007:

(i)Stock turnover rate (in months)

(ii)Average credit period received from trade creditors (in days)

HKCEE (2006, 4)(Accounting ratio)

Ball Limited had an issued share capital consisting of 650,000 ordinary shares of $1 each as at January 2005. On 1 July 2005, the company made an additional issue of 250,000 ordinary shares at $1.50 per share, payable in full on application. Applications were received for 260,000 shares on 8 July 2005. The shares were allotted to the successful applicants on 15 July 2005. Cash was returned to the unsuccessful applications on the same day.

You are required to:

(a) Prepare journal entries for Ball Limited to record the share issue in July 2005. (Narrations are not required)

The company’s information below relates to the year ended 31 December 2005:

$
As at 1 January 2005:
Stock / 62,430
Debtors / 60,080
Share premium / 75,000
Retained profits / 213,000
During year 2005:
Sales / 800,000
Purchases / 500,000
Operating expenses / 320,000
As at 31 December 2005:
Stock / 156,230
Debtors / 102,400
Cash in bank / 168,370
Creditors / 184,200
Accruals / 4,000

You are required to:

(b) Calculate (to one decimal place) the following for year 2005:

(i)Quick ratio

(ii)Credit period allowed to debtors (in days)

(iii)Stock turnover rate

(c)Calculate the amount of shareholders’ fund as at 31 December 2005.

HKCEE(2004, 2) (Accounting ratio)

(A)What do the following two types of ratios measure?

(a)Liquidity ratios

(b)Profitability ratios

(B)Selected financial data for Vera Limited is presented below:

Profit and Loss Account Data for the year ended 31 March 2004
$
Sales / 248,600
Returns inwards / 15,200
Cost of goods sold / 155,750
Operating expenses / 43,390
Net profit / 34,260
Balance Sheet Data as at March
2003 / 2004
$ / $
Furniture and fixtures (net) / 18,420
Office equipment (net) / 32,480
Stock / 28,750 / 26,400
Trade debtors / 29,260 / 30,340
Bank / 660
108,300
Ordinary share capital / 50,000
Share premium / 12,890
Retained profits / 15,500
Trade creditors / 26,900
Accruals / 3,010
108,300

You are required to:

Calculate (to two decimal places) for Vera Limited the following ratios for the year ended 31 March 2004:

(a)Quick ratio

(b)Stock turnover rate

(c)Debtors’ collection period (in months)

(d)Gross profit ratio

(e)Return on capital employed

HKCEE(2002, 3) (Accounting ratio)

The financial information of Grand View Limited for the year ended 31 December 2001 is presented below:

Profit and loss account for the year ended 31 December 2001
$ / $
Cash sales / 252,000
Credit sales / 1,008,000
1,260,000
Less: Cost of sales
Opening stock / 210,000
Purchases / 955,500
1,165,500
Less: Closing stock / 385,000 / 780,500
Gross profit / 479,500
Less: Operating expenses / 360,500
Net profit / 119,000
Balance sheet as at 31 December 2001
$
Assets
Office equipment / 1,145,000
Furniture and fittings / 381,000
Stock / 385,000
Debtors / 262,500
Bank / 451,500
2,625,000
Liabilities and shareholders’ fund / $
Creditors / 420,000
Accruals / 119,000
Ordinary share capital / 1,925,000
Retained profits / 161,000
2,625,000

Grand View Limited had also produced the following ratios for the year 2000.

Current ratio / 1.93 : 1
Quick ratio / 1.01 : 1
Stock turnover rate / 3.02 times
Debtors’ collection period / 3.26 months
Net profit ratio / 10.07%
Return on capital employed / 6.11%

Required:

(a) Compute the following ratios for the year 2001:

(i)Current ratio

(ii)Quick ratio

(iii)Stock turnover rate

(iv)Debtors’ collection period (in months)

(v)Net profit ratio

(vi)Return on capital employed

(Calculations to two decimal places)

(b)Based on the ratios for the year 2000, comment briefly on the liquidity and profitability of the company for the year 2001.

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