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 LtdStatements 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) (1 mark)
(b)Return on long-term capital (1 mark)
(c)Acid test ratio (1 mark)
(d)Months’ sales in accounts receivable (2 marks)
(e)Months’ purchases in accounts payable (2 marks)
(f)Months’ inventory on hand (2 marks)
(g)Debt-to-equity ratio (1 mark)
(h)Interest cover (1 mark)
(i)Price-earnings ratio (2 marks)
(j)Dividend cover (1 mark)
(k)Asset turnover(1 mark)
(a) / Net profit ratio = Net profit / Net Sales= $2,267,000 / $29,853,000
= 7.59%
(b) / Return on long-term capital = Operating profit / (Share capital + Reserves + Non-current liabilities)
= $2,267,000 / ($7,800,000 + $6,660,000+ $4,380,000)
= 12.03%
(c) / Acid test ratio = (Current assets – Inventory) / Current liabilities
= ($12,464,000 $4,118,000) / $3,279,000
= 2.55 times
(d) / Months’ sales inaccounts receivable = (Average account receivable / Net credit sales) x 12
= {[($7,654,000 + $7,464,000) 2] / $29,853,000} x 12
= 3.04 months
(e) / Months’ purchases inaccounts payable
= (Average account payable / Net credit purchases) x 12
= {[($3,868,000+ $2,402,000) 2] / ($15,394,000 + $4,118,000 $4,895,000)} x 12
= 2.58 months
(f) / Months’ inventory onhand= (Average inventory / Cost of goods sold) x 12
= {[($4,895,000 + $4,118,000) 2] / $15,394,000} x 12
= 3.51 months
(g) / Debt-to-equity ratio = Total liabilities / Owners’ equity
= $7,659,000 $14,460,000
= 0.53 times
(h) / Interest cover = Profit before interest and tax / Interest expense
= $2,267,000 $469,000
= 4.83 times
(i) / Price-earnings ratio = Market price per share / Earning per share
= Market price per share / (Profit after tax Number of share issued)
= $4 /[$1,438,000 ($7,800,000 $2)]
= 10.81 times
(j) / Dividend cover = Profit after tax / Dividend
= $1,438,000 ($5,846,000 + $1,438,000 $6,660,000)
= 2.30 times
(k) / Asset turnover = Net sales / Total assets
= $29,853,000 $22,119,000
= 1.35 times
HKET Mock (2, 2011) (Accounting ratio)
Rocket Limited is a company manufacturing and selling sports shoes. The selling price of sports shoes and the cost of sales for each pairs are equal. Here is Rocket Limited’s financial information for the period of 2011:
Income Statement for the period ended 31 December 2011$
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?
(a) / Contribution margin per unit = $ 770,000 / 4,000 = $192.5 per pairBreak-even point (calculate the units sold) = Fixed cost / Contribution margin per unit
= $370,000 / $192.5
= 1922.08
= 1,923 pairs
(b) / Net profit ratio = Net profit / Net sales
= $400,000 / 1,230,000
= 32.52%
(c) / Month’s sales in accounts receivable = (Average account receivable / Net credit sales) x 12
= {$450,000 / [1,230,000 x (1 – 20%)} x 12
= 5.49 months
(d) / Let y be the unit price for each pair of sports shoes
4,000 y = Fixed cost + target net profit + variable cost
4,000 y = 370,000 + 400,000 (1+30%) + 460,000
4,000 y = 370,000 + 520,000 + 460,000
y = $ 337.5
Rocket Limited needs to reset the selling price to $ 337.5 for each pair of sports shoesso as to
achieve the target net profit.
HKET Mock(7, 2011) (Accounting for Limited)
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
(a) / (i) / Debt-to-equity ratio = Total liabilities / Owners’ equity= ($1,500,000 + $800,000) /($5,000,000 x 1 + $1,000,000 x 2)
= 0.33
(ii) / Capital gearing ratio
= Funds with fixed interests or fixed dividends / Total long-term fund
= ($1,500,000 + $800,000 + $1,000,000 x 2) /($5,000,000 x 1 + $1,000,000 x 2 + $1,500,000 + $800,000)
= 0.46
HKDSE Sample 2 (Paper 2A, 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.
Answer:
(a) / (1) / Trade receivables collection periods = (Average receivable / Net credit sales) x 12= [($856,000 + $996,000) 2 / $10,186,000] x 12
= 1.1 months
(2) / Cost of goods sold = Opening inventory + Purchases – Closing inventory
= 878,000 + 7,294,500 – 990,000
= 7,182,500
Inventory turnover = (Cost of goods sold / Average Inventory)
= [7,182,500 / (878,000 + 990,000) 2]
= [7,182,500 / 934,000]
= 7.7 times
HKDSE Sample 1 (Paper 2A, 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:
$’000Capital 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.
(a) / (i) / Net profit for the year vs net increase in cash and bank balances for the year:—Net profit for the year is arrived at matching all expenses and revenues of a particular trading
period with adjustments of accruals and prepayments.
—Cash and bank balances represents the amount of cash in hand and on demand (net of cash
inflows and outflows).
—The business makes profit by converting cash into assets like accounts receivables, inventories,
investment, etc. and then converting such assets back into cash.
—A business wants to get hold of cash in the shortest possible time put to keep the least amount of
cash in hand so as to increase the number of trading cycles and hence the trading profits.
(ii) / Bank balance in the cash book vs the bank statement balance as at 31 December 20X6:
—The cash book makes records from the company’s point of view. It debits all cash and cheques
deposited into the bank account, and credit bank charges and cheques drawn on payees.
—The transactions recorded in the bank statement are shown from the point of view of the bank, in
that payment are debited and receipts are credited.
—The balance in the bank statement rarely agree with the cash book balance of the same date:
The discrepancy may arise from:
Items arising from time differences e.g. cheques issued to suppliers not yet presented to the
bank for payment, deposits made by the company not yet credited by the bank
errors made by the bank or errors present in the cash book
(b) / Gearing ratio = Debentures + Long-term loans + Preference share capital / Capital and reserves + Non-current liabilities
Alternative 1 : Gearing ratio = Preference share capital / Capital and reserves + New shares
= 1,500 / 5,100 + 1,800
= 21.74%
Alternative 2 : Gearing ratio = Preference share + Debentures / Capital and reserves + Debentures
= 1,500 + 1,800/ 5,100 + 1,800
= 47.83%
Alternative 3 : Gearing ratio = Preference share + Long-term loans / Capital and reserves + Long-term loans
= 1,500 + 1,440/ 5,100 + 1,440
= 44.95%
(c) / Earnings per share = Profit after tax – Interest and Preference share dividend/ Number of shares issued
Alternative 1 : Earnings per share = Profit after tax – Preference share dividend/ Number of shares issued
= (3,600 – 180) / (200 + 100)
= $11.4 per share
Alternative 2 : Earnings per share = Profit after tax – Interestand Preference share dividend / Number of shares issued
= (3,600 – 144 180) / 200
= $16.38 per share
Alternative 2 : Earnings per share = Profit after tax – Interestand Preference share dividend / Number of shares issued
= (3,600 – 120 180) / 200
= $16.38 per share
(d) / Gearing ratio
—Capital gearing depicts the relationship between equity capital and fixed-interest loan capital
(including preference share capital).
—Among the three alternatives, Alternatives 1 is less geared (only 21.74% capital was loan capital) than
that of Alternatives 2 and 3 (more than 40% capital was loan capital).
—Interest has to be paid half-yearly under Alternative 2 and Alternative 3 requires an annual
repayment of 20% of the liability.
—Overall, shareholders bear lower risk under Alternative 1.
Return to shareholders:
—Under all three alternatives, the return to long-term capital employed included preference dividend
and ordinary dividend.
—Both Alternatives 2 and 3 impose interest burden on the company and can weaken the company’s
profitability and liquidity position. Shareholders may suffer if the estimated profit is not attained.
—Based on the earning per share, ordinary shareholders will benefit from the highly geared position
under Alternatives 2 and 3.
(e) / Non-financial factors:
—Responses of potential investors in the market for issue of ordinary shares or debentures.
—Stakeholders’ support for the expansion (such as feedback from the workforce, environmental issues,
possible changes in the market share, etc.)
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 $2,500 brought down from 2006 was confirmed to be uncollectible and written off in 2007.
REQUIRED:
(a)Draw up the membership fee account for Macho Club, showing the amount of income derived from membership fee for the year ended 31 December 2007.
(b)Prepare the trading account for Macho Club for the year ended 31 December 2007, showing the profit or loss on the sales of T-shirts.
(c)Calculate (to two decimal places) the following ratios of Macho Club for the year ended 31 December 2007:
(i)Stock turnover rate (in months)
(ii)Average credit period received from trade creditors (in days)
(a)
Membership fee$ / $
Balance b/f / 5,500 / Balance b/f / 3,000
Income and expenditure / 90,000 / Bank / 84,000
Balance c/f / 1,500 / Membership fee write-off / 2,500
Balance c/f / 7,500
97,000 / 97,000
(b)
Macho ClubTrading account for the year ended 31 December 2007
$ / $
Opening stock / 6,320 / Sales / 48,200
Add: Purchases (W1) / 27,900
34,220
Less: Closing stock / 5,730
Cost of T-shirts sold / 28,490
Commission on T-shirt sales / 4,200
Income and expenditure: profit on sale of T-shirts / 15,510
48,200 / 48,200
W1
Creditors$ / $
Cash/Bank / 22,890 / Balance b/d / 8,970
Balance c/d / 13,980 / Purchases (balancing figure) / 27,900
36,870 / 36,870
(c) / (i) / Stock turnover rate (in months) = (Average inventory / Cost of goods sold) x 12
Average inventory = ($6,320 + $5,730)/2 = $6,025
Cost of goods sold = $28,490
Stock turnover rate (in months) = ($6,025/$28,490) x 12 = 2.54 months
(ii) / Average credit period received from trade creditors (in days) = (Average creditors / Net credit purchases) x 365
Average creditors = ($8,970 + $13,980)/2 = $11,475
Net credit purchases = 27,900
Average credit period received from trade creditors (in days) = ($11,475/$27,900) x 365 = 150.12 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.
(a)
JournalDate / Details / Dr / Cr
2005 / $ / $
Jul / 8 / Bank (260,000 x $1.50) / 390,000
Share application – ordinary shares / 390,000
“ / 15 / Share application – ordinary shares / 375,000
Ordinary share capital (250,000 x $1) / 250,000
Share premium (250,000 x $0.50) / 125,000
“ / 15 / Share application – ordinary shares / 15,000
Bank – Refund (10,000 x $1.50) / 15,000
(b) / (i) / Quick ratio = Current assets – Stock / Current liabilities
= $(102,400 + 168,370) / $(184,200 + 4,000)
= 1.4 : 1
(ii) / Credit period allowed to debtors (in days) = (Average Debtors / Net Sales) x 365 days
= [($60,080 + $102,400) ÷ 2/ $800,000] x 365 days
= 37.1 days
(iii) / Stock turnover rate = Cost of goods sold / Stock
= ($62,430 + $500,000 $156,230) / [($62,430 + $156,230) ÷ 2]
= $406,200 / $109,330
= 3.7 times
(c)
Calculation of shareholders’ fund as at 31 December 2005$
Share capital
900,000 ordinary shares of $1 each (650,000 + 250,000) / 900,000
Reserves
Share premium (75,000 + 125,000) / 200,000
Retained profits [213,000 + (800,000 406,200320,000)] / 286,800
1,386,800
Retained profits
= Last year retained profit + Net profit this year
= Last year retained profit + (Sales – Cost of goods sold – Operating expenses)
HKCEE(2004, 2) (Accounting ratio)
(A)What do the following two types of ratios measure?
(a)Liquidity ratios
(b)Profitability ratios
(B)Selected financial data for Vera Limited is presented below:
Profit and Loss Account Data for the year ended 31 March 2004$
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
(A) / (a) / Liquidity ratios measure how able is a firm to meet its current liabilities, how efficient is the company inutilizing its funds and whether it can meet unexpected need for cash. It is to ensure that a firm can pay its
creditors and expenses whey they are due. This is important as otherwise the firm will have to close down.
(b) / Profitability ratios measure the earnings and operating success of a firm within a given period of time. They
are always used to measure how effective the management is, operating and how efficient the
management is in utilizing the firm’s assets.
(B) / (a) / Quick ratio = Current assets – Stock / Current liabilities
= (30,340 + 660) / (26,900 + 3,010)
= 1.04 : 1
(b) / Stock turnover rate = Cost of goods sold / Average stock
= 155,750 / (28,750 + 26,400) ÷ 2
= 5.65 times
(c) / Debtors’ collection period (in months) = (Average Debtors / Net credit sales) x 12
= [(29,260 + 30,340) ÷ 2 / (248,600 – 15,200)] x 12
= 1.53 months
(d) / Gross profit ratio = Gross profit / Net sales
= (248,600 – 15,200 - 155,750) / (248,600 – 15,200)
= 33.27%
(e) / Return on capital employed = Net profit / Capital employed
= 34,260 / (50,000 + 12,890 + 15,500)
= 43.70%
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.