GROUP PROJECT 2 (15%)

COURSE LEARNING OUTCOME:

This assignment is design to enhance students’ teamwork through analysing financial
statements using simple financial ratios for sole proprietorship business (C4).

INSTRUCTIONS TO ALL STUDENTS:

1. Form a group with a maximum of 4 members.

2. Answer all questions.

3. Submit the answers in a proper report format including the declaration and cover page
with the details required. Only the group leader needs to submit the assignment on
behalf of the group.

4. If the answers found similar or the same with the other group(s), a penalty will be
imposed on all groups involved.

5. The deadline for submission is on 29 January 2023.

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QUESTION
Study the following financial statements for two very similar enterprises owned by Puan
Khairiah that are located in the city center of Perak and then answer the questions which
follow.
Statement of Profit or Loss for the year ended 31 December 20x9
FARMASI TAPAH FARMASI SERI
ISKANDAR
RM RM RM RM
‘000 ‘000 ‘000 ‘000
Sales 2,880 5,320
Less: cost of sales (2,240) (3,664)
Gross profit 640 1,656

Less: expenses
Depreciation (35) (184)
Other expenses (509) (1,108)
Net profit 96 364

Statement of Financial Position as at 31 December 20x9

FARMASI FARMASI SERI
TAPAH ISKANDAR
RM RM
’000 ’000
Non-current assets
Shophouse at carrying value 72 320
Office equipment at carrying value 34 244
106 564

Current assets
Inventory 224 316
Accounts receivable 422 191
Prepaid expenses 2 -
Bank 6 36
760 1,107

Financed by:
Owner’s equity
Opening balance 334 460
Add: Net profit 96 364
Less: Drawings (112) (118)
318 706

Non-current liabilities 50 153

Current liabilities
Accounts payable 380 245

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 Accrued expenses 2 -
Short-term loan 10 3
760 1,107

Additional information:
1. 10% of the sales were cash sales.
2. The net purchase incurred during the year were RM2,080,000 and RM3,700,000 for
Farmasi Tapah and Farmasi Seri Iskandar respectively.
3. Assume a year has 365 days.

Required:
a. Compute the following ratios for both businesses:

i. Current ratio
ii. Quick ratio
iii. Inventory turnover ratio
iv. Accounts receivable collection period
v. Gross profit
vi. Net profit margin

(30 marks)

b. Based on your above answer in (a):

i. Interpret each of the accounting ratios for both businesses.

(12 marks)

ii. State which business has difficulty in paying its short-term obligations without
using its inventory and give ONE (1) impact on business when it has liquidity ratio
less than 1.
(2 marks)

c. Identify which business seems to be the most efficient in using its capital to
generate the profit. Justify your opinion.
(6 marks)

(Total: 50 marks)

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Question a)

Farmasi Tapah

i) Current Ratio

Current Assets= RM 654,000

Current Liabilities= RM 392,000

RM 654,000
Current Ratio=
RM 392,000
= 1.67: 1

ii) Quick Ratio

Current Assets= RM 654,000

Current Liabilities= RM 392,000
Inventory= RM 224,000
Prepaid Expenses= RM 2,000

Current Assets−Inventory −Prepaid Expenses

Quick Ratio=
Current Liabilties
RM 654,000−RM 224,000−RM 2,000
=
RM 392,000
RM 428,000
=
RM 392,000
= 1.09: 1

iii) Inventory Turnover Ratio

Average Inventory
Inventory turnover ratio (days)= x 365
Cost of Goods Sold

Opening Inventory +Closing Inventory

Average Inventory=
2

*Opening Inventory= x
Closing Inventory= RM 224,000

Cost of Goods Sold= Opening inventory+ Purchases- Closing inventory

RM 2,240,000= x + RM 2,080,000 – RM 224,000
RM 2,240.000= x + RM 1,856,000
x= RM 2,240,000- RM 1,856,000
x= RM 384,000

RM 384,000+ RM 224,000
Average Inventory=
2

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 = RM 304,000

Average Inventory
Inventory Turnover Ratio (days)= x 365
Cost of Goods Sold
RM 304,000
= x 365
RM 2,240,000
= 49.5 days

Cost of Goods Sold

Inventory Turnover Ratio=
Average Inventory
RM 2,240,000
=
RM 304,000
= 7.37 times

iv) Accounts Receivable Collection Period

*10% of Sales= Cash Sales , 90% of Sales= Credit Sales

Net Credit Sales= RM 2,592,000-(0.1 x RM 2,592,000)

= RM 2,592,000- RM 259,200
= RM 2,332,800

Accounts Receivable= RM 422,000

Account Receivables
Account Receivable Collection Period (days)= x 365
Net Credit Sales
RM 422,000
= x 365
RM 2,592,000
= 59.43 days

v) Gross Profit Ratio

Gross Profit= RM 640,000

Net Sales= RM 2,880,000

Gross Profit
Gross Profit Ratio= x 100%
Net Sales
RM 640,000
= x 100%
RM 2,880,000
= 22.22%

vi) Net Profit Margin

Net Profit= RM 96,000

Net Sales= RM 2,880,000

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 Net Profit
Net Profit Margin= x 100%
Net Sales
RM 96,000
= x 100%
RM 2,880,000
= 3.33%
Farmasi Seri Iskandar

i) Current Ratio

Current asset= RM 316,000 + RM 191,000 + RM 36,000

= RM 543,000

Current liabilities= RM 245,000 + RM 3,000

= 248,000

Current Asset
Current Ratio=
Current Liabilities
543,000
= 240,000
= 2.19: 1

ii) Quick Ratio

Current Asset= RM 543,000

Current Liabilities= RM 248,000
Inventory= RM 316,000

Current Asset−Inventory−Prepaid Expense

Quick Ratio=
Current Liabilities
RM 543,000−RM 316,000−0
=
RM 248,000
RM 227,000
=
RM 248,000
= 0.92: 1

iii) Inventory Turnover Ratio

RM 3,664,000+ RM 316,000
Opening Inventory=
RM 3,700,000
= RM 280,000
Ending Inventory= RM316,000
Cost of Goods Sold= RM 3,664,000

Opening Inventory + Ending Inventory

Average Inventory=
2
RM 280,000+ RM 316,000
=
2
= RM 298,000

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 Cost of Goods Sold
Inventory Turnover Ratio=
Average Inventory
RM 3,664,000
=
RM 298,000
= 12.3 times

Average Inventory
Inventory Turnover Ratio= x 365
Cost of Goods Sold
RM 298,000
= x 365
RM 3,664,000
= 29.69 days

iv) Account Receivable Collection Period

*10% of Sales= Cash Sales , 90% of Sales= Credit Sales

Net Credit Sales= RM 5,320,000-(0.1 x RM 5,320,000)

= RM 5,320,000- RM 532,000
= RM 4,788,000

Accounts Receivable= RM 191,000

Account Receivables
Account Receivable Collection Period (days)= x 365
Net Credit Sales
RM 191,000
= x 365
RM 4,788,000
= 14.56 days

v) Gross Profit

Gross Profit= RM 1,656,000

Net Sales= RM 5,320,000

Gross Profit
Gross Profit Ratio= x 100%
Net Sales
RM 1,656,000
= x 100%
RM 5,320,000
= 31.13%

vi) Net Profit Margin

Net Profit= RM 364,000

Net Sales= RM 5,320,000

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 Net Profit
Net Profit Margin= x 100%
Net Sales
RM 364,000
= x 100%
RM 5,320,000
= 6.8%

Question b) i)

Farmasi Tapah

i) Current Ratio

Interpretation: This indicates that the Farmasi Tapah has RM 1.67 Current Assets to pay RM 1.00
Current Liabilities. Farmasi Tapah does not have the ability to pay its debt when it is due.

This is because Farmasi Tapah does not have sufficient Current Assets to pay off its Current
Liabilities. A low Ratio indicates that Farmasi Tapah is in a weak position to meet its debt. It may
be due to the lack of working capital.

ii) Quick Ratio

Interpretation: Farmasi Tapah’s Quick Ratio of 1.09:1 shows that the company has RM 1.09 of
liquid assets to pay RM 1.00 Current Liabilities. This is to say that the Farmasi Tapah has
sufficient Current Assets after deducting the less liquid assets and the company is still capable to
pay off its Current Liabilities.

iii) Inventory Turnover Ratio

Interpretation: By looking at the results, the Inventory Turnover rate of 7.37 indicates that the
average Inventory are being replaced 7.37 times in a year (per annum) or it means that the
inventory are replaced every 49.5 days or every 1.65 months.

iv) Account Receivable Collection Period

Interpretation: Farmasi Tapah’s Accounts Receivable Collection Period indicates that on average,
cash will be collected every 59.43 days in a year (per annum). An indication of efficiency in
collecting debt is the short time it takes for a company to collect it from its debtors.

v) Gross Profit

Interpretation: A Gross Profit Ratio of 22.22% means that for every RM 1.00 sale, RM 0.8 was
used to pay for the Cost of Goods Sold, which leaves RM 0.22 as the Gross Profit for Farmasi
Tapah.

For every RM 1 of Sales Farmasi Tapah made, they obtained 22 sen of Gross Profit. This shows
that the main operation of the company is able to cover their cost operation and reflect that the
company can control their operating cost.

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vi) Net Profit Margin

Interpretation: A Net Profit of 3.33% indicates that for every RM 1.00 sale, 96.67% of Sales value
was used to pay for the Cost of Goods Sold and expenses. The remaining of 3.33% is the
operating Net Profit that Farmasi Tapah made.

For every RM 1 of Sales Farmasi Tapah made, they obtained 0.33 sen of Net Profit. This means
that the Farmasi Tapah is still generating profit after considering the total costs. The company
remains competitive.

Farmasi Seri Iskandar

i) Current Ratio

Interpretation: The Current Ratio of Farmasi Seri Iskandar indicates that the company has RM
2.19 Current Assets to pay RM 1.00 Current Liabilities. Farmasi Seri Iskandar has the ability to
pay off its debt when it is due.

ii) Quick Ratio

Interpretation: Quick Ratio of 0.91:1 shows that Farmasi Seri Iskandar has RM 0.91 of liquid
assets to pay RM 1.00 Current Liabilities. This means that it does not have enough quick assets to
meet all its short-term obligations.

iii) Inventory Turnover Ratio

Interpretation: The Inventory Turnover Ratio of Farmasi Seri Iskandar indicates that for every
29.69 days, the Inventory are being replaced or it is indicated that the Inventory are being
replaced 12.3 times in year (per annum).

v) Account Receivable Collection Period

Interpretation: The Accounts Receivable Collection Period for Farmasi Seri Iskandar indicates
that on average, cash will be collected every 14.56 days in a year (per annum). Farmasi Seri
Iskandar is efficient in collecting debts because of the short time taken to collect them.

v) Gross Profit

Interpretation: A Gross Profit Ratio of 31.13% means that for every RM 1.00 sale, RM 0.7 was
used to pay for the Cost of Goods Sold, which leaves RM 0.31 as the Gross Proft for Farmasi Seri
Iskandar.

For every RM 1 of Sales Farmasi Seri Iskandar made, they obtained 31 sen of Gross Profit. This
shows that the main operation of the company is able to cover their cost operation and reflect
that the company can control their operating cost.

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vi) Net Profit Margin

Interpretation: A Net Profit of 6.8% means that for every RM 1.00 sale, 93.2% of Sales value was
used to pay for the Cost of Goods Sold and expenses, and the remaining percentage which is
6.8% is the Net Profit that Farmasi Seri Iskandar made.

For every RM 1 of Sales Farmasi Seri Iskandar made, they obtained 0.68 sen of Net Profit. This
means that the Farmasi Seri Iskandar is still generating profit after considering the total costs.
The company remains competitive.

Question b) ii)

The business which has difficulty in paying its short-term obligations without using its inventory
is Farmasi Seri Iskandar because the business has liquidity ratio less than 1 which is 0.92. The
impact on business when it has liquidity ratio less than 1 is the business is not capable to pay off
its current liabilities.

Question c)

The business that seems to be the most efficient in using its capital to generate the profit is
Farmasi Seri Iskandar.

Justification :-

Net profit
ROI = × 100
Capital Employed

Capital Employed = Total Assets – Current liabilities

Or

Capital Employed = Owners equity + Non-current liabilities

Farmasi Tapah

Net Profit = 96000

Assets = 760000
Current liabilities = 392000
Non-current liabilities = 50 000
Owners equity = 318 000

CE = 760 000 – 392 000 or CE = 318 000 + 50 000

= 368 000 = 368 000

96000
ROI = x 100
368000

= 0.2609 × 100
=26.09%

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A return on investment of 26.09% means that for every RM 1 of capital contribution the
business generates 26 sen (RM 0.26) of return on investment.

Farmasi Seri Iskandar

Net Profit = 364 000

Assets = 1 107 000
Current liabilities = 248 000
Non-current liabilities = 153 000
Owners equity = 706 000

CE = 1 107 000 – 248 000 or CE = 706 000 + 153 000

= 859 000 = 859 000

364 000
ROI = x 100
859 000

= 0.4237 x 100
= 42.37%

A return on investment of 42.4% means that for every RM 1 of capital contribution the business
generates 42 sen (RM 0.42) of return on investment.

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