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WS Solutions Additional Question Ratio Analysis

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13 views2 pages

WS Solutions Additional Question Ratio Analysis

Uploaded by

Shah Murad
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Additional Questions on Ratio Analysis

1.The following financial data relate to Bandara Pty Ltd for the years ended 30 June Year 3 and 30 June Year
2.
Financial item 30 June Year 3 Year 2
Net credit sales $630 000 $490 000
Cost of goods sold 290 000 250 000
Cash 18 000 12 000
Accounts receivable (Debtors) 70 000 60 000
Inventory 130 000 150 000
Current liabilities 105 000 81 000

Additional information
The debtors figure at 30 June Year 1 was $78 000 (net). The inventory figure at 30 June Year 1 was
$130 000. The company provides its credit customers 30 days to pay. The average inventory turnover
for the industry in which the company operates is 101 days.

(a) Calculate the following ratios for the years ended 30 June Year 3 and 30 June
Year 2:
– current ratio;
– quick ratio;
– accounts receivable turnover (times and in days); and
– inventory turnover (times and in days).
(b) Comment on the financial flexibility and operating capability of the business,
given the ratio results obtained in answering part (a).

ANS:
(a)
Formulae Year 3 ratio Year 2 ratio
Current assets 18 + 70 + 130 12 + 60 + 150
Current liabilities 105 2.08:1 81 2.74:1
Quick assets 18 + 70 12 + 60
Current liabilities 105 0.84:1 81 0.89:1
Net sales 630 490
Average A/R (70 + 60)/2 9.69 (60 + 78)/2 7.10
(debtors)
Days in year 365 365
A/R (Debtors) 9.69 37.67 7.10 51.41
turnover
Cost of goods sold 290 250
Average inventory (103 + 150)/2 2.29 (150 + 130)/2 1.79
Days in year 365 365
Inventory turnover 2.29 160 1.79 204

PTS: 1

(b)
Note: steps in analysis:
1. state the ratio/s you are using;
2. Compare with the figure in previous year/s and comment on the direction (better/worse);
3. Compare with a benchmark, e.g. previous year/s or industry average or comparable business;
4. Analyse/comment based on other relevant data/information.
Financial flexibility
Taking the results for the current ratio at face value, while the ratio has declined between the two
years (from 2.78 to 2.08), the figure is strong. However, the quick asset ratio suggests a tighter margin
of coverage. Whether this is a problem would depend on the entity’s access to say a bank-overdraft
facility. Taking into consideration the composition of the current assets, the entity has a comparatively
large amount of funds tied up in inventory.

Operating capability
The inventory turnover ratio, while it has improved, suggests that the inventory figure is higher than it
ought to be. The turnover of inventory is considerably slower than that of the industry as a whole.
This is a matter of concern for management.

The accounts receivable turnover figure has improved considerably – it is much closer to the entity’s
terms of credit than it was in the previous year. This reflects favourably on the strength of the current
and quick ratios, and management efficiency in that respect.

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