Question 1)
Directors of DPK Limited wish to compare the company’s most recent financial statements with those of the previous year. The company’s financial statements are given below:
DPK Limited
Profit and Loss Accounts Year Ended
30 June 2002 30 June 2001
Rs 000 Rs 000
Sales (note 1) 2,500 1,800
Opening stock 200 180
Purchases (all on credit) 1,960 1,220
2,160 1,400
Less closing stock (360) (200)
Cost of sales 1,800 1,200
Gross profit 700 600
Distribution costs (250) (160)
Administrative expenses (200) (200)
Interest payable (50) (50)
Profit before tax 200 190
Taxation (46) ( 44)
Retained profit 154 146
Note 1: 80% of the sales are on credit.
Balance Sheets as at
30 June 2002 30 June 2001
Rs 000 Rs 000
Non Current Assets 2,252 1,886
Current assets Stock 360 200
Debtors – trade 750 400
Cash at bank 120 100
1,230 700
Less current liabilities
Creditors – trade (380) (210)
- sundry (430) (260)
Taxation (50) (48)
(860) (518)
Net current assets 370 182
Total assets less current liabilities 2,622 2,068
10% debentures (500) (500)
2,122 1,568
Capital and reserves
Issued ordinary share capital 1,200 1,000
Share premium account 600 400
Profit and loss account 322 168
2,122 1,568
Required:
(a) Compute, for each of the two years, the following accounting ratios that must assist the directors for comparison.
(i) Current Ratio
(ii) Quick Ratio
(iii) Debtors Collection Period
(iv) Creditors Payment Period
(v) Gross Profit Margin
(vi) Return on Capital Employed
(vii) Return on Equity
(viii) Average Stock Turnover
(ix) Earnings per share
Demonstrate all your workings for each computations.
(b) Evaluate the liquidity position and the financial performance of the company at 30 June 2001 and 2002.
(c) Suggest possible reasons for changes in the ratios between the two years.