1- Gross profit percentage = gross profit ÷ sales × 100%
2014:24,000 ÷64,000× 100% = 37.5%
2015:32,400 ÷108,000× 100% = 30%
2- Current ratio = current asset ÷ current liabilities
2014:23,900 ÷14,200 = 1.68 : 1 times
2015:31,000 ÷20,400 = 1.52 : 1 times
3- Quick ratio = (current asset - inventories) ÷ current liabilities
2014:(23,900 -12,000) ÷14,200 = 0.84 : 1 times
2015:(31,000 -15,000) ÷20,400 = 0.78 : 1 times
4- Debtors collection period = trade Debtors ÷ credit sales × 365
2014:10,500 ÷64,000×365= 60 days
2015:14,000 ÷108,000× 365 = 47 days
5- creditors payment period = trade creditors ÷ *credit purchase × 365
2014:6,800 ÷*42,000 ×365= 59 days
2015:9,400 ÷*78,600× 365 = 44 days
*purchase = Cost of sales + (closing inventory - opining inventory)
2014: 40,000 + (12,000 - 10,000) = *42,000
2015:75,600 + (15,000 - 12,000) = *78,600
6- Gearing ratio = debt ÷ ( debt + equity ) × 100%
2014:60,000 ÷ (60,000 + 26,000 ) × 100% = 70%
2015: 60,000 ÷ (60,000 + 49,000) × 100% = 55%
required :- based on the above accountin ratios , answer the following question ?
1- Explain what you can deduce from the ratios as at 31 December 2015 and from comparing them with those for 2014. (Comment on accounting ratios )
2- State two points which could cause the movement in the gross profit percentages between the two years and explain how they could bring the change about.
3- State the extent to which you agree or disagree with the following and give brief reasons for your answers:-
a) The current ratio and the quick ratio help to assess whether a company is able to meet its debts as they fall due. Therefore the higher these ratios are the better placed the company is.
b) A high gearing ratio is advantageous to shareholders, because they benefit from the income produced by investing the money borrowed.