Question

23:38 < EA Qn BUS3006 Assignment (TM) ☺ A2. The following data are extracted from the financial statements of Fron Limited and Tarzan Limited for the year ended 31 March 2019 Tartan Limited S000 Frozen Limited S000 10100 3800 16.10 2100 13.00 4500 Closing inventory Trade receivables Total current assets Trade payables Total current liabilities Sales Cost of sales Gross profil Profit before tax 7510 6920 6 500 SO 100 12.400 4 SR900 $1,300 7,600 1.900 Frozen Limited and Tarzan Limited have a similar sure and structure. They operate in the same industry Frozen Limited is able to increase the selling prices of its products during the financial year. Required: (a) Calculate the following ratios (to TWO decimal places) for both Frozen Limited AND Tarzan Limited for the year ended 31 March 2019, (1) Gross profit margin: (1) Net profit margin (before tak (ii) Quick ratio (iv) Trade receivables collection period (in days and (v) Inventory turnover (in days) (Note: You are required to show the formula for your calculation) (10 marks) (b) Comment on the profitability and inventory management of the companies based on the ratios calculated in (a) above (5 marks) (Total 15 marks) End of Section A Page 36

Answer 1

			Frozen Limited	Tarzan Limited
		Closing Inventory	$             10,300	$                9,500
		Trade Receivables	$                3,800	$                2,300
		Total Current Assets	$             16,300	$             13,400
		Trade Payable	$                4,600	$                4,500
		Total Current Liabilities	$                6,920	$                7,810
		Sales	$             62,500	$             58,900
		Cost of Sales	$             50,100	$             51,300
		Gross Profit	$             12,400	$                7,600
		Profit before tax	$                4,600	$                1,900
a)			Frozen Limited	Tarzan Limited
i	Gross Margin ratio	Gross Profit/ Net Sales*100	19.84%	12.90%
ii	Profit Margin (before tax)	Profit Before tax / Net Sales *100	7.36%	3.23%
iii	Quick ratio	Quick Asset/ Total Current Liability	0.87	0.50	: 1
iv	Trade receivables collection period	Trade Receivables/Net Credit Sales * 365	22.19	14.25	days
v	Inventory Turnover	Ending Inventory/Cost of Sales *365	75.04	67.59	days
	Quick Assets	Total Current Assets-Closing inventory	$                6,000	$                3,900

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b) Profitability and Inventory management

Frozen Limited has better profitability ratio than Tarzan Limited. Frozen limited have 7.36% profit margin over sales, but Tarzan limited have only 3.23% profit margin over sales.

The decline of the inventory turnover (days) value during the year is a positive trend for the company. It means that less funds are being distracted to form the inventories.Here Tarzan Limited has more efficient inventory management than Frozen Limited

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