Question

A2. The following data are extracted from the financial statements of Frozen Limit and Tarzan Limited for the year ended 31 March 2019. Closing inventory Trade receivables Total current assets Trade payables Total current liabilities Sales Cost of sales Gross profit Profit before tax Frozen Limited S000 10,300 3.800 16,300 4,600 6.920 62,500 50.100 12.400 4.600 Tarzan Limited S'000 9,500 2,300 13,400 4,500 7,810 58,900 51,300 7,600 1,900 Frozen Limited and Tarzan Limited have a similar size 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: Calculate the following ratios (to TWO decimal places) for both Frozen Limited AND Tarzan Limited for the year ended 31 March 2019. ) Gross profit margin: (ii) Net profit margin (before tax): (iii) 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 two companies based on the ratios calculated in (a) above. (5 marks) (Total 15 marks)

Answer 1

Answer: Requirement 1: Gross Profit Margin = (Revenue-Cost of goods sold)/Revenue Gross Profit Margin-Frozen Limited = ($62,500- 50,100)/62,500 Gross Profit Margin-Frozen Limited - 19.84% Gross Profit Margin-Tarzan Limited = ($58,900- 51,300)/58,900 Gross Profit Margin-Tarzan Limited = 12.90% Net Profit Margin = Net Income / sales Net Profit Margin- Frozen Limited = $4,600 / 62,500 Net Profit Margin-Frozen Limited = 7.36% Net Profit Margin-Tarzan Limited - 1,900/58,900 Net Profit Margin-Tarzan Limited = 3.23% Quick Ratio - Total current Assets - Inventory/Current Liabilities Quick ratio- Frozen Limited = ($16,300-10,300)/$6,920 Quick ratio- Frozen Limited = 0.87 Quick ratio- Tarzan Limited =($13,400-9,500)/$7,810 Quick ratio- Tarzan Limited = 0.50 Trade Receivables Collection Period = (Trade Receivable/Credit sales) *365 Trade Receivables Collection Period- Frozen Limited = ($3,800/62,500)*365 Trade Receivables Collection Period- Frozen Limited = 22.19 or 23 days Trade Receivables Collection Period- Tarzan Limited -($2,300/58.900)*365 Trade Receivables Collection Period- Tarzan Limited = 14.25 or 15 days

Inventory Turnover ratio = Cost of goods sold / Average inventory Inventory Turnover ratio- Frozen Limited = $50,100 /10,300 Inventory Turnover ratio- Frozen Limited = 4.86 times Inventory Turnover ratio in days- Frozen Limited = 365/4.86 Inventory Turnover ratio in days- Frozen Limited = 75 days Inventory Turnover ratio- Tarzan Limited = $51,300 /9,500 Inventory Turnover ratio- Tarzan Limited = 5.40 times Inventory Turnover ratio in days- Tarzan Limited = 365/5.40 Inventory Turnover ratio in days- Tarzan Limited = 68 days Requirement 2: The Profitability of the Frozen limited is more than the profitability of the Tarzan Limited (more than 50% the later one) both in terms of Gross profit margin and Net profit margin. The inventory movement of Frozen Limited is slower than the Tarzan Limited.