Question

As an appointed Auditor, the company has provided you with following financial ratios for the year....

As an appointed Auditor, the company has provided you with following financial ratios for the year.

Mobile X Ltd.

Financial ratios

Ratio

Actual

Budget (expected)

Gross profit percentage

40%

45%

Net profit percentage

25%

40%

Trade payables ratio

70 days

30 days

Current ratio

1.35:1

1.40:1

Acid test ratio

0.85:1

0.80:1

The company’s year end is the 31st March 2020.

The auditor compared the planned and actual ratios for the company. Complete the table to indicate which ratios should be accepted and which should be investigated further. Provide a reason for your answer.

Mobile X Ltd.

Financial ratios

Ratio

Actual

Budget (expected)

Accept

Investigate further

Gross profit percentage

40%

45%

Net profit percentage

25%

40%

Trade payables ratio

70 days

30 days

Current ratio

1.35:1

1.40:1

Acid test ratio

0.85:1

0.80:1

0 0
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Answer #1
Ratio Actual Budget
(Expected)
Accept Investigate
further
Gross Profit percentage 40% 45% Accept, the variation is only 5% NA
Net Profit percentage 25% 40% No Difference is 15%, the administration/selling expenses would have increased drastically
Trade payables ratio 70 days 30 days No Eventhough, the ratio is in favour of the Company, but the inability to pay the Trade payables could be concern.
Current ratio 1.35:1 1.40:1 No The current ratio has reduced which is in line with the increase trade payables. Since the acid test ratio is favourable and Current ratio is unfavourable, the difference will help in identifying the difference
Acid test ratio 0.85:1 0.80:1 Accept, variation is in favour of company and difference is very less NA
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