Question

Financial Indicators/Ratios	2018	2017
Current ratio	?	2.92 : 1
Acid test ratio	?	1.28 : 1
Debtors collection period	?	16 days
Creditors payment period	?	27 days
Inventory turnover rate	?	24 times/year
Gross profit percentage	?	35%
Net profit percentage	?	10,29%
Return on equity	?	210,53%
Debt equity ratio	?	0.74

Catwalksale (Pty) Ltd

Extract from the statement of profit or loss and other comprehensive income for the year ending 31 December 2018:

	2018	2017
Revenue (40% on credit)	3 550 000	3 500 000
Cost of sales (30% on credit)	(2 307 500)	(2 275 000)
Net profit after tax	50 000	360 000

Catwalksale (Pty) Ltd

Statement of financial position as at 31 December 2018:

	2018	2017
Assets
Property, plant and equipment	125 000	120 000
Current assets	188 000	178 000
Inventory	110 000	100 000
Trade debtors	75 000	66 000
Other receivables	3 000	4 000
Cash and cash equivalents	0	8 000
Total assets	313 000	298 000
Equity and liabilities
Ordinary shares	51 000	51 000
Retained earnings	125 000	120 000
Long-term loans	47 000	66 000
Current liabilities	90 000	61 000
Trade creditors	66 000	53 000
Income tax	4 000	8 000
Bank overdraft	20 000	0
Total equity and liabilities	313 000	298 000

REQUIRED:

1.1       Use the financial information provided to calculate the following ratios for the year ending 31 December 2018:

1. Current ratio;                                                                                                         (2)
2. Acid test ratio;                                                                                                       (2)
3. Debtors collection period (in days);                                                                      (2)
4. Creditors payment period (in days);                                                                     (2)
5. Inventory turnover rate (times per year);                                                              (2)
6. Gross profit percentage;                                                                                       (2)
7. Net profit percentage;                                                                                           (2)
8. Return on equity; and                                                                                           (2)
1. Debt equity ratio.                                                                                                   (2)

Answer 1

A. Current ratio = Current assets / Current liabilities

=$1,88,000 /$90,000.

=2.088

B. Acid test ratio = Quick assets /Current liabilities

where, quick assets = Current assets - inventory

=1,88,000-1,10,000

=$78,000

so, Acid test ratio = $78,000/$90,000

=0.866

C. Debtors collection period ( days )

Debtors and other's receivable (2018) = $75,000+$3,000

=$78,000 (closing balance)

Debtors and other's receivable (2017)=$66,000+$4,000

=$70,000 (opening balance )

Net credit sales = 40 % of $3,550,000

=$1,420,000

Debtor collection period ( days ) = ( Average Debtors and other's receivable / Net credit sales ) X 360 days

=(($78,000+$70,00/2)/$1,420,000) X 360

=($74,000/$1,420,000) X 360

=18.76

=19 days ( rounded off )

D. Creditors payment period ( days )

Closing creditors = $66,000

Opening creditors = $53,000

Average creditors = Opening creditors +closing creditors / 2

=($53,000+$66,000) / 2

=$59,500

Net credit purchase = 30 % of $2,307,500

=$692,250

Creditor's payment period =( Average creditor's /Net Credit purchase ) X 360

=($59,500 / $692,250) X 360

=30.942

=31 days ( rounded off )

E. Inventory turnover ratio

Average inventory =(opening inventory + closing inventory) / 2

=($100,000+$110,000) / 2

=$105,000

Inventory turnover ratio = Cost of sales / Average inventory

=$2,307,500/$105,000

=21.976

=22 times ( rounded off )

F. Gross Profit percentage

Gross profit = Revenue - Cost of sales

=$3,550,000-$2,307,500

=$1,242,500

Gross Profit percentage = (Gross profit / Revenue ) x 100

=($1,242,500 / $3,550,000) X 100

=35 %

G. Net profit percentage

Net profit percentage = (Net profit / revenue ) X 100

=($50,000/$3,550,000 ) X 100

=1.408 %

=1.41%

H. Return on Equity

Equity shareholder's fund (2018) = ordinary shares + retained earning's

=$51,000 + $125,000

=$176,000 ( closing)

Equity shareholder's fund (2017) = ordinary shares + retained earning's

=$51,000 + $120,000

=$171,000 ( opening )

Average equity shareholder's fund = (opening equity shareholder's fund + closing equity shareholder's fund) / 2

=($171,000+$176,000) / 2

=$173,500

Return on Equity =( Net income / Average equity shareholder's fund) X 100

=($50,000/$173,500) X 100

=28.818 %

=29 % ( rounded off )

Note : Return on equity can also be computed without taking average that means by simply considering equity share holder's fund for the year 2018

I. Debt equity ratio

Total liabilities = Long term loans + current liabilities

=$47,000+$90,000

=-$137,000

Equity or Equity shareholder's fund = $176,000

Debt equity ratio = Total liabilities / Equity

=$137,000/$176,000

=0.778

=0.78 ( rounded off )