Question Tag: Gearing Ratios

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  • 20 Marks

CIBG – FRPA 2022 – L3 – Q3 – Smart Co Ltd Financial Position Report

Prepare a report commenting on the financial position of SMART Co Ltd using gearing and liquidity ratios, highlighting areas for further investigation.

SKY CO LTD. is considering acquiring an interest in its competitor. SMART Co LTD. The managing director of SKY Co LTD. has obtained the statements of financial position of SMART Co LTD. for the last three years as shown below. SMART Co LTD. – Statement of financial position at 31st December

2019 (GH¢000) 2020 (GH¢000) 2021 (GH¢000)
Non-current assets
Land and buildings 11,460 12,121 11,081
Plant and equipment 8,896 9,020 9,130
20,356 21,141 20,211
Current assets
Inventories 1,775 2,663 3,995
Trade receivables 1,440 2,260 3,164
Cash 50 53 55
3,265 4,976 7,214
Total assets 23,621 26,117 27,425
Equity
Share capital 8,000 8,000 8000
Retained earnings 6,434 7,313 7,584
14,434 15,313 15,584
Non-current liabilities
12% debentures 2022-2025 5,000 5,000 5,000
Current liabilities
Trade payable 390 388 446
Bank 1,300 2,300 3,400
Income taxes payable 897 1,420 1,195
Dividend payable 1,600 1,696 1,800
4,187 5,804 6,841
Total equity and liabilities 23,621 26,117 27,425

You are required to: Prepare a report for the managing director of SKY Co LTD. commenting on the financial position of SMART Co Ltd. and highlight any areas that require further investigation (using gearing and liquidity ratios only). (20 marks)

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  • 20 Marks

FR – May 2019 – L2 – Q3 – Statement of Cash Flows (IAS 7)

Calculation of cash operating cycle and comparative ratios for Kobape Limited, and analysis of company performance through a report.

Shown below are the financial statements of Kobape Limited for its most recent two years.

Extract from the statement of profit or loss for the year ended 30 April:

2019 (N’000) 2018 (N’000)
Revenue 224,000 195,000
Cost of sales (169,200) (136,500)
Gross profit 54,800 58,500
Administrative costs (32,700) (38,040)
Distribution costs (10,900) (12,680)
Finance cost (1,900) (1,380)
Profit before tax 9,300 6,400

Statement of financial position as at 30 April:

Assets (N’000) 2019 2018
Non-current assets 37,000 28,600
Current assets:
– Inventory 12,800 9,800
– Trade receivables 24,600 21,600
– Cash balance 1,600 2,400
Total assets 76,000 62,400

Equity and liabilities:

2019 2018
Ordinary share capital 16,000 16,000
Retained earnings 26,200 18,600
Non-current liabilities:
– 10% loan notes 16,000 12,000
Current liabilities:
– Bank overdraft 2,200 1,600
– Trade payables 15,000 13,800
– Taxation 600 400
Total equity and liabilities 76,000 62,400

The following are the ratios calculated for Kobape Limited based on the financial statements of the previous year and also the latest industry average ratios:

Ratio Kobape Ltd (30 April 2018) Industry Average
Net profit margin 3.99% 4.73%
ROCE (Capital employed = equity + loan notes) 16.69% 18.50%
Asset turnover 4.19 times 3.91 times
Current ratio 2.14:1 1.90:1
Quick ratio 1.52:1 1.27:1
Gross profit margin 30.0% 35.23%
Account receivables collection period 40 days 52 days
Account payables payment period 37 days 49 days
Inventory turnover (times) 13.9 times 18.3 times
Gearing ratio 25.75% 32.71%

Required:
a. Calculate the cash operating cycle of Kobape Limited for the year ended 30 April, 2018 and 2019. (5 Marks)

b. Calculate the comparative ratio(s) (to two decimal places where appropriate) for Kobape Limited for the year ended 30 April, 2019. (5 Marks)

c. Draft a report addressed to the board of directors of Kobape Limited, analyzing the performance of the company for the year 2019 based on the result of the previous year and the industry average. (10 Marks)

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  • 20 Marks

FR – May 2019 – L2 – Q4a – Financial Statement Analysis

Calculation of various financial ratios based on the financial statements of Zangi Ltd for 2017 and 2018.

Zangi Ltd is a private company in Ghana, and extracts from its most recent financial statements are provided below:

Statement of profit or loss for the year ended 31 March:

Required:

a) Calculate the following ratios using the information in the financial statements above:

  • i) Operating profit margin
  • ii) Gross profit margin
  • iii) Return on assets employed
  • iv) Debt to equity
  • v) Interest cover
  • vi) Current ratio
  • vii) Quick ratio

b) Comment on the profitability, liquidity, and gearing of the company for the two-year periods based on the ratios computed above and advice management where appropriate.

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  • 20 Marks

FA – Nov 2018 – L1 – Q6 – Interpretation of financial statements (Financial Ratios)

Evaluate two companies using financial ratios to advise on the better investment option.

Oware Ltd is considering possible investment in only one of the following companies: Achiaa Ltd or Apire Ltd. Extracts from the financial statements of both companies are below:

Required:
a) Calculate the following ratios for both Achiaa Ltd and Apire Ltd:
i) The Net Profit %
ii) The Debt to Equity Ratio
iii) Trade Receivable Days
iv) Interest Cover
(12 marks)

b) Prepare a memorandum on the overall assessment, making recommendations on which company Oware Ltd should invest in.
(8 marks)

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  • 20 Marks

CIBG – FRPA 2022 – L3 – Q3 – Smart Co Ltd Financial Position Report

Prepare a report commenting on the financial position of SMART Co Ltd using gearing and liquidity ratios, highlighting areas for further investigation.

SKY CO LTD. is considering acquiring an interest in its competitor. SMART Co LTD. The managing director of SKY Co LTD. has obtained the statements of financial position of SMART Co LTD. for the last three years as shown below. SMART Co LTD. – Statement of financial position at 31st December

2019 (GH¢000) 2020 (GH¢000) 2021 (GH¢000)
Non-current assets
Land and buildings 11,460 12,121 11,081
Plant and equipment 8,896 9,020 9,130
20,356 21,141 20,211
Current assets
Inventories 1,775 2,663 3,995
Trade receivables 1,440 2,260 3,164
Cash 50 53 55
3,265 4,976 7,214
Total assets 23,621 26,117 27,425
Equity
Share capital 8,000 8,000 8000
Retained earnings 6,434 7,313 7,584
14,434 15,313 15,584
Non-current liabilities
12% debentures 2022-2025 5,000 5,000 5,000
Current liabilities
Trade payable 390 388 446
Bank 1,300 2,300 3,400
Income taxes payable 897 1,420 1,195
Dividend payable 1,600 1,696 1,800
4,187 5,804 6,841
Total equity and liabilities 23,621 26,117 27,425

You are required to: Prepare a report for the managing director of SKY Co LTD. commenting on the financial position of SMART Co Ltd. and highlight any areas that require further investigation (using gearing and liquidity ratios only). (20 marks)

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  • 20 Marks

FR – May 2019 – L2 – Q3 – Statement of Cash Flows (IAS 7)

Calculation of cash operating cycle and comparative ratios for Kobape Limited, and analysis of company performance through a report.

Shown below are the financial statements of Kobape Limited for its most recent two years.

Extract from the statement of profit or loss for the year ended 30 April:

2019 (N’000) 2018 (N’000)
Revenue 224,000 195,000
Cost of sales (169,200) (136,500)
Gross profit 54,800 58,500
Administrative costs (32,700) (38,040)
Distribution costs (10,900) (12,680)
Finance cost (1,900) (1,380)
Profit before tax 9,300 6,400

Statement of financial position as at 30 April:

Assets (N’000) 2019 2018
Non-current assets 37,000 28,600
Current assets:
– Inventory 12,800 9,800
– Trade receivables 24,600 21,600
– Cash balance 1,600 2,400
Total assets 76,000 62,400

Equity and liabilities:

2019 2018
Ordinary share capital 16,000 16,000
Retained earnings 26,200 18,600
Non-current liabilities:
– 10% loan notes 16,000 12,000
Current liabilities:
– Bank overdraft 2,200 1,600
– Trade payables 15,000 13,800
– Taxation 600 400
Total equity and liabilities 76,000 62,400

The following are the ratios calculated for Kobape Limited based on the financial statements of the previous year and also the latest industry average ratios:

Ratio Kobape Ltd (30 April 2018) Industry Average
Net profit margin 3.99% 4.73%
ROCE (Capital employed = equity + loan notes) 16.69% 18.50%
Asset turnover 4.19 times 3.91 times
Current ratio 2.14:1 1.90:1
Quick ratio 1.52:1 1.27:1
Gross profit margin 30.0% 35.23%
Account receivables collection period 40 days 52 days
Account payables payment period 37 days 49 days
Inventory turnover (times) 13.9 times 18.3 times
Gearing ratio 25.75% 32.71%

Required:
a. Calculate the cash operating cycle of Kobape Limited for the year ended 30 April, 2018 and 2019. (5 Marks)

b. Calculate the comparative ratio(s) (to two decimal places where appropriate) for Kobape Limited for the year ended 30 April, 2019. (5 Marks)

c. Draft a report addressed to the board of directors of Kobape Limited, analyzing the performance of the company for the year 2019 based on the result of the previous year and the industry average. (10 Marks)

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  • 20 Marks

FR – May 2019 – L2 – Q4a – Financial Statement Analysis

Calculation of various financial ratios based on the financial statements of Zangi Ltd for 2017 and 2018.

Zangi Ltd is a private company in Ghana, and extracts from its most recent financial statements are provided below:

Statement of profit or loss for the year ended 31 March:

Required:

a) Calculate the following ratios using the information in the financial statements above:

  • i) Operating profit margin
  • ii) Gross profit margin
  • iii) Return on assets employed
  • iv) Debt to equity
  • v) Interest cover
  • vi) Current ratio
  • vii) Quick ratio

b) Comment on the profitability, liquidity, and gearing of the company for the two-year periods based on the ratios computed above and advice management where appropriate.

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  • 20 Marks

FA – Nov 2018 – L1 – Q6 – Interpretation of financial statements (Financial Ratios)

Evaluate two companies using financial ratios to advise on the better investment option.

Oware Ltd is considering possible investment in only one of the following companies: Achiaa Ltd or Apire Ltd. Extracts from the financial statements of both companies are below:

Required:
a) Calculate the following ratios for both Achiaa Ltd and Apire Ltd:
i) The Net Profit %
ii) The Debt to Equity Ratio
iii) Trade Receivable Days
iv) Interest Cover
(12 marks)

b) Prepare a memorandum on the overall assessment, making recommendations on which company Oware Ltd should invest in.
(8 marks)

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