Topic: Interpretation of financial statements (Financial Ratios)

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  • 5 Marks

FA – Nov 2024 – L1 – Q5c – Profitability vs Liquidity Ratios

Explain the difference between profitability and liquidity ratios and provide two examples of each.

Accounting ratios cover a wide array of ratios that are used by accountants and act as different indicators that measure profitability, liquidity, and potential financial distress in a company’s financials.

Required:

Differentiate between profitability ratios and liquidity ratios and give TWO examples each.

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  • 20 Marks

FA – Mar 2024 – L1 – Q5 – Interpretation of financial statements (Financial Ratios)

Calculate financial ratios and report on the reasons for Ziekah Ltd's deteriorating cash flow.

You are the financial accountant for Ziekah Ltd, a company that manufactures household furniture. Ziekah Ltd has experienced both a reduction in sales revenue and cash flow during the last financial period. You are provided with the following information regarding Ziekah Ltd for the years ended 31 October 2022 and 2023:

Statement of Profit or Loss for Years Ended

2023 (GH¢000) 2022 (GH¢000)
Revenue 1,000 1,400
Cost of sales (600) (700)
Gross profit 400 700
Operating expenses (150) (280)
Operating profit 250 420
Interest on debentures (60) (100)
Profit before tax 190 320
Tax (24) (40)
Profit after tax 166 280

Statement of Financial Position as at

2023 (GH¢000) 2022 (GH¢000)
Non-current assets
Property, plant, and equipment 2,320 2,400
Intangible assets 1,300 800
Total non-current assets 3,620 3,200
Current assets
Inventory 82 78
Trade receivables 138 134
Bank – 300
Total current assets 220 512
Total assets 3,840 3,712
Equity and liabilities
Issued share capital 1,600 1,600
Retained earnings 1,224 1,058
Total equity 2,824 2,658
Non-current liabilities
10% Debentures 600 1,000
Current liabilities
Bank overdraft 342 –
Trade payables 74 54
Total current liabilities 416 54
Total equity and liabilities 3,840 3,712

Required:

a) Calculate the following ratios for both years:

  • i) Operating profit margin.
  • ii) Return on capital employed.
  • iii) Acid test ratio.
  • iv) Receivable days.

(8 marks)

b) Write a report to the Managing Director of Ziekah Ltd explaining why the cash flow of the company has deteriorated during the current financial year. You should base your report on both the ratios calculated in (a) and any additional information provided in the financial statements.

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  • 20 Marks

FA – Nov 2023 – L1 – Q5 – Interpretation of financial statements (Financial Ratios)

Calculate and interpret financial performance ratios for Edumfa Ltd in comparison to a competitor.

The following summarised information is available in respect of Edumfa Ltd for the year ended 31 July 2022:

The performance ratios for a competitor company for the same period are as follows:

Description Ratio
Return On Capital Employed (ROCE) 25.2%
Asset turnover rate 1.06
Acid test ratio 0.9:1
Return on equity 31.5%
Receivables collection period 38 days

Required:

a) Calculate the performance indicators for Edumfa Ltd as shown for the comparable company. (10 marks)
b) Comment on the performance of Edumfa Ltd for the year ended 31 July 2022 using the information you calculated in (a) above. (10 marks)

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  • 20 Marks

FA – July 2023 – L1 – Q5 – Interpretation of financial statements (Financial Ratios)

Calculate financial ratios and discuss ways to improve liquidity for a company using its financial statements.

The following is a summary of the final accounts of Beposo Ltd for the year ended 31 December 2022.


Required:

a) Calculate each of the following ratios (where appropriate, calculations should be to two decimal places).
i) Sales to capital employed (2 marks)
ii) Current ratio (2 marks)
iii) Liquid (acid test) ratio (2 marks)
iv) Interest cover (2 marks)
v) Gearing ratio (2 marks)

b) Explain FOUR (4) ways in which Beposo Ltd could improve its liquidity. (10 marks)

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  • 20 Marks

FA – Mar 2023 – L1 – Q5 – Interpretation of financial statements (Financial Ratios)

Distinguishes between capital and revenue expenditure and calculates financial ratios to assess the performance of a business.

a) Distinguish between capital expenditure and revenue expenditure. (5 marks)

b) Banky is the owner of a business supplying goods to other traders. He has just received the financial statement for his business for the year ended 31 December 2022 from his accountant. Below are the summarized financial statements:

Required:

i) Calculate for Banky each of the following ratios for the year ended 31 December 2022 (where appropriate, calculations should be approximated to two decimal places):

  • Net profit margin. (2 marks)
  • Return on capital employed (using the closing year-end value for capital employed) (2 marks)
  • Current ratio. (2 marks)
  • Liquid (acid test) ratio. (2 marks)
  • Rate of inventory turnover. (2 marks)

ii) Based on the ratios calculated in i) above, and all other information provided, assess the performance (profitability) of Banky’s business. (5 marks)

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  • 20 Marks

FA – Dec 2023 – L1 – Q5 – Interpretation of financial statements (Financial Ratios)

Calculates and interprets financial ratios to assess the performance of a company over two years.

Below is the formatting of Question 5 from the uploaded document as per your request:

==========
Level:
Level 1

Professional Bodies:
ICAG

Programs:
Professional Program

Subjects:
Financial Accounting (Paper 1.1)

Topics:

  • Interpretation of financial statements (Financial Ratios)

Series:
Dec 2023

Total Marks:
20

Question Tags:
Financial Ratios, Performance Analysis, Profitability, Liquidity, Efficiency

Question Short Summary:
Calculates and interprets financial ratios to assess the performance of a company over two years.

Question:

a) The following summarised information has been extracted from the accounts of Kotoku Ltd for the years ended 31 December 2021 and 31 December 2020:

Statements of Profit and Loss 2021 (GHȼ’000) 2020 (GHȼ’000)
Revenue 1,150 1,766
Cost of sales (684) (1,141)
Gross profit 466 625
Expenses (338) (472)
Interest on loans (26) (33)
Profit before tax 102 120
Tax 30 36
Profit after tax 72 84

Calculate the following ratios for Kotoku Ltd for both years (2020 and 2021):

i) Return On Capital Employed (ROCE) (2 marks)
ii) Asset turnover (2 marks)
iii) Gross profit margin (2 marks)
iv) Acid test ratio (2 marks)
v) Receivables collection period (2 marks)

b) Using the additional information given and the ratios you calculated in part (a), comment on the financial performance of Kotoku Ltd. (10 marks)

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  • 20 Marks

FA – Aug 2022 – L1 – Q5 – Interpretation of financial statements (Financial Ratios)

Calculation and comparison of financial ratios for two businesses to assess performance, followed by a discussion of which business is performing better.

a) Garu and Gushegu are two businesses that compete in the same market and have been trading for a number of years. The following information relates to their results for the year ended 31 December 2021:

Account Garu (GHȼ’000) Gushegu (GHȼ’000)
Sales 4,455 5,264
Cost of Sales 2,549 2,632
Net Profit 1,075 1,137
Inventory at 1 January 820 518
Inventory at 31 December 1,040 498
Capital Employed 2,428 1,953
Receivables 1,200 1,324
Bank 75 980
Payables 750 720

There are no other current assets or current liabilities.

Required:
Calculate the following ratios for each of the two businesses: i) Return on Capital Employed (ROCE)
ii) Gross Profit Margin
iii) Current Ratio
iv) Liquid (Acid Test) Ratio
v) Inventory Turnover
(10 marks)

b) Using the ratios calculated, discuss which of the two businesses appears to be performing better.
(10 marks)

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  • 20 Marks

FA – Aug 2022 – L1 – Q4 – IAS 7: Statement of cash flows | Interpretation of financial statements (Financial Ratios)

Preparation of a Statement of Cash Flows using IAS 7, including cash flows from operating, investing, and financing activities, with an analysis of the benefits of preparing cash flow statements.

a) The following information relates to the activities of Chemu Ltd:

Statement of Financial Position as at 31 December

Account 2021 (GHȼ’000) 2020 (GHȼ’000)
Assets
Non-current assets 1,295 810
Current assets
Inventory 1,500 500
Receivables 2,680 890
Bank – 740
Total assets 5,475 2,940
Equity and liabilities
Equity
Share capital 600 400
Retained earnings 1,625 600
Total equity 2,225 1,000
Non-current liabilities
10% Debentures 160 360
Current liabilities
Bank overdraft 1,810 –
Payables 1,000 680
Taxation 280 900
Total liabilities 3,250 1,940
Total equity and liabilities 5,475 2,940

Additional information:

i) The Statement of Profit or Loss for the year ended 31 December 2021 shows the following:

Account Amount (GHȼ’000)
Operating profit 1,531
Interest payable (26)
Profit before taxation 1,505
Taxation (480)
Profit for the period 1,025

ii) Payables consist of trade payables and accrued interest. The accrued interest as at 31 December 2021 was GHȼ45,000 and as at 2020 was GHȼ80,000.

iii) Profit before taxation had been arrived at after charging GHȼ395,000 for depreciation on non-current assets.

iv) During the year, non-current assets with a carrying amount of GHȼ200,000 were sold for GHȼ190,000.

Required:
Prepare a Statement of Cash Flows for Chemu Ltd for the year ended 31 December 2021, in accordance with IAS 7: Statement of Cash Flows.
(16 marks)

b) Identify FOUR (4) benefits Chemu Ltd may derive from preparing a Statement of Cash Flows.
(4 marks)

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  • 20 Marks

FA – April 2022 – L1 – Q5 – Interpretation of financial statements (Financial Ratios)

Calculation and interpretation of key financial ratios for two companies to assess profitability and liquidity.`

The Statement of Profit or Loss and Statements of Financial Position of two manufacturing companies in the same sector are set out below:

Required:
a) Define and calculate the following ratios for each company:
i) Net profit percentage
ii) Return on capital employed
iii) Average receivables collection period
iv) Average payables period
v) Inventory turnover
(15 marks)

b) A not-for-profit organisation issues a different set of financial statements than the statements produced by a business organisation (profit making). When it comes to bookkeeping for a not-for-profit organisation, many processes remain the same as that of a business organisation. However, differences in terminology apply when managing the books of a not-for-profit organisation.

Required:
What terminology will be used for the following:
i) Profit for the period
ii) Loss for the period
iii) Equity reserve
(5 marks)

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  • 20 Marks

FA – Nov 2021 – L1 – Q5 – Interpretation of financial statements (Financial Ratios)

Calculation and interpretation of financial ratios, including gross profit margin, net profit margin, ROCE, and liquidity ratios, and assessment of liquidity and profitability.

The following summary information relates to two businesses, Danyi and Napo. Both businesses traded in the same market sector for the year ended 31 December 2020.

Statement of Profit or Loss Accounts for the year ended 31 December 2020:

Required:
a) Calculate the following ratios for Danyi and Napo:
i) Gross profit margin
ii) Net profit margin
iii) Return on capital employed (ROCE)
iv) Current ratio
v) Liquid (acid test) ratio
vi) Inventory turnover
(6 marks)

b) Use the ratios calculated in a) to assess:
i) The liquidity of both businesses
ii) The profitability of both businesses
(8 marks)

c) Advise management of both Danyi and Napo on the actions they should now take to improve liquidity and profitability.
(6 marks)

 

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  • 20 Marks

FA – Nov 2015 – L1 – Q3 -Interpretation of financial statements (Financial Ratios) | IAS 7: Statement of cash flows

Define key terms related to cash flow and calculate liquidity ratios using given financial data.

(a) Explain what is meant by the following terms as per IAS 7:
i. Statement of Cash flow (3 marks)
ii. Cash (1 mark)
iii. Cash equivalents (1½ marks)
iv. Operating activities (1½ marks)
v. Investing activities (1½ marks)
vi. Financing activities (1½ marks)

(b)
(i) Yaa Baby Company Ltd. has the following items in its Statement of Financial Position as at 31st December, 2014:

Item GH¢
Inventories 130,000
Trade Receivables 60,500
Cash in hand 3,453
Trade Payables 96,750

The company belongs to a Trade Association that has recently published industry averages for key financial ratios based upon a survey of its members. The industry averages for current and quick ratios applicable to the business of Yaa Baby Co. Ltd are:

  • Current ratio = 1.55: 1
  • Quick ratio = 0.95: 1

Required:
Calculate Current and Quick ratios of Yaa Baby Co. Ltd. and briefly comment on the result with reference to the industry averages. (5 marks)

(ii) Financial Ratios can be grouped under three (3) broad categories i.e. Profitability, Liquidity/Working capital, and Debt and Gearing/Leverage ratios. List all the ratios under Liquidity or Working capital ratios. (5 marks)

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