Financial Accounting Practice Question Paper

Topics: Financial ratios, Financial ratio, Debt Pages: 5 (1361 words) Published: May 7, 2013
Question 1


|Ratio |Industry average 20X8 |Actual 20X8 | |Net working capital |$125,000 |$63,300 | |Current Ratio |2.35 |1.84 | |Quick Ratio |.87 |.75 | |Inventory turnovers |4.55 |5.61 | |Average collection periods |35.3 days |20.46 days | |Total asset turnover |1.09 |1.47 | |Debt ratio |.300 |.55 | |Time interest earned ratio |12.3 |8 | |Gross profit margin |20.2% |23.3% | |Net profit margin |9.1% |7.17% | |Return on total assets(ROA) |9.9% |10.53% | |Return on equity(ROE) |16.7% |23.5% | |Earnings per share(EPS) |$3.10 |$2.15 | | | | | |Based on a 360-day year and on end-of-year | | | |figures | | |

(b)Summarize your findings and make recommendations.

Liquidity: The figures of the liquidity ratios are all lower than the industry average,i.e current ratio, quick ratio, which implies that is the company’s liquidity status is worse than the industry. Thus they are less able to fulfil short term obligations compared to an average firm in the industry. The networking capital in particular, is nearly half of the industry average. Even though this figure may not be useful in determining the performance of different firms, it still shows that the company has lower overall liquidity as compared to others in the industry. (should be compared with time series model) Both the current and quick ratios are below the acceptable level of 2 and 1. However, this may depend on the industry of the firm.

Activity: Overall, the activity ratio figures show that the company is doing better than the industry average in terms of the speed that assets are converted to cash. The inventory turnover is higher than the industry average. This means that the assets are converted into cash more quickly, compared to the industry average. High inventory turnover could mean effective management of stocks. However it could also lead to stock-out or lost sales. Additionally, the average collection period may be excessively short as compared to the industry average, which means that the period of time taken to collect debts is shorter than the industry average. This may mean that the credit...
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