Chapter+20+-+2009

Chapter+20+-+2009 - Exercise 20.9 Cash sufficiency ratios...

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Unformatted text preview: Exercise 20.9 Cash sufficiency ratios 2007 2006 1. Cash flow adequacy % 2 . 55 220 820 120 640 = + + % 1 . 107 220 280 135 680 = + + 2. Repay LT borrowings % 8 . 18 640 120 = % 9 . 19 680 135 = 3. Dividend payment % 4 . 34 640 220 = % 4 . 32 680 220 = Exercise 20.10 Limitations of ratio analysis A. PERI LTD SCOPE LTD 1. Rate of return on total assets % 5 . 43 000 177 000 8 000 69 = + % 5 . 35 55000 1 000 8 47000 = + 2. Rate of return on ordinary equity % 6 . 67 000 102 000 69 = % 8 . 58 80000 47000 = 3. Profit margin % 6 . 27 000 250 000 69 = % 8 . 18 000 250 47000 = 4. Current ratio 1 : 1 . 4 000 30 000 122 = 1 : 7 . 3 000 30 110000 = 5. Receivables turnover times . 5 000 50 000 250 = times . 5 000 50 000 250 = 6. Inventory turnover times 65 . 2 52000 000 138 = times 75 . 3 40000 150000 = 7. Debt ratio % 4 . 42 000 177 000 75 = % 4 . 48 155000 000 75 = B. As can be seen from the above ratios, the impact of different accounting methods on ratio calculations is significant. Compare, in particular, the return on total assets, return on equity, profit margin and debt ratio. These ratios highlight the need for adjustments to accounting figures to achieve consistent accounting methods when comparing similar entities. But how do we decide which method to use – FIFO or weighted average, straight line or reducing balance? 2 Problem 20.1 Trend analysis A. QUIK DELIVERY LTD Comparative Income Statements for the years ended 31 December 2004-2009 2004 2005 2006 2007 2008 2009 Sales revenue 100 105 105 108 130 138 Cost of sales 100 103 100 104 116 135 Gross profit 100 109 113 116 152 143 Expenses 100 105 101 123 138 140 Profit 100 118 142 97 188 152 QUIK DELIVERY LTD Comparative Balance Sheets as at 31 December 2004-2009 2004 2005 2006 2007 2008 2009 ASSETS Cash 100 106 100 144 139 78 Receivables 100 120 112 172 208 296 Inventories 100 114 120 159 203 216 Property, plant & equip. 100 108 116 193 191 189 Total assets 100 110 115 180 192 198 LIABILITIES Payables 100 122 131 180 219 236 Non-current liabilities 100 96 92 208 201 199 EQUITY Share capital 100 100 100 150 150 150 Retained earnings 100 146 178 220 256 278 Total liabilities & equity 100 110 115 180 192 198 B. From 2004 to 2009 sales revenue increased at a faster rate than cost of sales, resulting in increased gross profit. The wide fluctuations in profit is an unfavourable situation which indicates instability and requires further investigation. For example, expenses have shown a steep increase from 2007 onwards. The substantial increase in profit between 2007 and 2008 as shown in the trend figures, is misleading because of the relative size of the absolute dollar amounts. During 2007, the company financed investments in property, plant and equipment and other assets by increasing long term borrowing and by issuing ordinary shares....
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Chapter+20+-+2009 - Exercise 20.9 Cash sufficiency ratios...

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