Question for understanding ratios Using the following information, Calculate the firm’s debtor’s turnover and briefly explain the ratio you have calculated. Year 1 Year 2 Sales – Cash 20,000 30,000 Sales - Credit 300, ,000 Debtors 50,000 30,000 Solution: Explanation: Collection from Credit customers have exceed the usual 30 days term in year 1. The situation improves for the better in year 2 where collections give within the 30 days term. University of Libya BETC Prepared by: Muhammad akhtar Debtor’s Turnover Year 1 Year 2 Debtors / Credit sales x / x 365 =60.83 =61 days / x 365 = Days

Question for understanding ratios Using the Following information, calculate the firm’s Stock Turnover And briefly explain the ratios you have calculated. Year 3 Year 4 Opening Stock 15,000 25,000 Closing Stock 25,000 80,000 Purchases 460, ,000 Solution: University of Libya BETC Prepared by: Muhammad akhtar Stock Turnover Year 3 year 4 Cost of Goods sold Average Stock Explanation: The rapidity of Proof that the firm is selling /20000 = 22.5 times Sales is higher in year 3 as The goods slower in year / = 12.3 times compared to year 4. This

Question for understanding ratios Using the following information, calculate the following ratios. a.Gross profit margin b.Net Profit margin. c.Return on Shareholder’s fund Year 1 year 2 $ $ Sales 150, ,000 Opening Stock 20,000 ? Purchases 80, ,000 Closing Stock 30,000 50,000 Operating Expenses 40,000 80,000 Shareholder’Fund 300, ,000 University of Libya BETC Prepared by: Muhammad akhtar

Question for understanding ratios Using the following information, calculate the following ratios. a.Gross profit margin = Gross profit / net Sales x 100 = 80000/15000x100 = 53.33% Sales Less: Cost of good sold Opening Stock Add: Purchases Less: Closing Stock -(30000) Gross profit Less operating Expenses - ( 40000) Net profit University of Libya BETC Prepared by: Muhammad akhtar

Question for understanding ratios Using the following information, calculate the following ratios. B. Net profit Margin= Net profit before Tax / Net sales x 100 = 40000/ x 100 = % University of Libya BETC Prepared by: Muhammad akhtar

Question for understanding ratios Using the following information, calculate the following ratios. C.Return on Shareholder’s Fund = Net Profit / Capital Employed x 100 = 40000/ x 100 Return on Shareholder’s Fund = % University of Libya BETC Prepared by: Muhammad akhtar

Horizontal analysis & Vertical analysis Horizontal Analysis and Vertical Analysis are also popular forms. Horizontal analysis is used to evaluate the trend in the accounts over the years, while vertical analysis, also called a Common Size Financial Statement discloses the internal structure of the firm. It indicates the existing relationship between sales and each income statement account. It shows the mix of assets that produce income and the mix of the sources of capital, whether by current or long-term debt or by equity funding. University of Libya BETC Prepared by: Muhammad akhtar

The Balance sheets of Lauder corporation : 31/12/ /12/2004 $ $ Fixed Assets 625, ,000 Current Assets ,000 Less: Current Liabilities , , ,192,400 1,033,600 Less: Long term Liabilities 390, , , ,000 Financed By: Ordinary Share Capital 220, ,000 Retained Profit 582, , , ,000 Required: a). Compute the amount and percentage changes in 2005 using Horizontal analysis, Assume 2004 is the base year. b).Compute the percentage change in the individual asset, liability and shareholders equity items using the vertical analysis. University of Libya BETC Prepared by: Muhammad akhtar

The Balance sheets of Lauder corporation : a)Horizontal Analysis University of Libya BETC Prepared by: Muhammad akhtar AmountPercentage Fixed Assets Current Asset Total Assets Current Liabilities Long term liabilities Total Liabilities Shareholders Fund Ordinary Share Capital Retained profit 652, ,000 1,468, , , , , , , , ,000 1,276, , , , , , ,000 60, ,000 33,200 (7,600) 25,600 4, , , % 7.94 % 15.05% 13.70% % 4.00% 2.00% 38.59% 26.16%

Horizontal Analysis C.The horizontal analysis shows a number of significant changes for the company from 2004 to 2005: Fixed assets increase by 132,000 representing 25.38% Current Liabilities increased by 33,200 representing 13.70% The Retained profit increased by 162,080 representing 38.59% These changes suggest that the company expanded its assets financed primarily by retained profit rather than long-term debts. University of Libya BETC Prepared by: Muhammad akhtar

The Balance sheets of Lauder corporation : b) Vertical Analysis. University of Libya BETC Prepared by: Muhammad akhtar 2005 Amount Percentage 2004 Amount Percentage Fixed Assets Current assets Total Assets Current Liabilities Long term Liabilities Total Liabilities Shareholders Fund: Ordinary Share Capital Retained Profit Total liabilities & shareholders fund 652, % 816, % 1,468, % 275, % 390, % 665, , % 582, % 802,400 1,468, , % 756, % 1,276, % 242, % % 640, , % 420, % 636,000 1,276, %

Vertical Analysis Vertical Analysis shows the relative size of each category in the balance sheet. Current assets decreased from 59.25% to 55.59% even though the absolute dollar amount has increased. Fixed assets increased from 40.75% to % Retained profit has increased from 32.92% to 39.65% of total liabilities and shareholders fund. These results reinforce the earlier observations that the company finances its growth through retained profit rather than through long term debts. University of Libya BETC Prepared by: Muhammad akhtar

Home work Questions You as on of the staff in the finance department, you manager ask you to prepare a formal report to the management on the performance of Kohinoor KDM after analysis the results over the previous years and also with the industry average. The manager has given you the following information. The latest industry financial ratio’s average is : Gross profit margin 38% Net profit margin 4.5% Return on capital employed (equity and debentures) Current ratio 1.95 : 1 Quick ratio 1.25: 1 Total Asset Turnover 3.85 times Debtors collection period 50 days Creditors collection period 45 days Stock turnover 18.5 days Gearing 30 % University of Libya BETC Prepared by: Muhammad akhtar

Home work Questions The following information was extracted from the published accounts of Kohinoor kdm. Income Statement for the year ended 31 December $ $ Turnover 482, ,400 Cost of Sales 337, ,770 Gross profit 144, ,630 Operating Expenses Depreciations 13,860 17,820 Audit fees Debenture interest 2,970 3,960 Selling and Administrative expenses 111,623 90,239 Net Profit 15,839 23,017 University of Libya BETC Prepared by: Muhammad akhtar

Home work Questions Balance Sheet as at 31 December $ $ $ $ $ $ Property, Plant and Equipment 70,785 91,575 Current Assets Inventory 24,255 31,680 Debtors 53,640 60,885 Cash 5,760 3,960 83,655 96,525 Less: Current Liabilities Bank overdraft 3,960 5,445 Creditors 34,155 37,125 Taxation payable 990 1,485 Others payables 2, ,828 47,273 Working Capital 41,827 49, , Financed By: Capital And Reserves Share Capital 39,600 39,600 Reserves 43,312 61,627 82, ,227 Non-Current Liabilities 10% debenture 29,700 39, , ,827 University of Libya BETC

Home work Questions a.The Relevant financial ratios for the Kohinoor kdm for the years ended 31 December 2010 and All Foumulas and Calculations must be shown clearly. b. And also interpretation of ratios. University of Libya BETC Prepared by: Muhammad akhtar