The following information relates to the books of accounts of Adom Ltd. Trading, profit, and loss account for the year ended 31st December 2014 opening stoc...

Answer Details

Key figures drawn from the accounts. Sales N240,000; Gross profit N96,000; Cost of goods sold N144,000; Net profit N8,000; Opening stock N20,000; Closing stock N36,000; Current assets N82,000 (Stock 36,000 + Debtors 39,000 + Cash 7,000); Current liabilities N40,000 (Creditors 28,000 + Accruals 12,000); Shareholders' funds and capital employed N142,000.

All nine measures are shown below for completeness (only six are required).

(a) Gross Profit Percentage

\( \text{GP\%} = \dfrac{\text{Gross Profit}}{\text{Sales}} \times 100 = \dfrac{96{,}000}{240{,}000} \times 100 = \mathbf{40\%} \)

(b) Net Profit Percentage

\( \text{NP\%} = \dfrac{\text{Net Profit}}{\text{Sales}} \times 100 = \dfrac{8{,}000}{240{,}000} \times 100 = \mathbf{3.33\%} \)

(c) Return on Capital Employed

Capital employed = Total assets N182,000 less Current liabilities N40,000 = N142,000 (equal to shareholders' funds, since there are no long-term loans).

\( \text{ROCE} = \dfrac{\text{Net Profit}}{\text{Capital Employed}} \times 100 = \dfrac{8{,}000}{142{,}000} \times 100 = \mathbf{5.63\%} \)

(d) Current Ratio

\( \text{Current Ratio} = \dfrac{\text{Current Assets}}{\text{Current Liabilities}} = \dfrac{82{,}000}{40{,}000} = \mathbf{2.05:1} \)

(e) Acid Test (Quick) Ratio

\( \text{Acid Test} = \dfrac{\text{Current Assets} - \text{Stock}}{\text{Current Liabilities}} = \dfrac{82{,}000 - 36{,}000}{40{,}000} = \dfrac{46{,}000}{40{,}000} = \mathbf{1.15:1} \)

(f) Rate of Stock Turnover

Average stock = \( \dfrac{20{,}000 + 36{,}000}{2} = 28{,}000 \).

\( \text{Stock Turnover} = \dfrac{\text{Cost of Goods Sold}}{\text{Average Stock}} = \dfrac{144{,}000}{28{,}000} = \mathbf{5.14\ times} \)

(g) Working Capital

Working Capital = Current Assets - Current Liabilities = 82,000 - 40,000 = N42,000.

(h) Shareholders' Funds

(i) Liquid Assets

Liquid assets = Current assets - Stock = Debtors N39,000 + Cash at bank N7,000 = N46,000.

Interpretation. A 40% gross margin is healthy, but the net margin of only 3.33% and ROCE of 5.63% show that operating expenses (mainly selling and distribution) absorb most of the gross profit. Liquidity is sound: a current ratio of about 2:1 and a quick ratio above 1:1 mean the company can meet its short-term obligations comfortably.