Accounting Business Reporting for Decision Making

362 Accounting: Business Reporting for Decision Making

Required

a. Perform a trend analysis for the following statement of profit or loss items:

• Revenue


• Profit before tax and finance costs


• Profit after tax
  b. Calculate the ratios for the year 2016 that reflect the following:
  i. The company’s ability to generate income from its asset investments.
  ii. The average period of time it takes for the company to sell its inventory.
  iii. The dollars of current assets available to repay a dollar of current liabilities.
  iv. The number of times the company’s earnings before interest and tax covers its net finance
  expense.
  v. The percentage of sales revenue dollars results in earnings before interest and tax.
  vi. The company’s efficiency in generating income per dollar investments in assets.
  vii. The average period of time it takes for the company to collect money from its customers.

SOLUTION TO 8.3

a. Trend analysis

Absolute $ figures 2016 2015 2014 2013 2012

Sales revenue

Profit before tax and finance costs

Profit after tax

115 750

30 032

18 822

117 564

33 785

20 884

88 263

23 079

14 860

93 575

24 592

15 660

85 651

24 843

14 636

Trend analysis 2016 2015 2014 2013 2012

Sales revenue

Profit before tax and finance costs

Profit after tax

135

121

125

137

136

143

103

93

102

109

99

107

100

100

100

b. Calculating ratios

Ratio Calculation

i.Return on assets

=

Profit (loss)

× 100

Average total assets

=

18 822

× 100

(161 985 + 148 168)/2

= 12.14%

ii.Days inventory

=

Average inventory

× 365 days

Cost of sales

=

(24 625 + 18 454)/2

× 365 days

60 750

= 129 days

iii.Quick ratio

=

Current assets − inventory

Current liabilities

=

71 333 − 24 625

54 050

= 0.86 times