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