- 20 Marks
FA – Mar 2024 – L1 – Q5 – Interpretation of financial statements (Financial Ratios)
Calculate financial ratios and report on the reasons for Ziekah Ltd's deteriorating cash flow.
Question
You are the financial accountant for Ziekah Ltd, a company that manufactures household furniture. Ziekah Ltd has experienced both a reduction in sales revenue and cash flow during the last financial period. You are provided with the following information regarding Ziekah Ltd for the years ended 31 October 2022 and 2023:
Statement of Profit or Loss for Years Ended
| 2023 (GH¢000) | 2022 (GH¢000) | |
|---|---|---|
| Revenue | 1,000 | 1,400 |
| Cost of sales | (600) | (700) |
| Gross profit | 400 | 700 |
| Operating expenses | (150) | (280) |
| Operating profit | 250 | 420 |
| Interest on debentures | (60) | (100) |
| Profit before tax | 190 | 320 |
| Tax | (24) | (40) |
| Profit after tax | 166 | 280 |
Statement of Financial Position as at
| 2023 (GH¢000) | 2022 (GH¢000) | |
|---|---|---|
| Non-current assets | ||
| Property, plant, and equipment | 2,320 | 2,400 |
| Intangible assets | 1,300 | 800 |
| Total non-current assets | 3,620 | 3,200 |
| Current assets | ||
| Inventory | 82 | 78 |
| Trade receivables | 138 | 134 |
| Bank | – | 300 |
| Total current assets | 220 | 512 |
| Total assets | 3,840 | 3,712 |
| Equity and liabilities | ||
| Issued share capital | 1,600 | 1,600 |
| Retained earnings | 1,224 | 1,058 |
| Total equity | 2,824 | 2,658 |
| Non-current liabilities | ||
| 10% Debentures | 600 | 1,000 |
| Current liabilities | ||
| Bank overdraft | 342 | – |
| Trade payables | 74 | 54 |
| Total current liabilities | 416 | 54 |
| Total equity and liabilities | 3,840 | 3,712 |
Required:
a) Calculate the following ratios for both years:
- i) Operating profit margin.
- ii) Return on capital employed.
- iii) Acid test ratio.
- iv) Receivable days.
(8 marks)
b) Write a report to the Managing Director of Ziekah Ltd explaining why the cash flow of the company has deteriorated during the current financial year. You should base your report on both the ratios calculated in (a) and any additional information provided in the financial statements.
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