# accounting-ratios-paraphrasing

a. Return on Capital Employed= PBIT/capital employed*100

2015) 20000/109000*100 = 18.3%

2014) 14000/86000*100 = 16.3%

b. Net Profit = PBIT/Net Sales*100

2015) 20000/108000*100 = 18.5%

2014) 14000/64000*100 = 21.9%

c. Accounts receivable period= Trade receivable/Net Sales*365

2015) 14000/108000*365 = 47 days

2014) 10500/64000*365 = 59 days

2015) 9400/75600*365 = 45 days

2014) 6800/40000*365 = 62 days

e. Debt = Total liability/Total assets

2015) 80400/129400 = 0.6213

2014) 74200/100200 = 0.7405

• Required :- based on the above accounting ratios , answer the following question ?

1- Explain what you can deduce from the ratios as at 31 December 2015 and from comparing them with those for 2014. ( comment on each accounting ratio )

a- Return on Capital Employed has increased when compared with last year, so it indicate that the more profit itâ€™s creating out of every dollar of capital investment it uses in its operations.If a company has a return on capital employed of 18.3%, it means itâ€™s generating a net return of 18.3 cents from every dollar of capital it employs. so a higher ratio result indicates that a business is making good use of its long-term financing strategy.

b- There has been a reduction in net profit, although in absolute terms, both profit and sales are higher. it indicate that the firm has lowered the price of goods to increase sales. There is inefficient management of the affairs of business

c-The debtorsâ€™ collection period, already satisfactory, has decreased still further from 60 to 47 days. There is not enough information to say whether this is all due to good credit control, or whether some sales are being made on shorter credit terms or for cash.

Â·d- The creditors payment period has shortened. Possibly the company has become more efficient at paying creditors, or perhaps it is purchasing goods on shorter credit terms.

e- Â· The debt to equity ratio has reduced in 2015. The reduction is lower than 1 , so it indicate that the more financially secure a company is, since the majority of its operations are being funded by investor equity rather than by debt.

2- State two points which could cause the movement in the gross profit percentages between the two years and explain how they could bring the change about.

– An error in counting closing stock.

– An increase in prices from suppliers not passed on to customers.

– Deliberate reduction in margin in an attempt to increase sales volume.

3- State the extent to which you agree or disagree with the following and give brief reasons for your answers:-

a) The current ratio and the quick ratio help to assess whether a company is able to meet its debts as they fall due. Therefore the higher these ratios are the better placed the company is.