A-level accounting question..(financial ratio)?
Question:
gross profit as percentage of sales=24% 37.5%
net profit as percentage of sales=10% 20%
expenses profit as percentage of sales=14% 17.5%
stock turnover=3 5
current ratio=2:1 5:1
acid test ratio=0.78:1 1.875:1
debtor :sales ratio=91day 46day
creditor:purchases ratio=156day 49day
pls help me answer my question tq.(right-company B, left company A)
Answer:
My answer assumes that both the companies are engaged is same type of business.
Because company A has creditor:purchase ratio of 156 days, it clearly shows that the company has long outstandings to its creditors. The creditors must be pressurizing the company to pay off its obligations asap. This pressure by its suppliers makes the company to speed up its sales anyhow even if it has to forego it's margins (that is why it's Gross profit ratio is lower).
Because company B has lower sundry debtors outstanding (just 46 days compared to 91 days), it seems that company B has focused more on cash sales or sales with a very limited credit allowance.
The current ratio says that company A's CA are 2 times it's CL, while company B's CA are 5 times it's CL. Company B is in far better condition to repay is current liabilities but it is holding excess of liquid assets, it could have invested the sum in some short term investments to make some reasonable returns.
The stock turnover ratio states that company B is holding very limited stocks as compared to the volume of sales and has been able reduce the cost of carrying the inventory.
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