12.4 Beta Ltd is reviewing the financial statements of two companies, Zeta Ltd and Omega Ltd. The companies trade as wholesalers, selling electrical goods to retailers on credit. Their most recent financial statements appear below.

Profit and loss accounts for the year ended 31 March 19X8 Zeta Limited Omega Limited

£ 000 £ 000 £ 000 £ 000 Sales 4,000 6,000 Cost of sales Opening stock 200 800 Purchases 3,200 4,800 3,400 5,600 Less: closing stock 400 800 3,000 4,800 Gross profit 1,000 1,200 Expenses Distribution costs 200 150 Administrative expenses 290 250 Interest paid 10 400 500 800 Profit before tax 500 400 Taxation 120 90 Net profit for the period 380 310 Balance Sheets as at 31 March 19X8 Zeta Limited Omega Limited

£ 000 £ 000 £ 000 £ 000 Fixed assets Tangible assets Warehouse and office buildings 1,200 5,000 Equipment and vehicles 600 1,000 1,800 6,000 Current assets Stock 400 800 Debtors – trade 800 900

– sundry 150 80 Cash at bank – 100 1,350 1,880 Current liabilities Creditors – trade (800) (800)
– sundry (80) (100)
Overdraft (200) –
Taxation (120) (90)
150 890 1,950 6,890 Long-term loan (interest 10% p.a.) – (4,000)
1,950 2,890 Share capital 1,000 1,600 Revaluation reserve – 500 Profit and loss account 950 790 1,950 2,890

(a) Calculate for each company a total of eight ratios which will assist in measuring the three aspects of profitability, liquidity and management of the elements of working capital. Show all workings. (8 marks)

(b) Based on the ratios you have calculated in (a), compare the two companies as regards their profitability, liquidity and working capital management. (8 marks)

(c) Omega Ltd is much more highly geared than Zeta Ltd. What are the implications of this for the two companies? (4 marks)
(20 marks)
(ACCA, Paper 1, The Accounting Framework, December 1998)