12.8 Emerald Ltd and Garnet Ltd are two companies engaged in manufacturing electrical appliances. Both operate from rented premises. Their financial statements at 31 March 1997 were as follows.

Profit and loss accounts for the year ended 31 March 1997 Emerald Garnet

£000 £000 £000 £000 Sales 1,075 756 Less: Costs of sales Materials (360) (280)

Manufacturing wages (130) (140)

Depreciation of plant (125) (74)

Other manufacturing costs (100) (715) (80) (574)

Gross profit 360 182 Saundry expenses (125) (95)

Operating profit 235 87 Interest on debentures (10) (30)

Net profit before tax 225 57 Taxation (50) (15)

Net profit after tax 175 42 Proposed dividend (100) (40)

Retained profit 75 2 Balance sheets as at 31 March 1997 Emerald Garnet

£000 £000 £000 £000 Fixed assets Plant and machinery Cost 1,250 1,480 Aggregate depreciation (450) 800 (1,160) 320 Office equipment Cost 65 180 Aggregate depreciation (20) 45 (82) 98 Motor vehicles Cost 60 50 Aggregate depreciation (20) 40 (20) 30 885 448 Current assets Stock 210 170 Debtors: trade 400 300 sundry 50 40 Cash at bank 20 680 510 Creditors: amounts falling due within one year Trade creditors (100) (140)
Sundry (including taxation) (80) (60)
Bank overdraft (100) (280)
Proposed dividend (100) (40)
(380) (520)
Net current assets 300 (10)
Total assets less current liabilities 1,185 438 Creditors: amounts falling due in more than one year 10% debentures (!00) (300)
1,085 138 Capital Called up share capital 600 100 Profit and loss account 485 38 1,085 138

(a) Calculate the following ratios for both companies:
(i) current ratio;
(ii) quick ratio/acid test;
(iii) debtors’ collection period in days;
(iv) return on capital employed (ROCE);
(v) return on owners’ equity (before taxation);
(vi) gearing ratio;
(vii) interest cover;
(viii) dividend cover (ignore tax relating to dividends);
(ix) gross profit percentage on sales;
(x) operating profit percentage on sales. (10 marks)

(b) Comment briefly on the relative profitability, liquidity and risk of the two companies.
(10 marks)
(20 marks)
(ACCA, Paper 1, The Accounting Framework, June 1997)