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Wentworth Institute ASSESSMENT COVER SHEET STUDENT SURNAME: UNIT CODE NO: STUDENT FIRST NAME: UNIT NAME: Interpret and use financial statistics and tools FNSINC602A ASSESSOR'S NAME: STUDENT NUMBER: ASSESSMENT TASK: SIMULATED ACTIVITIES DATEOF ASSESSMENT: ELEMENTS OF PERFORMANCE CRITERIA(S) ELEMENTS 1 & 2 STUDENTS SIGNATURE: ___________________________ DATE: _______________ Assessment Task 3 This assessment consists of 1 (One) part all of which must be answered. The instructions to complete this assessment are included on the following page. Follow the instructions with each question. Solve the following problems: V1.0 February 2015 Updated by Kazi FNSINC602A Interpret and use financial statistics and tools 1. ABC Ltd is a long standing public company with a share capital consisting of fully paid ordinary shares. You have been just appointed as a financial analyst and management told you to conduct an analysis on past three years performance. Data Entry for: ABC Ltd 2012 2011 2010 Assets - Balance Sheet Total Current 127,000 117,000 109,000 Assets Inventory Trade debtors Total Assets 69,000 47,000 327,000 64,000 41,000 302,000 61,000 36,000 298,000 Liabilities - Balance Sheet Total Current 54,000 52,000 51,000 24,000 143,500 119,500 20,000 138,000 86,000 16,000 116,000 65,000 Income Statement Sales Revenue Cost of Goods 190,000 82,000 200,000 90,000 220,000 110,000 Sold Gross Profit Net profit before 108,000 12,500 110,000 21,000 110,000 30,000 Liabilities Trade creditors Total Liabilities Long Term Liabilities Interest & Tax Based on the information provided calculate the following ratios including formula: - current ratio acid test ratio gross profit percentage net profit percentage asset turnover ratio debtor collection days inventory turnover days V1.0 February 2015 Updated by Kazi FNSINC602A Interpret and use financial statistics and tools You need to also prepare a report for management explaining the performance of the business including make comments on each type of ratios and what it means along with any recommendations. Prepare the report in business report format. 2. You are required with the following gross profit details for the year ended 30 June 2009 and comparative information from the balance sheet. Debit ($) Credit ($) Sales (credit) 50000 Opening inventory 2400 Purchases 21600 24000 Closing inventory 4000 20000 Gross profit 30000 Balance sheet extract as at 30 June: 2008 2009 80000 60000 Accounts receivable 5200 4800 Inventory 2400 4000 Total assets Calculate and make comments on the following ratios: a) Rate of stock turnover b) Debtors collection period c) Total asset turnover 3. The following percentages have been calculated for the XYZ Company and the average for the industry. T Company (%) V1.0 February 2015 Updated by Kazi Industry (%) FNSINC602A Interpret and use financial statistics and tools Sales 100 100 Gross profit 60 80 Net profit 10 20 List the factors that might explain the variation in the gross and net profit results between the T Company and the average for the industry. 4. The following details of Company P and Company Q are provided for analysis Company P Company Q Sales 40000 50000 Cost of goods sold 12000 18000 Marketing expenses 4000 8000 Administration expenses 3000 6000 Interest 6000 9000 Both companies pay average tax 30% of the profits before tax. a. You are required to determine for each company i. The profit after tax ii. The times interest coverage b. Which measure of profit best indicates performance in operating activities? c. Assuming that each company has the same amount of assets employees, which company is more highly geared? 5. A company's equity consisted of 10000 shares of $1 fully paid, retained earnings of $15000 and reserves of $5000. All the company's assets appearing in the current balance sheet were at fair values and there are no intangibles. You have calculated the following share information from the metropolitan newspaper: Dividends per share V1.0 February 2015 Updated by Kazi $0.10 FNSINC602A Interpret and use financial statistics and tools Earnings per share Market price per share $0.24 $3.20 You are required to calculate and make comments on the following ratios: a. Dividend yield b. Earnings yield c. Price/earnings ratio d. Asset backing per share 6. The following details have been prepared for the possible purchase of a new item of plant called a P76 Retro converter. Plant purchase cost Estimated life Depreciation rate Net annual cash flow before tax $20000 8 Years 12.5% $8000 The company is able to finance the purchase at a cost o 10%. Tax is paid at 30% in the year following the particular year of income. Should the plant be purchased? Make your comments. 7. Calculate the coefficient of correlation between the possible returns of the following shares: Probability of occurrence Possible returns White ltd Black ltd 0.1 0.20 0.25 0.6 0.15 0.19 0.3 0.09 0.13 V1.0 February 2015 Updated by Kazi FNSINC602A Interpret and use financial statistics and tools Checklist for Assessment Assessment 3 Student Name: Assessor Name: Unit of Competency: FNSINC602A Interpret and use financial statistics and tools Elements and Performance Criteria(s) Elements 1& 2 Note any special conditions: C Assessor Comments Problem solving Result : V1.0 February 2015 Updated by Kazi C NYC FNSINC602A Interpret and use financial statistics and tools NYC Feedback to student This signature confirms that the student agrees that the above record is a true reflection of the task performed. Student signature: ___________________Date:_________________________ Assessor signature: __________________ Date:_______________________ V1.0 February 2015 Updated by Kazi FNSINC602A Interpret and use financial statistics and tools ACCOUNTING ASSIGNMENT THREE Question 1 Current Ratio=Current Assets/ Current liabilities For 2012= 243,000/24,000 = 10.13 For 2011= 222,000/52,000 =4.27 For 2010= 206,000/51,000 =4.04 Acid Test Ratio= (Cash+ Cash Equivalents+ short term investments + Current receivables)/Current liabilities Or = (Total Current Assets-inventory -prepaid expenses)/ Current Liabilities Acid Test Ratio For 2012 =(243,000-69,000-47,000)/24,000 = 5.29 Acid Test Ratio for 2011 = (222,000-64,000-41,000)/52,000 = 2.25 Acid Test Ratio for 2010 = 109,000/ 51,000 = 2.14 Gross profit percentage= (Gross Profit/ Sales Revenue)*100% For 2012= 108,000/190,000*100% = 56.84% For 2011= 110,000/200,000*100% = 55.00% For 2010= 110,000/220,000*100% = 50.00% Net profit percentage= Net Income/ Sales Revenue*100% For 2012=12,500/190,000*100% = 6.58% For 2011= 21,000/200,000*100% =10.50% For 2010= 30,000/220,000*100% = 13.64% Asset turnover ratio= Net Sales/ Average Total Assets For 2012 = 190,000/( (327,000+302,000)/2) = 0.60 For 2011= 200,000/ ((302,000+298,000)/2) = 0.67 Debtor collection days= (Average accounts receivable)/Annual sales 365 days For 2012= ((47,000+41,000)/2) / (190,000/365) =44,000/520.55 =84.53 Days For 2011= ((41,000+36,000)/2) / (200,000/365) = 38,500/ 547.95 = 70.26 Inventory Turnover Ratio = Cost of goods Sold/ Average Inventory For 2012 = 82,000/ ((69,000+64,000)/2) = 1.23 For 2011= 90,000/ ((64,000+61,000)/2) = 1.44 Question 2 A) Stock turnover ratio = Cost of goods sold average stock holding = 20,000/ ((2400+4000)/2) = 6.25 B) Debtor's collection period= Average accounts receivable)/Annual sales 365 days = ((5,200+4,800)/2) / (50,000/365) = 5,000 /136.986 =36.5 C) Total asset turnover= Net Sales/ Average Total Assets = 50,000/ 70,000 = 0.71 Question 3 The lower gross profit and net profit compared to the industry average might be an indication that the company cost of goods sold is higher than the industry average. Cost of raw materials, cost of labor and predetermined overhead costs have direct bearing on the gross profit. Therefore the company should strive to reduce this costs if it has to generate gross profits that are higher or relative to those of the industry. Question 4 a. You are required to determine for each company i. The profit after tax Profit after Tax= Gross Profit* (1- Tax Rate) For Company P = 40,000 -(12,000+ 4,000+ 3,000+ 6,000) = 15,000*(1-0.3) =10,500 For Company Q = 50,000 -( 18,000+ 8,000+ 6,000+ 9,000) = 9,000* (1-0.3) =6,300 ii. The times interest coverage= EBIT/Interest Expense For Company P = 15,000/ 6,000 = 2.5 For Company Q = 9,000/9,000 =1 b. Which measure of profit best indicates performance in operating activities? The best measure of company performance is the net profit margin ratio as it shows exactly out of the total sales what percentage will end up being earned by the company. In other words it shows the amount of revenue that the company will retain as profit before paying dividends. c. Assuming that each company has the same amount of assets employees, which company is more highly geared? Company Q is highly geared as revealed by its lower times interest coverage of one compared to that of Company P which stands at 2.5 Question 5 A) Dividend Yield= Dividends per share/ Market Price per share =$0.10/ $1*100% = 10% B) Earnings Yield = Earnings per Share of Common Stock / Stock Price = $0.24/$1*100% = 24% C) Price/ Earnings Ratio =1/ Earnings yield = 1/0.24 = 4.167 Question 6 Total EBIT for the 8 years = 8*8,000 = $64,000 After Tax Earnings for the 8 years= $44,800 Cost of Financing = 0.1*20,000 = 2,000 Total costs= 22,000 Net Value for the 8 years= 44,800- 22,000 = $22,800 The company should purchase Plant P76 Retro Converter. Question 7 White Ltd = O.1* O.2 + 0.6*0.15+ 0.3*0.09 = 0.0137 Black Ltd= 0.1*0.25+ 0.6*0.19+ 0.3*0.13 = 0.178