Question $3$

Leisure Ltd is in the business of manufacturing, distributing, and retailing gym shoes and athleisure wear. The Finance Director has provided you with Financial Statement extracts for two years and has asked you to calculate supporting ratios so that you can evaluate the financial situation of Leisure Ltd$.$

A summary Income Statement and Balance Sheet for the company sets out the financial performance and financial position as follows:

Income statement for the year to $31$ December

$\backslash$table$[[,$Previous,Current year$],[,$year,$],[$So$00,000,],[,600,600],[5|P|$ a g e of $11,,]]$

Cost of sales

$(300)$

$(360)$

Gross profit

$300$

$240$

Expenses

$(180)$

$(180)$

Profit for the year

$120$

$60$

Dividends of $60,000$ were paid in respect of both years.

Required:

$($a$)$ Calculate the following ratios for Leisure Ltd for the current year and the previous year:

$($i$)$ Gross Profit Margin

$($ii$)$ Net Profit Margin

$($iii$)$ Return on Capital Employed

$($iv$)$ Current Ratio

$($v$)$ Acid Test Ratio $($ also known as Quick Ratio$)$

$($vi$)$ Cash Conversion Cycle

Each ratio one mark except Return on Capital Employed $2$ marks and Cash Conversion Cycle $4$ marks

$(10$ marks$)$

$($b$)$ Draft a report to the Directors of Leisure Ltd commenting on the financial position and performance of the company over the past two years.

$(15$ marks$)$

$[$Total $25$ Marks$]$