QUESTION 3

WOOD LIMITED makes furniture and sells to various wholesalers and retailers. It has recently subscribed to an inter-firm comparison service. Members submit their own accounting ratios as specified by the operator of the service, and in return, receive the average figures for each of the specified ratios taken from all of the companies in the same sector that subscribe to the service. The specified ratios and the average figures for Wood's sector are shown below.

BELOW ARE THE INDUSTRY AVERAGE FIGURES FOR DECEMBER 31, 2014:

Return on capital employed = 22.1%

Net asset turnover = 1.8 times

Gross profit margin = 30%

Net profit (before tax) margin = 12.5%

Current ratio = 1.6:1

Quick ratio = 0.9:1

Inventory holding period = 46 days

Trade receivables collection period = 45 days

Trade payables payment period = 55 days

Debt to equity = 40%

Wood's financial statements for the year to 31 December 2014 are set out below:

STATEMENT OF PROFIT OR LOSS

	GH000
Revenue	2,425
Cost of sales	(1,870)
Gross profit	555
Operating expenses (note 1)	(335)
Interest payable	(34)
Profit before tax	186
Income tax expense	(90)
Profit for the year	96

EXTRACT FROM STATEMENT OF CHANGES IN EQUITY

	GH000
Income surplus 1/1/2014	179
Profit for the year	96
Dividends (interim = 60,000; final = 30,000	(90)
Income surplus 31/12/2014	185

STATEMENT OF FINANCIAL POSITION

	GH000
Property, plant and equipment (note 2)	540
Current assets
Inventories	275
Trade receivables	320
Bank	Nil
	595
	1,135
Equity
Stated capital (600,000 shares)	150
Income surplus	185
	335
Non-current liabilities - 8% loan notes	300
Current liabilities
Bank overdraft	65
Trade payables	350
Tax	85
	500
	1,135

Notes

(1) Operating expenses include GH120,000 for the write off of obsolete inventory.

(2) The details of property, plant and equipment are:

	Cost (GH000)	Accumulated depreciation (GH000)	Carrying value (GH000)
At December 30 2014	3,600	3,060	540

(3) The market price of Wood's shares throughout the year averaged GH6.00 each.

Required

(a) Calculate the ratios for Wood equivalent to those provided by the inter-firm comparison service.

(b) Analyse the financial performance of Wood in terms of profitability, short term solvency and liquidity and long term solvency and stability by comparing Wood with the sector averages.