Exercise

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Jimma University

Department Of Accounting and Finance


MA in Project Management and Finance
Financial and Managerial Accounting
Part-I: Short Answer Questions
1. Describe the need for performance evaluation
2. Explain and discuss the different types of ratio analysis
Part-II: Workout Questions
Question-1:The only current asset possessed by a firm are: Cash birr 105,000, Inventories birr
560,000 and Accounts Receivable birr 420,000. If the current ratio for the firm is 2:1, determine its
current liabilities and calculate the firm's quick ratio
Question-2:At the close of the year a company has inventory of birr 150,000 and cost of goods
sold for birr 975,000. If the company's turnover ratio is 5, determine the opening balance of the
inventory
Question-3:Dear Students, use the financial statements of Merob Company, shown below to
investigate and explain ratio analysis.

Merob Company, Income Statements


2000 2001
2,567,000 3,074,000 Sales
1,711,000 2,088,000 Less Cost of Goods Sold
856,000 986,000 Gross Profit
Less Operating Expenses
108,000 100,000 Selling Expenses
445,000 468,000 General and Adm. Expenses
553,000 568,000 Total Operating Expenses
303,000 418,000 Operating Profit
91,000 93,000 Less Interest Expenses
212,000 325,000 Net Profit Before Tax
61,480 94,250 Less Profit Tax (at 29%)
150,520 230,750 Net Income After Tax
10,000 10,000 Less Preferred Stock Dividends
140,520 220,750 Earning Available to Common Shareholders
1.81 2.90 EPS

Merob, Balance Sheets


2000 2001

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Assets
Current Assets
288,000 363,000 Cash
51,000 68,000 Marketable Securities
365,000 503,000 Accounts Receivables
300,000 289,000 Inventories
1,004,000 1,223,000 Total Current Assets
Gross Fixed Assets (at cost)
1,903,000 2,072,000 Land and Buildings
1,693,000 1,866,000 Machinery and Equipment
316,000 358,000 Furniture and Fixture
314,000 275,000 Vehicles
96,000 98,000 Others
4,322,000 4,669,000 Total Fixed Assets
2,056,000 2,295,000 Less Acc. Depreciation
2,266,000 2,374,000 Net Fixed Assets
3,270,000 3,597,000 Total Assets
Liabilities and Owners' Equity
Current Liabilities
270,000 382,000 Accounts Payable
99,000 79,000 Notes Payable
114,000 159,000 Accruals
483,000 620,000 Total Current Liabilities
967,000 1,023,000 Long-Term Debts
1,450,000 1,643,000 Total Liabilities
Shareholder's Equity
200,000 200,000 Preferred Stock –Cumulative, 2000 Share issued and Outstanding
190,000 191,000 Common Stock, Shares issued and Outstanding in 2001, 76,262; in
2000, 76,244
418,000 428,000 Paid- in Capital in Excess of Par on Common Stock
1,012,000 1,135,000 Retained Earnings
1,820,000 1,954,000 Total Stockholders' Equity
3,270,000 3,597,000 Total Liabilities and Stockholders' Equity
Conduct the following calculation based the given information:
1. Liquidity Ratios
A. Current Ratio B. B. Quick (Acid-test) Ratio
2. Activity Ratios/ assets management or turnover ratios
A. Inventory Turnover Ratio D. Average Collection Period
B. Average Age of Inventory E. Average Payment Period
C. Accounts Receivable Turnover F. Fixed Asset Turnover
Ratio G. Total Asset Turnover
3. Leverage Ratios B. Debt -Equity Ratio
A. Debt Ratio C. Times Interest Earned Ratio
4. Profitability Ratios
A. Gross Profit Margin D. Return on Investment
B. Operating Profit Margin E. Return on Equity
C. Net Profit Margin F. Earnings Per Share

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