Financial Accounting
1) The following are the summarised financial statements of Cordoba Ltd for the past two years.
Income statement for the year ended 30th December
2011 2012
£000 £000
Revenue 4,940 6,850
Cost of sales (3,020) (4,550)
Gross profit 1,920 2,300
Operating expenses (1,460) (1,850)
Operating profit 460 450
Statement of financial position as at 30th December
ASSETS
Non-current assets 2,600 3,210
Current assets
Inventories 930 1,850
Trade receivables 820 1,230
Bank 20 10
Total assets 4,370 6,300
EQUITY AND LIABILITIES
Equity
Ordinary shares 1,000 2,200
Long term liabilities 2,810 3,260
Current liabilities 560 840
Total equity and liabilities 4,370 6,300
Calculate the following financial ratios for Cordoba Ltd where possible for both years:
Profitability
• Gross profit margin
• Operating profit margin
• Return on capital employed
• Return on ordinary shareholders’ funds
Efficiency
• Average inventories turnover period
• Average settlement period for trade receivables
• Average settlement period for trade payables
• Sales revenue to capital employed
• Sales revenue per employee
Liquidity
• Current ratio
• Acid test ratio
• Cash generated from operations to maturing obligations
Gearing
• Gearing ratio
• Interest cover ratio
2) Discuss three reasons why financial ratios are commonly used by various stakeholders?
3) Describe five limitations of financial ratios?
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