These eight original questions follow the four lessons in financial statement analysis. All amounts are in RM and all names are invented.
Show the formula and the working each time, then write a short comment. Use the timed practice session builder for a timed run.
Questions
1. Sales are 90 000, cost of sales 54 000 and expenses 21 600. Find gross profit, net profit, and both margins.
Answer
Gross profit = 90 000 − 54 000 = 36 000. Net profit = 36 000 − 21 600 = 14 400.
Gross profit margin = 36 000 ÷ 90 000 × 100 = 40%. Net profit margin = 14 400 ÷ 90 000 × 100 = 16%.
2. Using question 1, find the mark-up.
Answer
Mark-up = gross profit ÷ cost of sales × 100 = 36 000 ÷ 54 000 × 100 = 66.7%. This is higher than the 40% margin because cost of sales is smaller than sales.
3. Current assets are stock 8 000, debtors 5 000 and bank 2 000. Current liabilities are creditors 6 000 and accrued wages 1 500. Find the current ratio.
Answer
Current assets = 15 000. Current liabilities = 7 500. Current ratio = 15 000 ÷ 7 500 = 2 : 1.
4. Using question 3, find the quick ratio and say what it shows.
Answer
Quick ratio = (15 000 − 8 000) ÷ 7 500 = 7 000 ÷ 7 500 = 0.93 : 1. The business has about RM0.93 of quick assets for every RM1 it owes, so it would need to sell some stock to pay all its debts.
5. Cost of sales is 72 000. Opening stock is 10 000 and closing stock is 14 000. Find stock turnover.
Answer
Average stock = (10 000 + 14 000) ÷ 2 = 12 000. Turnover = 72 000 ÷ 12 000 = 6 times.
6. Debtors are 18 250 and credit sales are 219 000. Find the collection period.
Answer
18 250 ÷ 219 000 × 365 = 30.4 days to one decimal place. Check: 18 250 ÷ 219 000 = 0.0833, and × 365 = 30.4.
7. A student says: “Shop A has a gross profit margin of 30% and shop B has 20%, so shop A is more efficient.” Improve this.
Answer
Margin measures how much of each ringgit of sales is left after the goods, not efficiency. A better comment names the figures, then adds: “Shop A keeps more of each sale, but its business type and sales volume may differ from shop B’s. Stock turnover and expenses are needed before judging efficiency.”
8. Business P has a net profit margin of 6% and stock turnover of 15 times. Business Q has 14% and 4 times. Write a fair comment.
Answer
“P earns a thinner margin (6% against 14%) but sells its stock far faster (15 times against 4), so each ringgit of stock earns profit more often. Q keeps more of each sale but moves stock slowly. The two may sell different goods, and one year shows no trend, so neither can be judged better on these figures alone.”
If you got these wrong
- Questions 1 and 2: revisit calculating profitability ratios.
- Questions 3 and 4: revisit calculating liquidity ratios.
- Questions 5 and 6: revisit interpreting efficiency ratios.
- Questions 7 and 8: revisit comparing businesses without ignoring context.
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