ACCOUNTING ASSIGNMENT NUMBER ONE

SOLUTIONS OF RATIO ANALYSIS AT ABC COMPANY FOR 2017

1) Current ratio:-
-Measures a firm ability to satisfy the claims of short term creditors by using current assets.
-Is calculated by dividing current asset to current liability.
i.e. current ratio=current asset/current liabilities
=1223000/620000
=1.97:1
Interpretation:- This result indicates that at the year of 2017 ABC company has birr 1.97 in current
asset for every 1 birr in current liabilities.
2)Quick (acid test)ratio:-
-Measures the short term liquidity by removing the least liquid assets such as inventories and
other expenses.
-Is calculated by subtract inventories and other expenses from current asset and divided by
current liabilities.
i.e acid test ratio=(current asset-(inventories + other expenses))/current liabilities
= (1223000-289000)/620000
= 1.51:1
Interpretation:-This result indicates that ABC company has 1.51 birr in quick asset for 1 birr current
liabilities. Which indicates that quick asset is greater than current liabilities then the company becomes
liquidity.
3)Inventory turnover ratio:-
-Is the measure of how many times per year the inventory level is replaced or turned over.
-Is calculated as cost of goods sold divided by average inventories.
i.e inventory turnover ratio=costs of goods sold/average inventories
=2088000/ {(289000+300000)/2}
=7.09 times
Interpretation:-ABC company’s inventory is sold-out or turned over 7.09 times per year.
4) Average age of inventory:-
-Is the number of days inventory is kept before it is sold to customers.
-Is calculated as the total number of days in a year divided by inventory turnover ratio.
i.e average age of inventory=total number of days in a year/inventory turnover ratio
=365/7.09
=51.5 days
Interpretation:- This result indicates that ABC company inventory remains in the stock for 51.5days
on average before it is sold.

5)Account receivable turnover ratio:-

-Is the measure of the liquidity of firms account receivable.
It indicates that how many times or how rapidly account receivable is converted to cash in a year.
-Is calculated as net sales divided by average account receivable
i.e account receivable turnover ratio=net sales/ average account receivable
=3,074,000/ {(503,000+365,000)/2}
=7.08 times
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Interpretation:-ABC company collected its outstanding credit accounts and re-loaned the money
7.08times during the year.
6)Average collection period:-
-Is represents the number of days for which credit sales are locked with debtors (account receivables).
-Is calculated as total number of days in a year divided by Account receivable turnover ratio.
i.e Average collection period=Total number of days in a year/Account receivable turnover ratio
=365/7.08
=51.6 days
Interpretation: - This result indicates that ABC Company collects Account receivables for 51.6 days
in a year.
7)Average payment period:-
-Is indicates the time it takes to pay to its suppliers.
-It calculated as Accounts payable divided by Average purchase per day.
i.e. Average payment period =Accounts payable/Average purchases per day
But
Average purchase per day = (cost of goods sold x percent of purchase)/(total number of days in
year*100)
Assume purchase were70% of the cost of goods sold in 2017.
Average purchase per day =2,088000x70/365x100 =4004.4
Average payment period=38200/4004.4 = 95.5
Interpretation:- This result indicates that on average the firm has pay its suppliers in 95.5days.
8)Fixed asset turnover:-
-Is measures the efficiency with which the firm has been using its fixed assets to generate revenue.
- Is calculated as net sales divided by average net fixed assets.
i.e. fixed asset turnover=Net sales/Average net fixed asset
=3074000/ {(2374000+2266000)/2}
=1.32
Interpretation:-This indicates that ABC company has generated birr 1.32 net sales for every birr
invested in fixed assets.
9) Total asset turnover:-
-Measures the firms efficiency in management its total asset to generate sales.
-Is calculated as net sales divided by net total asset.
i.e total asset turnover=Net sales/Net total asset
=3074000/3597000 =0.85

Interpretation:-ABC company has generates birr 0.85 in net sales for every birr invested in to total
assets.
10)Debt ratio:-
- Shows the percentage of assets financed through debt.
-Is calculated as total liabilities divided by total assets and multiply the result by 100.
i.e debt ratio=(total liabilities/total assets)x100
= (1643000/3596000)x100
=45.7%
Interpretation:- This result indicates that the firm has financed 45.7% of its asset with debt.
11)debt-equity ratio:-
-It reflects the relative claims of creditors and shareholders against the asset of the firm.
-It calculated as total liability divided by stockholder’s equity.
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i.e debt-equity ratio= Total liability/ Stockholders equity
=1643000/1954000
=0.84 times
Interpretation:-This result indicates that lenders contribution is 0.84 times of stock holder’s
contribution.
12)Times interest earned ratio:-
-Is measure the ability of a firm to pay interest on a timely basis.
- Is calculated as earnings before interest and tax divided by interest expense.
i.e Times interest earned ratio= Earnings before interest and tax/ Interest expense
Where earnings before interest and tax is operating profit
=418000/93000
=4.5 times
Interpretation:- This result indicates that the fact that earnings of ABC company can decline 4.5
times without causing financial losses to the company and creating an inability to meet the interest cost.
13)Gross profit margin:-
-Is the indication of management effectiveness in pricing policy, generating sales and controlling
production costs.
-Is calculated as gross profit divided by net sales.
i.e gross profit margin= gross profit/ net sales
=986000/3074000
=0.32 birr or 32 cents
Interpretation: - This result indicates that ABC Company has a profit of 32 cents for each birr of
sales.
14)Operating profit margin:-
-Is calculat by dividing the operating profit with net sales.
i.e. Operating profit margin= operating profit/net sales
=418000/3074000
=0.14birr or 14 cents

Interpretation: - This result indicates that ABC Company generates around 14 cents operating profit
for each of birr sales.
15)Net profit margin:-
-It measures the profitableness of the sales.
-It is calculated as dividing net income by net sales.
i.e net profit margin=net income/net sales
=23750/3074000
=0.08 birr or 8 cents
Interpretation: - This result indicates that ABC Company has acquired 8 centsprofit from each birr of
sales.
16)Return on investment:-
-It measures the overall effectiveness of management in generating profit with its available assets.
-Is calculated as net income divided by total assets.
i.e. return on investment=net income/total assets
=230750/3597000
=0.06 birr or 6 cents
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Interpretation: - This result indicates that ABCCompany generates littlemore than 6 cents for every
birr invested in assets.
17)Return on equity:-
-Is the profit dividend payments presented as return equity of shareholders after taxes and after
preferences shares.
-Is calculated as dividing net income by stockholders equity.
i.e return on equity=net income/stockholders equity
=230750/1954000
=0.12 birr or 12 cents
Interpretation: - This result indicates that ABC Company generates around 12 cents for every birr in
shareholders’ equity.
18)Earnings per share: -
- It reveals the profit availability to each ordinary share.
-Is calculated as earning available for common stockholders divided by number of commonstock
outstanding.
i.e. Earnings per share= earning available for common stockholders/ Average number of common stock
outstanding
=220,750/76,262+76,244= 220,750/152,506 shares
=1.45 birr
Interpretation: - This result indicates that ABC Company earns 1.45 birr for each common shares of
out standing