FACULTY OF BUSINESS MANAGEMENT
DIPLOMA IN OFFICE MANAGEMENT AND TECHNOLOGY
INTRODUCTION TO FINANCIAL ACCOUNTING AND REPORTING
(ACC106)
PREPARED FOR:
MISS NURUL HASSANAH BINTI HAMZAH
PREPARED BY
NAME
FARAH ADILA EZANIE BINTI BAZARUDIN
NATASHA BALQIS BINTI AHMAD RUFLI
STUDENT ID
2019438992
2019248224
NIK NUR SYAHIRAH BINTI MOHD KAMAL
2019611028
QURATUL AMISHA BINTI HAZIMIN
2019805876
SITI SUHAILAH BINTI SARIFF
2019632684
OUTLINE PLAN FOR GROUP PROJECT 2
CARRY MARK: 15%
TOTAL MARKS: 50
INTRODUCTION:
In this group assignment, a group of students are expected to analyse financial statements using
simple financial ratios for sole proprietorship business.
INSTRUCTIONS:
1. Form a group same as group project 1 members
2. Answer all questions.
Questions
Muggles Enterprise produces cleaning potion for the housing and development
industry. The followings are the financial statements of the business:
Sales
Cost of sales
Muggles Enterprise
Statement of Profit or Loss for the year ended 30 June
2020
3,900,000
(1,750,000)
Gross profit
Less:
Interest
Depreciation
Operating expenses
Operating profit
Tax expenses
Net Income
2021
22,500,000
(16,750,000)
2,150,000
5,750,000
100,000
550,000
120,000
1,380,000
(345,000)
1,035,000
1,250,000
500,000
1,250,000
2,750,000
(750,000)
2,000,000
Muggles Enterprise
Statement of Financial Position as at 30 June
NON CURRENT ASSETS
Intangible assets
10,000
50,000
Investments
60,000
200,000
CURRENT ASSETS
Inventories
1,600,000
3,100,000
Account receivables
Prepayments
Cash and bank
TOTAL ASSETS
2,050,000
20,000
380,000
1,900,000
175,000
675,000
8,720,000 20,075,000
EQUITY
Capital
6,130,000
11,900,000
Drawing
(1,515,000)
1,035,000
(1,950,000)
2,000,000
5,650,000
11,950,000
Net profit
NON CURRENT LIABILITIES
Long term liabilities
1,550,000
3,750,000
Other payable
600,000
600,000
Account payable
880,000
3,500,000
40,000
275,000
CURRENT LIABILITIES
Accruals
TOTAL EQUITY AND LIABILITIES
8,720,000 20,075,000
Additional Information
i)
Closing inventory as at 30 June 2019 is RM 2,000,000
ii) Credit sales for the year ended 2020 and 2021 was 90% and 50% respectively
Based on the financial statements for the year ended on 30 June 2020 and 2021 given, you
are required to:
i)
Calculate for both years:
a. Current Ratio
Formula
Currents assets
Current liabilities
30 June 2020
30 June 2021
Current ratio=
RM4,050,000/RM 1,520,000
Current ratio=
RM 5,850,000/RM 4,375,000
= 2.66 : 1
= 1.34 : 1
b. Acid-test Ratio
Formula
30 June 2020
Current assets - closing inventoryprepayments/
Current liabilities
RM 4,050,000-RM 1,600,000RM 20,000/RM 1,520,000
30 June 2021
RM 5,850,000RM3,100,000-RM
175,000/RM 4,375,000
= 1.60 : 1
= 0.59 : 1
c. Gross Profit Margin
Formula
Gross profit
Sales
X 100
30 June 2020
30 June 2021
RM 2,150,000/RM 3,900,000 X
100
RM 5,750,000/RM 22,500,000
X 100
= 55.13%
= 25.56%
d. Net Profit Margin
Formula
Net profit
Sales
X 100
30 June 2020
30 June 2021
RM 1,035,000/RM 3,900,000 X
100
RM 2,000,000/RM 22,500,000
X 100
= 26.54%
= 8.89%
e. Return On Investment
Formula
Net profit
X 100
Capital employed (Opening
capital + ending capital / 2 )
f.
30 June 2020
RM 1,035,000 / (RM
6,130,000+RM 5,650,000/2) X
100
7200,000
= 17.57%
30 June 2021
RM 2,000,000 / (RM
11,900,000+RM 11,950,000 / 2)
X 100
= 16.77%
Inventory Turnover Ratio
Formula
Cost of sales
Average inventory
[1/2 (opening inventory +
closing inventory)]
30 June 2020
30 June 2021
RM 1,750,000 / ( ½ (RM
2,000,000 + RM 1,600,000))
RM 16,750,000 / ( ½ (RM
1,600,000 + RM 3,100,000))
= 1 times
= 7 times
g. Average Collection Period
Formula
Account receivable X 365
Credit sales
30 June 2020
30 June 2021
RM 2,050,000/ RM 3,510,000 X
365
RM 1,900,000/RM 11,250,000
X 365
= 213 days
= 61 days
ii)
Interpret each of the ratios for both years.
FS ANALYSIS
30 JUNE 2020
30 JUNE 2021
Current ratio
For every RM1 Current
Liabilities owed by the
business, it has RM2.66
of Current Asset to pay it.
For every RM1 Current
Liabilities owed by the
business, it has RM1.34
of Current Asset to pay it.
Acid-test ratio
For every RM1 Current
Liabilities owed by the
business, it has RM1.60
of Current Asset to pay it.
For every RM1 Current
Liabilities owed by the
business, it has RM0.59
of Current Asset to pay it.
Gross profit margin
For every RM1 of sales
made by the business,
the gross profit is 55.13
sen.
For every RM1 of sales
made by the business,
the gross profit is 25.56
sen.
Net profit margin
For every RM1 of sales
made by the business,
the net profit is 26.54 sen.
Return on investment
For every RM1 of Assets,
the profit is RM0.1757.
For every RM1 of Assets,
the profit is RM0.1677.
Inventory turnover
ratio
Average inventory are
being replaced 1 time per
annum.
Average inventory are
being replaced 7 times
per annum.
Average collection
period
The business takes 213
days to collect debts from
account receivable in one
year.
The business takes 61
days to collect debts from
account receivable in one
year.
WHILE
For every RM1 of sales
made by the business,
the net profit is 8.89 sen.
iii. Compare and contrast the liquidity ratios, profitability ratios and efficiency ratios for both
years.
Liquidity Ratios
Formula
Current Ratio:
Currents assets
Current liabilities
Acid-test Ratio:
Current assets - closing inventoryprepayments/
Current liabilities
30 June 2020
30 June 2021
Current ratio=
RM4,050,000/RM 1,520,000
Current ratio=
RM 5,850,000/RM 4,375,000
= 2.66 : 1
= 1.34 : 1
RM 4,050,000 - RM
1,600,000 - RM 20,000/RM
1,520,000
RM 5,850,000-RM3,100,000RM 175,000/RM 4,375,000
= 1.60 : 1
= 0.59 : 1
Liquidity ratios used to assess a company's ability to meet its short-term obligations.
It’s the company ability to pay or meet its short-term obligations when they become due. There
are two types of liquidity ratios, namely the current ratio and acid test or quick ratio. Current
ratio determined by dividing the amount of short-term assets accessible by the amount of
short-term liabilities owed. This ratio compares a company's current assets to its current
liabilities to determine its liquidity. Subtracting inventories and prepaid expenses from the total
is how to determine the acid/base ratio. This ratio will assess the company's ability to meet its
short-term obligations without relying on inventories or pre-paid expenses. Since it exempts
inventories and other current assets, which are less liquid than the current asset, this ratio is
a more stringent measure of liquidity than the current ratio.
Ratios greater than 1.0 are preferred depending on the structure of the ratio, which
places assets on top and liabilities on the bottom. A ratio of 1 indicates that such a company's
current assets sufficient to cover all of its current liabilities. A ratio less than 1 indicates that a
company is unable to meet its current liabilities. A ratio greater than 1 indicates that a company
can pay their current bills. In fact, a ratio of 2.0 indicates that a company's current liabilities
can be covered twice over. A ratio of 3.0 indicates that they can cover their current liabilities
three times over, and so on.
2020, as shown in the table, is greater than 2021. It is because the ratio in 2020 is all
greater than one, whereas in 2021 it is one greater than one and another one is less than
one in 2021.
Profitability Ratios
Formula
Gross Profit Margin:
Gross profit
Sales
30 June 2021
RM 2,150,000/RM 3,900,000 X
100
RM 5,750,000/RM 22,500,000
X 100
= 55.13%
= 25.56%
RM 1,035,000/RM 3,900,000 X
100
RM 2,000,000/RM 22,500,000
X 100
= 26.54%
= 8.89%
RM 1,035,000 / (RM
6,130,000+RM 5,650,000/2) X
100
7200,000
= 17.57%
RM 2,000,000 / (RM
11,900,000+RM 11,950,000 / 2)
X 100
X 100
Net Profit Margin:
Net profit
30 June 2020
X 100
Sales
Return on Investment:
Net profit
X 100
Capital employed (Opening
capital + ending capital / 2 )
= 16.77%
Probability ratios measure the performance of a firm during an accounting period. They
prove how a company uses its assets to generate revenue and value for its shareholders. A
higher ratio or value is frequently selected after by most businesses because it indicates that
the business has performed well in terms of revenues, profits, and cash flow. When analysed
in comparison between similar companies or previous periods, the ratio is used to determine.
There are a few main ratios under this category, namely gross profit margin, net profit margin
and return on investment.
Gross profit margin measures how much of every RM of sales is left after paying for
the cost of goods sold but before the expenses are paid. It is expressed as a percentage of
sales. Meaning that the business with a higher percentage of gross profit margins may retain
a higher proportion of sales to service its other obligations.
Net profit margin measures how much of every RM of sales is left after all the
expenses have been paid. It expresses the percentage of sales. This mean that operating
business with higher percentage of net profit margin may retain a higher proportion of sales
after it’s received its other obligations. Based on the table, net profit margin in 2020 is the
higher percentage more than net profit margin in 2021.
As shown in the table, profitability in 2020 is higher than in 2021, which is still fine
because this company is still profitable, even though profits are decreasing.
Efficiency Ratios
Formula
30 June 2020
30 June 2021
Inventory Turnover Ratio:
Cost of sales
Average inventory
[1/2 (opening inventory +
closing inventory)]
Average Collection Period:
Account receivable X 365
Credit sales
RM 1,750,000/(RM 2,000,000 +
RM 1,600,000/2)
RM 16,750,000/(RM 1,600,000
+ RM 3,100,000/2)
= 1 times
= 7 times
RM 2,050,000/ RM 3,510,000 X
365
RM 1,900,000/RM 11,250,000
X 365
= 213 days
= 61 days
Efficiency ratios measure the efficiency of a business in managing its assets to
generate revenue. The ratios compare expenses to revenues generated, primarily reflecting
exactly what sort revenue or profit a company can make from the money it spends to run its
business. There are two types of efficiency ratios namely the inventory turnover ratio and
average collection period.
The inventory turnover ratio implies the number of times inventory was replaced during
an accounting period. This means that this ratio can give you an idea of how quickly the goods
are selling. The higher the inventory turnover ratio, the better for the business. This ratio is
computed by dividing the cost of goods sold by the average inventory for a given time period.
An inventory turnover ratio of 2 to 4 is ideal for most retailers; however, this varies by industry.
A ratio between 2 and 4 indicates that our inventory restocking corresponds to our sales cycle
that we receive new inventory before we need it, and that we can move it pretty rapidly. Based
on table the ratio is good because its increase from 1 times for 2020 to 7 times for 2021.
The average collection period denotes the amount of time it takes a company to collect
money from its accounts receivable. The shorter the period, the better for the business in
terms of liquidity and reducing the risk of uncollectible debt. This ratio also provides information
useful for debt monitoring because it compares the actual credit period to the granted credit
period. Based on the results of this ratio, further action to monitor the debt can be taken.
Muggles Enterprise are doing well on their business because their average collection period
decreased from 2020's 213 days to 61 days in 2021.