Finance: Calculation of Ratios and Cash Flow Analysis

This document provides a detailed analysis of financial ratios and cash flow for a company. It includes calculations of gross profit margin, inventory turnover ratio, net profit margin, current ratio, quick ratio, and more. The document also explains the importance of these ratios and provides recommendations for investment. Additionally, it discusses the concept of bad debts and allowance for doubtful debts. References are included for further reading.

Running head: FINANCE 0
Finance

FINANCE 1
Contents
Question 1........................................................................................................................................2
Part B)..........................................................................................................................................2
Question 2........................................................................................................................................3
Part b)...........................................................................................................................................3
Question 3........................................................................................................................................3
Part c)...........................................................................................................................................3
References........................................................................................................................................4

FINANCE 2
Question 1
Part B)
Calculation of Ratios
Senys
Limited
Mint
Limited
Gross profit
Margin
Gross profit *
100 50 33% 25%
Net sales 150
Inventory Turnover Ratio
Average Inventory*365 3650 36.50 45
Cost of goods sold 100
Net profit
margin
Net profit * 100 42 28% 10%
Sales 150
Current ratio
Current Assets 20 2.00 1
Current
Liabilities 10
Quick Ratio
Quick Assets 10 1.00 0.5
Current
Liabilities 10
From the above table and after calculating the ratios it can be analyzed that the Senys Limited is
performing much better in comparison to the Mint Limited. The gross profit margin of the
company is 33% and that of the Mint limited is 25% this indicates that the operating costs are
heavy on part of the Mint Limited and the same shall be reduced.
The inventory turnover ratio on the other hand indicates the number of days in which the cash
will be realized from the inventory. From the above analysis it can be concluded that the cash

FINANCE 3
collecting ability of the Senys Limited is better than the Mint Limited (Laitinen and Laitinen,
2018).
The company shall maintain the net profit margin which is attributable in to the shareholders of
the company. Basically the decision taken by the users of the financial statements are on the
basis of the profitability position of the company hence the investors shall invest in the Senys
Limited as the net profit margin of the company is 28% in contrast to 10% margin set by the
Mint Limited (Sari, Nurlaela and Titisari, 2018).
Further the liquidity position of the Mint Limited needs to be improved in comparison of the
Senys Limited as the current ratio of the company is 2:1 and the quick ratio is 1:1 and thereafter
the ratio of Mint Limited is 1:1 and 0.5:1 respectively. Henceforth, the investor shall invest in the
Senys Limited.
Question 2
Part b)
The cash flow is a statement that describes the inflow and the outflow of the cash of the company
and helps in supervising the position of the company. The cash from operating activities are
related to direct buying and selling of the goods and services. The cash from investing activities
mainly deals with the purchase and sale of long term assets. The financing activities on the other
hand deals with the equity or borrowings of the company. From the calculations it can be
observed that the cash from operating activities is $853. In the current year, the company
purchased machinery for 1.8 million, whereas as the cash from financing activities is $612. The
company is having the cash balance after repayment of loan and trade payables. This indicates

FINANCE 4
that the company is walking in the right direction and therefore it shall maintain the position
(DeFusco, et al 2015).
Question 3
Part c)
There is a slight difference between the bad debts and allowance for doubtful debts. Bad debts
are the monetary amount that is unlikely to be paid or for which the action is not going to be
taken. On the other hand the allowance for the doubtful debts is a contra asset that reduces the
total receivables. It is a kind of the provision kept aside as the amount is not expected to be paid
(Weygandt, Kimmel and Kieso, 2015).

FINANCE 5
References
Laitinen, E.K. and Laitinen, T., 2018. Financial reporting: profitability ratios in the different
stages of life cycle. Archives of Business Research, 6(11).
DeFusco, R.A., McLeavey, D.W., Pinto, J.E., Anson, M.J. and Runkle, D.E., 2015. Quantitative
investment analysis. John Wiley & Sons.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John
Wiley & Sons.
Sari, R.K., Nurlaela, S. and Titisari, K.H., 2018, August. The Effect of Liquidity Ratio,
Profitability Ratio, Company Size, and Leverage on Bond Rating in Construction and Real
Estate Company. In PROCEEDING ICTESS (Internasional Conference on Technology,
Education and Social Sciences).