Ratio Analysis: Use of Accounting Concepts

Ratio analysis: Use of Accounting Concepts
Accounting for Managers

Use of Accounting Concepts 1
Question 1:
Part A
1. Rate of Return on Assets
A. Net income 4362 $4,362
B. Average total assets (29935+28045)/2 $28,990
(A/B) 15.05%
Notes: Net income is the profit after tax
Average total assets = Opening Assets + Closing Assets
2
Industry Ratio= 22%
2. Rate of Return on Equity
A. Net income available
to equity shareholders
4362-50 $4,312
B. Shareholder’s Equity 7200+6515 $14,215
(A/B) 30.33%
Notes: Net income available to equity shareholders= profit after tax – preference dividend
Shareholder’s equity= equity share capital + retained earnings
Industry Ratio=20%
3. Profit Margin Ratio
A. Net income 4362 $4,362
B. Net Sales $55,000
(A/B) 7.93%
Notes: Net income is the profit after tax
Industry Ratio= 4%
4. Earnings Per Share
A. Profit available after
preference dividend
4362-50 $4,312
B. Number of Equity
Shareholders
$7,200
(A/B) .60 or 60 cents
Profit available after preference dividend = Profit after tax – preference dividend
Industry Ratio= 45 cents

Use of Accounting Concepts 2
5. Price Earnings Ratio
A. Market price per share (Given) $12
B. Earnings per share (calculated in 4) $0.60
(A/B) 20
Industry Ratio= 12
6. Dividend Yield
A. Cash dividend per
share
2702/7200 $0.375
B. Market value per share 12 $12
(A/B) 3.13%
Note: cash dividend per equity share= Equity Dividend
No. of Equity Shareholders
Industry Ratio= 5%
7. Dividend Pay-Out Ratio
A. Cash dividend per share 2702/7200 .375
B. Earnings per share Calculated in 4 .60
(A/B) 63%
Notes= Cash dividend per share= Equity Dividend
No. of equity shareholders
Industry Ratio= 70%
8. Current Ratio
A. Current Assets $12,745
B. Current Liabilities $5,780
(A/B) 2.21
Industry Ratio= 2.5: 1
9. Quick Ratio
A. Quick Assets 12,745-7,000 $5,745
B. Current Liabilities $5,780
(A/B) .99
Notes: Quick Assets= Cash & Cash Equivalents + Accounts Receivables or
Total Current Assets- Inventory
Industry Ratio= 1.3:1