Ratio Analysis & Cash Flow Statement: Complete Solution Guide

This assignment solution covers key aspects of financial analysis, including ratio calculations and cash flow statement preparation. It begins with multiple-choice questions on topics such as bad debts and depreciation. Section B provides a detailed cash flow statement from operating activities, highlighting a favorable cash position and positive implications for the company's liquidity. The solution includes a ratio analysis, calculating operating profit margin, gross profit margin, current ratio, acid test ratio, gearing ratio, and interest coverage ratio for both 2019 and 2020. The analysis interprets profitability, gearing position, and liquidity, noting improvements in profitability and gearing but potential liquidity concerns. Desklib provides this document and many other solved assignments for students.

Section A
Question: 1
Bad Debts
Question: 2
Depriciation for the year ended 31st December 2021 = 42000 – 7000 / 7 = 5000.
Question: 3
Expenses will increase; profit will decrease
Question: 4
B
Question: 5
39.45%
Q.6) A
Q.7) A
Q.8) C
Q.9) D
Q.10) A
Section B
Question: 11
Cash flow from operating activity
Particular Amount
Opening cash balance 60
Sales 500
Less:
Cost of sale -250
Distribution expense -20
Administrative -80

Interest expense -50
Increased in inventory -20
Decrease trade receivable 20
Decrease trade payable -20 -420
140
Depreciation charge 35
Tax paid -50
Cash flow from operating activities 125
Comment on cash position
The cash position of the company is favourable. The cash flow from the operating
activity is identifies as 125000 that is favourable in nature. The method followed to identify the
cash flow position is indirect. The positive cash balance always support the company to approach
the liquidity situation of organisation. This is indicated that the organisation is capable to attend
the positive cash situation in against to deliver the business operation. The positive cash position
also strengthened the liquidity situation of the company.
Question: 12
a)
Ratio Formula 2019 2020
Operating profit
margin
Operating profit /
Sales revenue *100
20000 / 300000 *100
= 6.7%
90000 / 500000 *100
= 18%
Gross profit margin Gross profit / Sales
revenue * 100
110000 / 300000
*100
= 36.67%
250000 / 500000
*100
= 50%
Current ratio Current Assets / 60000 + 70000 + 80000 + 120000 +

Current Liabilities 20000 / 5000 + 80000
= 1.76 times
40000 / 25000 +
120000
= 1.65 times
Acid test ratio Current assets –
Inventories / Current
Liabilities
150000 – 60000 /
85000
= 1.05 times
240000 – 80000 /
145000
= 1.1 times
Gearing ratio Long term Debt /
total equity
90000 / 200000
= 0.45
130000 / 210000
= 0.62
Interest coverage
ratio
Earnings before
interest and tax /
Interest expenses
20000 / 10000
= 2 times.
90000 / 30000
= 3 times.
b)
Profitability analysis: In the above table, two ratio that is, operating profit margin and gross
profit margin has been calculated where it can be seen that both of these ratios has increased
from that of previous year indicating that the company is able to generate higher profits with the
help of generating higher sales revenue. The company has experienced an improvement in its
sales performance in the current year as compared to previous year.
Gearing position of the company: The company has better financial commitment in the current
year where its ability to meet fixed interest charges has improved in terms of higher operating
profit which accounted for making interest payment twice in the previous year and thrice in the
current year. Company’s long term solvency is quite stable. However its long term debt
obligations has increased more than its equity capital, but as it is below that of equity capital,
then it is said to be favorable for the company.
Liquidity analysis of the company: Ideal current ratio for managing liquidity is said to be 2:1. In
the case given, company’s liquidity position is below this ideal level indicating that the company
may face problems in meeting its short term debt obligations in future. However, more than 1
current and acid test ratio is also acceptable in the short run.