IDENTIFY FOUR LIMITATIONS OF USING ACCOUNTING RATIOS FOR THE PURPOSE OF ANALYZING FINANCIAL STATEMENTS.
IDENTIFY FOUR LIMITATIONS OF USING ACCOUNTING RATIOS FOR THE PURPOSE OF ANALYZING FINANCIAL STATEMENTS.
Kiawara Enterprises prepares its financial statements on 31st October each year. Given below are the comparative profit and loss statements and balance sheets for the year ended 31st October 2009 and 2010.
Balance Sheet as 31st October
Assets:
2010
Kshs “Millions”
2009
Kshs “Millions”
Non- current assets
Land and buildings
560
630
Machinery and equipment
400
480
Furniture
300
240
1,260
1,350
Current assets
Stocks
240
130
Debtors
300
240
Prepayments
130
60
Cash in hand and bank
40
20
710
450
Total assets
1,970
1,800
Equity and Liabilities:
Capital and reserves
Ordinary share capital
500
500
Share premium
200
200
Genera reserve
150
150
Profit and loss account
670
450
1,520
1,300
Non-current liability
Long term loan
200
300
Current Liabilities
Trade creditors
180
140
Accruals
70
60
Total equity and liabilities
1,970
1,800
Profit and loss account for the year ended 31st October.
2010
Kshs
“Millions”
2009
Kshs
“Millions”
Sales
3,600
3,000
Cost of sales
2,400
2,400
Gross profit
1,200
600
Administrative expenses
300
180
Selling and distribution expenses
175
90
Interest
25
30
Total expenses
500
300
Profit before tax
700
300
Tax
(280)
(120)
Profits after tax
420
180
Dividend paid
200
100
Retained profit
220
80
Required:
The following ratios for the two years ended 31st October 2010 and 2009:
i.Gross profit to sales ratio
(2 marks)
ii.Net profit to fixed charges
(2 marks)
iii.Stock turnover (closing stock on 31st October 2008 was Kshs 110 million)
(2 marks)
iv.Current ratio
(2 marks)
v.Acid test ratio
(2 marks)
vi.Debtors collection period (Assume there are 360 days in a year and that all sales are made on credit. (2 marks)vii.Gearing ratio (2 marks) viii.Return on capital employed (2 marks)
(b)Identify four limitations of using accounting ratios for the purpose of analyzing financial statements. (2 marks)QUESTION FOUR
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