Question

QUESTION 2

  
The details of JJA (Limited) are as follows, from the financial statements compiled as per IFRS. JJA (Limited) – Extract from income statement for the year ended 28 February 2019.
Sales 9 000 000 Cost of sales 5 625 000 Operating profit 3 375 000 Income tax (426 000) Net profit after tax 2 949 000
JJA (Limited) – Balance sheet as at 28 February 2019:
ASSETS Non-current assets 4 626 000 Tangible assets 4 326 000 Financial assets 300 000 Current assets 1 857 000 Inventories (all trading stock) 1 640 000 Trade and other receivables (all trade debtors) 110 000 SARS (Income tax) 0 Cash and cash equivalents 107 000 Total assets 6 483 000 EQUITY AND LIABILITIES Ordinary shareholders equity 3 698 000 Ordinary share capital (R2.00 per share) 2 200 000 Retained income 1 498 000 Noncurrent liabilities 1 980 000 Mortgage loan: UCT bank (15% p.a.) 1 980 000 Current liabilities 805 000 Trade and other payables (all trade creditors) 705 000 SARS (income tax) 32 000 Current portion of loan 68 000 Total equity and liabilities 6 483 000
BBA2_FIN_ASG_2020 © Regenesys Business School 5
Assuming a year of 360 days, calculate and explain the following ratios:   
2.1 Percentage gross profit on cost of sales   
(8)
2.2 Percentage net profit on sales   
(8)
2.3 Percentage operating profit on sales   
(8)
2.4 Acid-test ratio   
(8)
2.5 Debt/equity ratio (8)

Answer 1

2.1) (3375000/5625000)*100=60%

as there is no expenses, the grossprofir will be same as the operating profit which is 60% of the cost of sales

2.2) (2949000/9000000)*100=32.77%

The percentage of net profit on sales is 32.77%

2.3) (3375000/9000000)*100=37.5%

The percentage of operating profit on sales is 37.5%

2.4) (trade receivables+cash)/current liabilities=(110000+107000)/805000=0.27

The company has a very low acid-test ratio which mean the company is not a good position to meet the current liablities.

2.5) debt/equity= 1980000/3698000=0.54

The company financied 54% of its capital with the debt and so the finance risk is high.