Homework Help is Here – Start Your Trial Now!
Business
Accounting
advantages and disadvantages of using ratios

advantages and disadvantages of using ratios

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
See similar textbooks
icon
Related questions
Question
Please answer c only
QUESTION 1 Esther G. started her business called EG Fun & Games at the beginning of 2019. At the end of her second year in business, Esther wants to compare the 2019 and 2020 results. She provides you with the following financial information: Ratios at the end of December 2019 Gross profit margin Net profit margin Return on capital employed (ROCE) 35% 11% 13% Current ratio 1.4:1 As at 31 December 2020 Revenue 4 800 000 Cost of sales 2 880 000 Total running costs 1536 000 Current assets 660 000 Current liabilities 600 000 Total capital employed 2 560 000 Required: a Showing the formulae, calculate the following ratios for the year 2020. i. Gross profit margin. Net profit margin. Return on capital employed (ROCE). ii. ii. iv. Current ratio b Tabulate the 2019 and your calculated 2020 ratios. Comment on the changes in the ratios from 2019 to 2020. In your commentary, provide two plausible reasons that could explain the trends observed. Explain to Esther G. the advantages and disadvantages of using ratios to analyse and interpret performance.
Transcribed Image Text:QUESTION 1 Esther G. started her business called EG Fun & Games at the beginning of 2019. At the end of her second year in business, Esther wants to compare the 2019 and 2020 results. She provides you with the following financial information: Ratios at the end of December 2019 Gross profit margin Net profit margin Return on capital employed (ROCE) 35% 11% 13% Current ratio 1.4:1 As at 31 December 2020 Revenue 4 800 000 Cost of sales 2 880 000 Total running costs 1536 000 Current assets 660 000 Current liabilities 600 000 Total capital employed 2 560 000 Required: a Showing the formulae, calculate the following ratios for the year 2020. i. Gross profit margin. Net profit margin. Return on capital employed (ROCE). ii. ii. iv. Current ratio b Tabulate the 2019 and your calculated 2020 ratios. Comment on the changes in the ratios from 2019 to 2020. In your commentary, provide two plausible reasons that could explain the trends observed. Explain to Esther G. the advantages and disadvantages of using ratios to analyse and interpret performance.
Expert Solution
steps

Step by step

Solved in 2 steps

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education
SEE MORE TEXTBOOKS