Problem No.4 Business A and Business B are both engaged in retailing but seem to take a different approach to this trade according to the information available. The information con- sists of a table of ratios, shown as Table 7.10. Table 7.10 Financial ratios for companies A and B Ratio Business A Current ratio 2:1 Quick assets (acid test) ratio 1.7:1 20 per cent Return on capital employed (ROCE) Return on owner's equity (ROE) 30 per cent Debtors collection Creditors payment 63 days 50 days Gross profit percentage Net profit percentage Inventory turnover 40 per cent 10 per cent 52 days Business B 15:1 0.7:1 per cent 17 18 per cent 21 days 45 days 15 per cent 10 per cent 25 days Required: (a) Explain briefly how each ratio is calculated. (b) Describe what this information indicates about the differences in approach between the two businesses. If one of them prides itself on personal service and one of them on competitive prices, which do you think is which, and why?

Problem No.4 Business A and Business B are both engaged in retailing but seem to take a different approach to this trade according to the information available. The information con- sists of a table of ratios, shown as Table 7.10. Table 7.10 Financial ratios for companies A and B Ratio Business A Current ratio 2:1 Quick assets (acid test) ratio 1.7:1 20 per cent Return on capital employed (ROCE) Return on owner's equity (ROE) 30 per cent Debtors collection Creditors payment 63 days 50 days Gross profit percentage Net profit percentage Inventory turnover 40 per cent 10 per cent 52 days Business B 15:1 0.7:1 per cent 17 18 per cent 21 days 45 days 15 per cent 10 per cent 25 days Required: (a) Explain briefly how each ratio is calculated. (b) Describe what this information indicates about the differences in approach between the two businesses. If one of them prides itself on personal service and one of them on competitive prices, which do you think is which, and why?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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