Csec: May 2013, Question #3

No. 2(a): Calculation of currents assets and current liabilities using the current ratio:

1. The current ratio formula is Current Assets/Current liabilities.  Therefore the  current assets as at 30th June 2011 can be calculated as follows:

Current Assets/$12,000 = 2
 Current Assets = $12,000 x 2 = $24,000.
     2. The  current liabilities as at 30th June 2012 can be calculated as follows:
$60,000/Current Liabilities = 4
Current Liabilities = $60,000/4 = $15,000.
 

2(b): Calculation of:

    i.   Average Stock = Opening  stock + Closing stock/2 = ($6,800 + $4,400)/2 = $5,600.

    ii.   Stock Turnover = Cost of Sales/Average Stock = $118,400/$5,600 = 21.15 times.

    iii.  Gross Profit Percentage = Gross Profit/Sales = $131,600/$250,000 = 53%.

No. 2(c): Below is the summarized Balance Sheet of Reisse Holdings as at 30th June, 2012:

No. 2(d): Calculation of return on capital employed:
Return on Capital Employed is calculated as: Net Profit/Capital Employed = $69,900/170,000 = 42%.
 
No. 2(e): Below is a brief comment on the performance of Reisse Holdings based on current ratio of 4:1:
Reisse Holdings appears to have a high liquidity level as currently they have $4 of current assets to cover every $1 of liability. The benchmark for this ratio is 2:1 so the results seem to indicate excess liquidity. Reisse Holdings can consider investing this excess liquidity in short term investment options to gain interest as opposed to having the cash idle.

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