you are considering joints and Fixes limited as a prospective supplier for your
ID: 2726303 • Letter: Y
Question
you are considering joints and Fixes limited as a prospective supplier for your company, H.M. Industries. Joints and Fixes Limited manufactures nuts and bolts, which are sold to industrial users. The financial statements for years 2011 and 2012 are given:
Abbreviated financial statements for year 2011
Income statements for the year ended 30 June
2011 ($) 2012 ($)
revenue 1,180 1,200
cost of sales (680) (750)
Gross profit 500 450
operating expenses (200) (208)
depreciation (60) (75)
Operating profit 234 167
Interest (-) (8)
profit before taxation 234 167
taxation (80) (48)
profit for the year 154 111
Abbreviated financial statements for year 2012
2011 ($) 2012 ($)
assets
Noncurrent assets
property, plant, and equipment 702 687
Current assets
inventories 148 236
trade receivables 102 156
cash 3 4
253 396
Total assets 955 1,083
Equity and liabilities
equity
ordinary share capital ($1 shares,
fully paid 500 500
Retained earnings 256 295
756 795
Noncurrent liabilities
Borrowing-Bank loan - 50
current liabilities
trade payables 60 76
other payables and accruals 18 16
taxation 40 24
short-term borrowings (all bank overdraft 81 122
199 238
Total equity and liabilities 955 1,083
Dividends were paid on ordinary shares of $70,000 and $72,000 for the years 2011 and 2012, respectively. use the given information to calculate the following financial ratios for both 2011 and 2012 (using year-end figures for statement of financial position items): 1 Return in capital employed, operating profit margin, settlement period for trade receivables, settlement period for trade payables, inventory turnover period. and comment on the performance of Joints and Fixes Limited from the viewpoint of considering supplying a substantial amount of goods to Joints and Fixes Limited on usual trade credit terms
Explanation / Answer
Return on capital employed ROCE=EBIT/Capital employed 2011 2012 operating profit 234 167 captial employed: Total assets 955 1083 Current liabilities 199 238 captial employed 1154 1321 ROCE = 20.28% 12.64% operating profit margin=operating income/sales sales 1180 1200 operating profit margin 19.83% 13.92% Avg collection period=days*AR/credit sales 365*102/1180 365*156/1200 31.55 47.45 settlement period for trade payables Average settlement = trade payable x 365 days / cost of sales 199*365/680 238*365/750 106.82 106.82
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