Lecture Notes on Financial Analysis 2020

LECTURE NOTE ON

FINANCIAL ANALYSIS
(‘GENERAL LEDGER’)

FOR
HUMAN RESOURCE MANAGEMENT
LEVEL II
(Principles of accounting, Elements of the balance sheet, Balance sheet ratios, Purchase and sales transactions)

Course Facilitator: Tameukong Romario

Academy Year 2019/2020

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 Lecture Notes on Financial Analysis 2020

CHAPTER ONE
GENERAL INTRODUCTION
GENERAL OBJECTIVES

An enterprise is an organization that produces goods and services with the aim of making profit. Some
examples of enterprises in Cameroon are C.D.C, M.T.N, ORANGE, CAMWATER, AES SONEL and Guinness
Cameroon. It important to know and understand the heritage or patrimony of these organizations be it profit
making or not.

SPECIFIC OBJECTIVES
At the end of this chapter, the student should be able to understand and explain the following
 Understand the meaning of patrimony or heritage
 Define and explain each of the six elements of accounting, stating a lot of practical examples
 State the different financial statements and their results
 Understand the accounting equation and solve basics examples

THE PATRIMONY
The patrimony of an enterprise is revealed in the balance sheet. It is the use and source of funds in an enterprise
i.e the assets, capital and liabilities of an enterprise which are shown in the balance sheet.

These can also be known as the basic elements of accounting. The whole point of accounting is to present a
precise financial picture of your business operations. By the accepted standards of the industry, financial
accounting consists of five basic elements. When you prepare financial records, each activity will touch at least
one of these elements.

The SIX Elements

 Assets
 Liabilities
 Owner's Equity or capital
 Revenue
 Expenses and expenditure
 Drawings
The first three elements - asset, Liability and Owner's Equity forms the Accounting equation and is represented on the
Statement of Financial Position.
The other two elements - Revenue and Expenses are represented on the Statement of Financial Performance.

1. ASSETS
Anything owned by the business is asset. But as business students, the SAC definition below should be use to
define accounting
SAC definition:
o Assets are future economic benefits controlled by the entity as a result of past transactions or
other past events. Or better still an asset is a resource controlled by an entity, as a result of
past events, and from which future economic benefits are expected to flow into the
organization. Assets can be classified as current or non-current assets and tangible and
intangible assets.
o Assets should be recognized (recorded) in the Statement of Financial Position only if:
 it is probable that future economic benefits embodied in the asset will eventuate.
 the asset possesses a cost or other value that can be reliably measured.

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Examples of the different classification:

 Non-current assets or Fixed assets;these are resources of a permanent nature acquired to be

used in the business for a long period of time, usually more than one year.
e.g
 Land and building
 Plant and machinery
 Equipment
 Motor vehicle
 Fixtures and fittings
 Furniture

 Current assets; these are resources which are expected to be realized in a business within one
year. They are acquired principally for resale at a profit.
E.g;
 Inventory or stock
 Receivables or debtors
 Prepaid expense or prepayment
 Accrued Revenue
 Cash at bank
 Cash in hand
 Short term investments e,g loan granted to be repaid within one year

 Tangible assets; these are assets which has physical appearance and can be touched and felt. All
examples listed under current and non-current assets above are tangible.

 Intangible Assets; these are identifiable non-monetary assets without physical substance. They
do not have physical appearance, and cannot be touched or felt.
e.g
 Goodwill
 Trade mark
 License
 Research and development
 Patents and copy rights

2. LIABILITIES

A liability is defined as an entity’s present obligation arising from past events, the settlement of which will
result in an out flow of economic benefits from the entity.
There are two categories of liabilities, namely current and non-current liability.

 Current liabilities; these are claims on the business which have to be settled within one year from the
reporting date.
Examples include
 Creditors or trade payables
 Expenses owing or accruals
 Bank overdraft
 Short term loan
 Note payables
 Interest payables
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 Tax payables or tax liability

 Non-current liabilities; ; these are claims on the business which have to be settled in more than one year
after the reporting date. However, part of the obligation could be settled within a year with interest, but
the entire principal not paid.
e.g
 Long term loans
 Debentures
 Long term bonds

3. CAPITAL
This is the amount of resources invested in to the business by the owner(s) of the business. It will normally
increase from year to year by any new capital injected into the business.it can also decrease if owner(s)
withdraw some of the resources for personal use. The total amount due to owner at a given time is known as
owner’s equity. This owner’s equity involves capital, retained earners ,profits, reserves etc.

4. DRAWINGS
This refers to cash or goods taken from the business by the owner(s) for personal use. It reduces owner’s equity.

5. EXPENDITURE AND EXPENSES

An Expense
An expense is a cost that has been incurred by an organization or company to earn revenues during a specific
period. Expenses are reported in the income statement that is prepared annually.
Companies record cost of goods and services sold in a specific period to be expensed. Other expenses that are
recorded by organizations include advertising, salaries, interests, utilities, and rent among others.
An Expenditure
Expenditure refers to the amount incurred by a company or an organization after purchasing an asset or
reduction of liability among others.
Expenditure covers all the costs incurred by the companies in their purchase of goods and services or payment
of recurring expenses.
For example, the amount incurred to offset a liability is referred to as expenditure and not an expense.

6. REVENUE

The income generated from sale of goods or services, or any other use of capital or assets, associated with the
main operations of an organization before any costs or expenses are deducted. Revenue is shown usually as the
top item in an income (profit and loss) statement from which all charges, costs, and expenses are subtracted to
arrive at net income. Also called sales, or turnover.

Examples or revenue are


sales of goods
 Discount received
 Rent receivables
 Interest receivables
 Proceeds from the sales of Non-current assets
 Commissions and royalties

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CHAPTER TWO
THE CLASSICAL ACCOUNTING SYSTEM
GENERAL OBJECTIVE

This is a system of recording where a single journal is used for all the prime recording. The entries in the
journal are later posted into the ledger accounts. The balance of each account is calculated and a trial balance is
extracted. The recording process of the classical system can be summarized as: information is picked from the
source documents (such as invoice, cheques ,receipts etc) and its recorded in the journal so that the posting can
be done into the ledger accounts. From there, the balanced brought down in the ledger accounts are extracted
and used to prepare the trial balanced, from which the final accounts (that is profit and loss account, balanced
sheet etc) are prepared.

SPECIFIC OBJECTIVES
By the end of this chapter, the student should be able to understand and process the following
 The general meaning of a classical system
 The diagrammatical steps of recording under this system
 The format of a journal ,ledger ,and trial balance under this system
 Advantages and disadvantages of the classical system

THE DOUBLE ENTRY BOOKKEEPING

The double entry system is believed to have been formulated by an Italian Monk Luca Pacioli in the 1894. The
system is based on the fact that every transaction has a double aspect or has two parties involved whereby one
party gives while the other receives. That is every business transaction must be recorded in at least two
accounts. One account is debited while the other is credited.
Therefore, the double entry principle states that, for every debit entry there must be a corresponding
credit entry of the same amount.

APPLICATION OF DOUBLE ENTRY PRINCIPLE IN RECORDING TRANSACTION

Debit for increase Debit for decrease
Credit for decrease Credit for increase

ALL ALL
 ASSETS,  CAPITAL,
 EXPENSES and  LIABILITIES and
 DRAWINGS  REVENUE

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FOLLOWING THE CLASSICAL SYSTEM

Here we are going to see a system of recording where a single journal is used for all the prime recording. The
entries in the journal are later posted into the ledger accounts. The balance of each account is calculated and a
trial balance is extracted
The recording process of the classical system can be summarized as:
A. Information is picked from the source documents ( such as invoice, cheques, receipts etc) and its
recorded in the journal
B. The posting is then done into the ledger accounts.
C. From there, the balanced broughtdown in the ledger accounts are extracted and
D. These balanced brought downs are used to prepare the trial balanced,
E. from which the final accounts (that is profit and loss account, balanced sheet etc) are prepare( will be
dealt with in the next chapter)
As said above in the general objective, the classical journal is illustrated below diagrammatically

Source Journal Ledger Trial Final Accounts

Document Account Balance
(Financial

FORMAT OF THE CLASSICAL SYSTEM

1. CLASSICAL JOURNAL

Journal entries are the first step in the accounting cycle and are used to record all business transactions and events in the
accounting system. As business events occur throughout the accounting period, journal entries are recorded in the general
journal to show how the event changed in the accounting equation. For example, when the company spends cash to
purchase a new vehicle, the cash account is decreased or credited and the vehicle account is increased or debited.

Dr Cr Date Dr Cr
Account Account Dr account name Amount Amount
Number Number Cr account name

Date

Example
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An enterprise has provided you with the following transactions for the year 2008.
Feb 2 purchased goods on credit 800,000 frs
Mar 3 sold goods by cheque 900,000 frs
May 5 paid transport by cash 50,000 frs
June 6 sold goods on credit 200,000 frs
Required
a)Record the transactions in a journal given that the enterprise uses the

SOLUTION

a) i. Journal entry with the periodic inventory FCFA FCFA

2/2/2008
601 Purchases 800,000
401 Account payables 800,000
(To record credit purchases)
3/3/2008
521 Bank 900,000
701 Sales 900,000
(to record sales of good by cheque)

5/5/2008
61 Transport 500,000
571 Cash 500,000
( To record transport expense
paid by cash)

6/6/2008
411 Account receivables 200,000
701 Sales 200,000
(To record credit sales of goods)

EXAMPLE 1
You have been confronted with the following transactions for the month of January 2009:
Jan 1 Purchased goods by cash 500,000 frs
Jan 2 Sold goods by cash 400,000 frs
Jan 3 paid salaries by cash 300,000 FRS
Jan 4 Paid insurance by cash 200,000 frs
Required;
A. Record the transactions in a classical journal (ignore VAT)
B. Record the transactions in a classical journal (VAT rate 19.25%)

SOLUTION
A. Ignoring VAT

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1/1/2009
601 Purchases of goods 500,000
571 Cash 500,000
(to record cash purchases of goods)

2/1/2009
571 Cash 400,000
701 Sales of goods 400,000
(to record cash sales of goods)

3/1/2009
661 salaries (direct remuneration) 300,000
571 Cash 300,000
(to record payment of salaries by cash)

4/1/2009
625 Insurance 200,000
571 Cash 200,000
(To record payment of insurance by cash)

B. VAT rate 19.25%

Calculation for VAT

Jan 1 VAT recoverable on Purchases = 19.25% x 500,000 = 96,250 frs
Jan 2 VAT invoice on sales = 19.25% x 400,000 = 77,000 frs

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1/1/2009
601 Purchases of goods 500,000
4452 VAT recoverable on Purchases 96,250
571 Cash 596,250
(to record cash purchases of goods)

2/1/2009
571 Cash 477,000
701 Sales of goods 400,000
4431 VAT invoice on sales 77,000
(to record cash sales of goods)

3/1/2009
661 salaries (direct remuneration) 300,000
571 Cash 300,000
(to record payment of salaries by cash)

4/1/2009
625 Insurance 200,000
571 Cash 200,000
(To record payment of insurance by cash)

2. LEDGER ACCOUNT
Here, the OHADA account number is written beside the account name on the T-account. For instance, the T-
account format of a cash account is represented as follows

571 Cash
Date Description Amount Date Description Amount

EXAMPLE 2

You are provided with the following transactions for the month of February 2009
Feb 2 Bought goods on credit from Mona 500,000 frs
Feb 3 Sold goods by cash 400,000 frs
Feb 5 Purchased goods by cash 100,000 frs
Feb 7 Paid Mona by cash 200,000frs
Feb 11 Sales settled by cheque 150,000 frs
Feb 13 Paid electricity by cheque 50,000 frs
Feb 17 Credit sales to Lexy 175,000frs
Feb 19 Received a cheque from Lexy 125,000 frs
Feb 23 Paid mona by cheque 60,000 frs
Feb 27 paid salaries by cheque 80,000 Frs
Required
Show the classical ledger account using the T-format (ignore VAT)

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3. TRIAL BALANCE
Be it a two ,or four, or six or eight column trial balance under the classical system, the only column added will
be the OHADA accounting number column.

Format Of A 2-Column Trial Balance

Name of the enterprise

Trial balance as at …./…/…..
Bal b/d
Account Number Description Dr Cr

Total

Format Of A 4-Column Trial Balance

Name of the enterprise
Trial balance as at …./…/…..

Account Number Description Movement Balance b/d

Dr Cr Dr Cr

Total

NB
Arrange the accounts number in ascending order, that is from class 1 to class 9

Example 3
Prepare a four column classical trial balance for example 2 above

Example 4
MILI MINI enterprise has given you the following balances as at 1/1/2008
FCFA
Stock of goods 1000,000
Cash 500,000
Bank 2,500,000
Suppliers 2,200,000
Customers 1,500,000
Personal Capital 8,000,000
Sales of goods 3,200,000
Purchases of goods 2,000,000
Buildings 1,900,000
Land 1,100,000
Transport equipment 2,800,000

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Transport expenses 100,000

Required
Prepare a 2-column trial balance for MINI enterprise as at 1/1/2008
Solution
MILI MINI enterprise
Trial balance as at 1/1/2008

Account Details Dr (FCFA) Cr (FCFA)

number
103 Capital 8,000,000
22 Land 1,100,000
23 Buildings 1,900,000
24 Transport equipment 2,800,000
311 Stock of goods 1,000,000
401 Suppliers 2,200,000
411 Customers 1,500,000
521 Bank 2,500,000
571 Cash 500,000
601 Purchases of goods 2,000,000
61 Transport expenses 100,000
701 Sales of goods 3,200,000

Total 13,400,000 13,400,000

ADVANTAGES AND DISADVANTAGES OF THE CLASSICAL SYSTEM

 The main advantages of using the classical system are:
 The system of recording is simple since only a single journal and a general journal are used.
 It is less costly

 And the main disadvantages are

 The recording in the journal is heavy, since only person is involved.
 The manipulations of many accounts may slow down work especially when done by one person.

ASSIGNMENT

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FREE BOY enterprise made available the following transactions for the month of January 2019
Jan 1 Started business with personal capital 1,000,000 frs cash
Jan 2 Purchased goods by cash 700,000 frs
Jan 3 Sold goods by cash 800,000 frs
Jan 5 Bought an office equipment by cash 500,000 frs
Jan 7 Purchased goods on credit from Zuma 300,000 frs
Jan 11 Sold goods on credit to Aruna 400,000 frs
Jan 13Recieved cash from Aruna 200,000 frs
Jan 17 Paid Zuma by Cash 100,000 frs

Required
Record the transaction in the classical journal, post to the ledger and extract a 4- column trial balance as at
17/01/2009 ( VAT rate is 19.25%).

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CHAPTER TWO
PURCHASING AND SALES TRANSACTIONS

GENERAL OBJECTIVE
Purchase is the cost of buying inventory during a period for the purpose of sale in the ordinary course of the
business. It is therefore a kind of expense and is hence included in the income statement within the cost of
goods sold. Purchases may include buying of raw materials in the case of a manufacturing concern or finished
goods in the case of a retail business..
The main activities of commercial enterprises are the purchases and sales of goods (merchandises), a process
known as merchandising. When goods are sold or purchased, a document known as an invoice is issued. An in
general, an invoice is a document that demands for payment.

SPECIFIC OBJECTIVES
By the end of this chapter, the student should be able to understand and explain the following
 A simple invoice
 Reduction of invoice
 Addition on invoices
 Recording invoices
 Reductions off invoices

A. SIMPLE INVOICE
An invoice is a document that demands payment. It is issued by a supplier to a customer showing the quantity,
price, amount and description of the goods sold. A specimen of an invoice is given as follows

Name and Address

Of Supplier

Name and Address

Of Supplier

Invoice No ……………. Date……………………..

Ref Description Quantity Unit Price Amount (FCFA)

Signature of Customer Signature of Supplier

……………………… ……………………….
Source Document: Invoice

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B. REDUCTION ON INVOICES
The following deductions are made on invoices: Trade discount and Cash discount

1. Trade Discount
This is a reduction in the price of goods to encourage bulk discount buying. It is also known as commercial
deduction. Another important deduction is rebate granted to the customer by the supplier as a result of poor
quality or non-conformity of the product.

2. Cash Discount
This is reduction granted by the customer by the supplier to encourage prompt payment. It is a financial
deduction. The supplier treats it as an expense and calls discount granted( or discount allow). The customer
considers it as an income and calls it discount received.

C. ADDITION ON INVOICES
The following additions are made on invoices: Transport, packages and VAT

1. Transport
When goods are purchased, they will be transported from suppliers’ warehouse to that of the customer. If
the transportation is done by the supplier, then the transport expenses will be added on the invoice. The
supplier can either pay a third party to transport the goods or he can do it himself using his own transport
equipment.

2. Packages( commercial containers)

Returnable commercial containers like crates, cases and bottles can be used to contain the goods before
consignment to customers hoping that the customers will return the containers. In this case, the value of the
container is added to the invoice.

3. Value Added Tax (VAT)

This is an indirect tax levied on goods and services at the rate of 19.25%. VAT paid on purchases and other
expenses is known as VAT recoverable ( VAT input). VAT collected on sales and other revenue is known
as VAT invoiced ( VAT output). The difference between VAT invoices for the month and VAT recoverable
for the same month is paid to the government treasury as VAT payable on or before the 15 th of the following
month. This implies that:

VAT payable due on 15th march = VAT invoice for Feb – VAT recoverable for Feb

EXAMLE 1
VENERADA plc , P.O Box 233 Limbe, sold the following items to BELKA Ltd , P.O Box 211 Wum , on the
16th April 2009:
 100 sheet of zinc at 6,000 frs each, ref B606
 200 pieces pieces of plank at 1200 frs each, ref C404
Trade terms include:
 Trade discount 10% and cash discount 5%
 Transport invoice 10,000 frs
 Packages 15,800 frs and VAT rate is 19.25%
Required:
Draft invoice number 002 send to BELKA Ltd by VERANDA plc on the 16th of April 2009

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SOLUTION

VENERADA Plc
P.O Box 233 Limbe
Debit
BELKA Ltd
P.O Box 211 Wum

Invoice No 002 Date : 16/04/2009

Ref Description Quantity Unit Price Amount (FCFA)
B606 Sheets of zinc 100 6,000 600,000
C404 Pieces of plank 200 1,200 240,000

Gross amount 840,000

Trade discount (10% X 840,000) (84,000)
COMMERCIAL NET 756,000
Cash discount (5% X 756,000) (37,800)
FINANCIAL NET 718,200
Transport 10,000
Packages 15,800
744,000
VAT 19.25% 0F 744,000 143,220
NET AMOUNT PAYABEL 887,220

Signature of Customer Signature of Supplier

B.K V.N
Source Document: Invoice

D. RECORDING INVOICES
There exist a Debit invoice and a Credit invoice. The Debit invoice shows the amount payable by the customer (
that is the amount to hid debit) the credit invoice shows the amount to the credit of the customer. Consider
invoice number 002 in example 1 above, issued to BELKA Ltd by VENERANDA Plc on the 16 th April 2009
which can now be recorded in the classical journal of both parties as follows:

 In the books of the Supplier, VENERANDA Plc

16/04/2009
411 Customer 887,220
673 Discount granted 37,800
701 Sales of goods 756,000
7071 Transport invoice 10,000
4194 Customer’s debt on container 15,800
4431 VAT invoice on sales 143,220
( To record invoice number 002)

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 In the books of the Customer, BELKA Ltd

16/04/2009
601 Purchases of goods 756,000
6015 Transport on purchase 10,000
4094 Suppliers claim on container 15,800
4452 VAT recoverable on purchases 143,220
401 Supplier 887,220
773 Discount received 37,800
( To record invoice number 002)

ASSIGNMENT
MANTINKANG & Sons , P.O Box 222 Buea sold goods worth 200,000 frs on the 17th of July 2009 to
MUKONTSO Plc , P.O Box 333 Yaounde, under the following conditions:
 Trade discount 10% and 5%
 Cash discount 2% and VAT 19.25%
 Packages invoice 17,420 frs and transport paid 15,000 frs
On the 18th of July 2009, invoice number 003 was issued by MANTINKANG & Sons and send to
MUKONTSO Plc.
Required
Present invoice number 003 and record it in the books of the parties concerned.

E. REDUCTIONS OFF INVOICES

When goods are returned as a result of damages, or wrong specifications, the supplier raises a CREDIT NOTE
(Credit Invoice) and sends it to the customer so as to reduce the amount owed by the customer. The supplier
will also issue a credit note to the customer when the goods are over charged. When the goods are instead under
charged, the supplier issues a DEBIT NOTE (debit invoice) to the customer so as to increase the amount owed
by the customer.

EXAMPLE 2
On the 19/07/2009 MUKONTSO Plc ,P,O Box 33 Yaounde, returned goods worth 100,000 frs to
MANTINKANG $Sons P.O Box 222 Buea under the following conditions:
 Trade discount 15%
 Cash discount 2%
 Packages 15,800frs
 VAT 19.25%
Required
a. Establish the credit Note number 004 send to MUKONTSO by MANTINKANG
b. Record the credit note in the books of :
i. MUKONTSO
ii. MANTINKANG

Solution

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MANTINKANG $Sons
P.O Box 222 Buea
Credit
MUKONTSO Plc
P,O Box 33 Yaounde
Credit Note No 004 Date : 19/07/2009
Description Amount (FCFA)
Gross amount 100,000
Trade discount (10% X 100,000) (10,000)
COMMERCIAL NET 90,000
Cash discount (2% X 90,000) (1,800)
FINANCIAL NET 88,200
Packages 15,800
104,000
VAT 19.25% 0F 104,000 20,020
NET AMOUNT CREDIT 124,020

Signature of Customer Signature of Supplier

M.S M.K

B. RECORDING:
In the books of the Supplier MANTINKANG $Sons

19/07/2009
701 Sales of goods 90,000
4194 Customer’s debt on container 15,800
4431 VAT invoice on sales 20,020
411 Customer , book debt 124,020
673 Discount granted 1,800

( To record invoice number 004)

 In the books of the Customer, MUKONTSO Plc

19/07/2009
401 Supplier, book debt 124,020
773 Discount received 1,800
601 Purchases of goods 90,000
4094 Suppliers claim on container 15,800
4452 VAT recoverable on purchases 20,020
( To record invoice number 004)

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CHAPTER THREE
THE FINANCIAL STATEMENTS AND THEIR RESULTS
Financial statements are reports prepared and issued by company management to give investors and creditors
additional information about a company’s performance and financial standings. These reports are prepared in
this order and are issued to the public as a full set of statements. This means they are not only published
together, but they are also designed and intended to be read and used together. Since each statement only gives
information about specific aspects of a company’s financial position, it is important that these reports are used
together.

What are Financial Statements?

Financial statements are reports prepared and issued by company management to give investors and creditors
additional information about a company’s performance and financial standings.
The five general purpose financial statements include:
 Income Statement
 Balance Sheet
 Statement of Stockholders Equity or Statement of Owner’s Equity
 Statement of Cash Flows
 Notes to the Financial Statement
Here are some of the financial statements prepared by companies:

1. INCOME STATEMENT AND RESULTS

The income statement, also called the profit and loss statement, is a report that shows the income, expenses, and
resulting profits or losses of a company during a specific time period. The income statement is the first financial
statement typically prepared during the accounting cycle because the net income or loss must be calculated and
carried over to the statement of owner’s equity before other financial statements can be prepared.
The income statement calculates the net income of a company by subtracting total expenses from total income.
This calculation shows investors and creditors the overall profitability of the company as well as how efficiently
the company is at generating profits from total revenues. The P&L is always for a specific period of time, such
as a month, a quarter or a year. The periodic nature of the income statement is essential as this allows users to
compare results for the company over similar periods of time, and to the results of other firms for the same
period. Depending on the industry, year over year comparisons that eliminate seasonal variables can be
especially useful.

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FORMAT OF INCOME STATEMENT

Name of Company
Statement of income for the period ended 31/12/202X

FCFA FCFA
Sales revenue or Turnover x
Sales returned or return outwards (x)
NET SALES XX

LESS: Cost of Goods Sold

Opening inventory x
Purchases x
Purchase returned or returned outwards (x)
Carriage inwards x
xx
Closing inventory (x) (xx)
GROSS PROFITS XX

ADD: Other revenues

Rent income x
Dividend income x
Discount received x
Interest received x
Commission received etc x XX

LESS: Other Expenses

Carriage outwards x
Salaries and wages x
Rents and rates x
Insurance x
Depreciation x
Discount allowed x
Bad debts x
Stationery x
Interest payable x
Etc x (XX)
PROFIT BEFORE TAX XX
Tax (x)

NET PROFIT/ (LOSS) AFTER TAX XX/(XX)

2. STATEMENT OF FINANCIAL POSITION OR BALANCE SHEET

AND RESULTS

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The balance sheet, also called the statement of financial position, is the third general purpose financial
statement prepared during the accounting cycle. It reports a company’s assets, liabilities, and equity at a single
moment in time. You can think of it like a snapshot of what the business looked like on that day in time.Unlike
the income statement, the balance sheet does not report activities over a period of time. The balance sheet is
essentially a picture a company’s recourses, debts, and ownership on a given day. This is why the balance sheet
is sometimes considered less reliable or less telling of a company’s current financial performance than a profit
and loss statement. Annual income statements look at performance over the course of 12 months, where as, the
statement of financial position only focuses on the financial position of one day.
The balance sheet is basically a report version of the accounting equation also called the balance sheet
equation where assets always equation liabilities plus shareholder’s equity.
In this way, the balance sheet shows how the resources controlled by the business (assets) are financed by debt
(liabilities) or shareholder investments (equity). Investors and creditors generally look at the statement of
financial position for insight as to how efficiently a company can use its resources and how effectively it can
finance them.

THE ACCOUNTING EQUATION (BALANCE SHEET EQUATION)

The three balance sheets elements cane be related in the following equation

ASSETS = CAPITAL + LIABILITY or Assets = Owners Equity + Liabilities

From the above
Capital or owner’s equity = Assets – Liability and
Liability = Assets - Capital

EXAMPLES

1 )A man starts a business with a capital of 2,000,000 frs and a total liability of 1,500,000 frs. Determine the
value of the assets of that business.

Solution
Capital = 2,000,000 liability = 1,500,000 frs
And A = C +L = 2000000+1500000= 3500000 FRS

2) The assets of a business is worth 800,000frs . A liability of 300,000 frs has been engaged. What is the capital
of the business?
Solution
Assets = 800,000 frs liability = 300,000 frs
Capital = assets – liability = 800,000 – 300,000= 500,000 frs

3) Determine the liability of an enterprsie that possesses a capital of 1,200,000 frs and a total assets of
1,900,000 frs.
Solution
Capital = 1,200,000 frs assets = 1,900,000frs
Liability = assets- capital = 1,900,000 – 1,200,000 = 700,000 frs

ASSIGNMENT

Small Boys enterprise started business on the 1st January 2009 with the following assets and liabilities.

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 Lecture Notes on Financial Analysis 2020

Land and building 4,000,000 frs Transport equipments 2,000,000 frs

Stock of goods 900,000 frs Debtors 500,000 frs
Cash 600,000 frs Creditors 700,000 frs
Debentures 2,300,000 frs

Required
Determine the capital Ans: 5,000,000 frs

NB

ASSETS= CAPITAL + LIABILITIES

The above can still be expressed as;

WORKING CAPITAL = Total assets – current liability

= (Fixed asset + Current assets) – Current liabilities
And

FINANCED BY = Owner’s Equity + Non-Current Liabilities

If working capital = Financed value, then the balance sheet is said to have balanced

FORMAT OF A STATEMENT OF FINANCIAL POSITION OR BALANCE SHEET

Name of company
Balance sheet as at 31st December 201X

COST ACCUMULATED NBV

DEPRECIATION
FCFA FCFA FCFA

FIXED ASSETS OR NON

CURRENT ASSETS:

INTANGIBLE ASSETS
Goodwill x (x) x
Patent x (x) x

TANGIBLE ASSETS

Land and building x (x) x

Plant and Machinery x (x) x
Equipment x (x) x
Fixtures and Fittings x (x) x
Motor Van etc x (x) x
TOTAL FIXED ASSETS XX

CURRENT ASSETS:
Inventory or stock of goods x

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Receivables or debtors x
Cash at bank x
Cash at hand x
Marketable securities x
Prepaid expenses or prepayments etc x
TOTAL CURRENT ASSEST XX

TOTAL ASSETS XXX

LESS: CURRENT LIABILITIES:

Bank overdraft x
Short term Creditors x
Accruals x
Short term loans x
Accounts Payables etc x (XX)
WORKING CAPITAL XXXX

FINANCED BY:

OWNER’S EQUITY
Capital x
Retained Earnings x
Net Profit x
Share Premium x
Drawings (x) XX

NON CURRENT LIABILITIES:

Long term loan x
Notes payables x
Bonds payables x
Debentures (x) XX
XXXX

EXAMPLE 1
AFUACAM enterprise has provided you with the following balances as at 31st December 2009
FCFA
Stock at 1/10/2009 900,000
Sales 4,900,000
Purchases 2,500,000
Return inwards 107,000
Return outwards 210,000
Carriage inwards 107,000
Carriage outwards 111,000
Discount allowed 75,000
Discount received 25,000
Rents and rates 390,000
Insurance 250,000
Telephone 100,000

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Salaries 410,000
Transport 200,000

Required
Prepare the trading and profit and loss account for the year ended 31 of December 2009, given that the stock as
at 31 of December is worth 120,000FCFA.

SOLUTION

AFUACAM enterprise
Trading profit and loss account for the year ended 31st December 2009
FCFA FCFA
Sales 4,900,000
Return inwards (107,000) 4,793,000

Less Cost of Goods Sold:

Opening stock 900,000
Purchases 2,500,000
Return outwards (210,000)
Carriage inwards 107,000
Cost of good available for sales 3,297,000
Closing stock (120,000) (3,177,000)
Gross profit 1,616,000

Add other income:

Discount received 25,000

Less expenses:
Carriage outwards 111,000
Discount allowed 75,000
Rents and rates 390,000
Insurance 250,000
Telephone 100,000
Salaries 410,000
Transport 200,000 (1,536,000)
Net profit 105,000

EXAMPLE 2
You have been provided with the following balances by KWEKWE Enterprise as at 31/12/2008
FCFA

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Capital 2,800,000
Net profit 105,000
Land 700,000
Building 990,000
Fixtures and Fittings 505,000
Office equipment 555,000
Stock at 31/12/2008 300,000
Creditors 425,000
Debtors 350,000
Bank overdraft 195,000
Cash 200,000
Outstanding rents 75,000 L
Required
a. Prepare a trial balance as at 31/12/2008 for KWEKWE
b. prepare the balance sheet as at 31/12/2008 for KWEKWE
( Ans: Working capital = owners’ equity = 2,905,000frs)

EXAMPLE 3
(MIXED QUESTION BUT EXCLUDES ADJUSTMENTS)

At the end of 2010, TABENCHONG provided you with the following information

FCFA (000) FCFA (000)

Sales 6,620
Purchases 4,050 Fixtures and Fittings 750
Return inwards 120 Debtors 1,200
Return outwards 80 Creditors 900
Lightening and heating 190 Bank 120
Rent and Rates 240 Cash 40
Wages and salaries 520 Loan (repayable in 2 years) 1,000
General expenses 70 Drawings 900
Carriage inwards 90 Capital 2,100
Carriage outwards 110 Stock at 1/1/2010 300
Buildings 2,000

Required
a. prepare a trial balance for the year ended 31st December 2010
b. Prepare a trading and profit and loss account for the years ended 31st December 2010
c. Prepare a balance sheet for the years ended 31st December 2010 given that stock is worth 550,000 FRS at 31st
December 2010.

Solution
a. TABENCHONG
Trial balance for the year ended 31st December 2010

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Description DR (000 FCFA) CR (000 FCFA)

Total 10,700 10,700

b.

. TABENCHONG
Trading Profit and Loss Account for the year ended 31st December 2010

FCFA(000) FCFA(000)
Sales 6,620
Return inwards ( 120)
Net sales 6,500

LESS: Cost of goods:

Opening Stock at 1/1/2010 300
Purchases 4,050
Return outwards ( 80)
Carriage inwards 90
4,360
Closing stock 31/12/2010 (550)(3,810)
Gross profit 2,690
Less other Expenses:
Lightening and heating 190

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Rent and Rates 240

Wages and salaries 520
General expenses 70
Carriage outwards 110 (1,536)
Net profit 1,560

c.
TABENCHONG
Balance sheet for the year ended 31st December 2010

FCFA (000) FCFA (000)

Fixed Assets:
Buildings 2,000
Fixtures and Fittings 750 2,750
Current assets:
Stock 550
Debtors 1,200
Bank 120
Cash 40 1,910
Total Assets 4,660

Less Current liabilities:

Creditors 900 (900)
WORKING CAPITAL 3,760

Financed by:
Owner’s equity
Capital 2,100
Net profit 1,560
Drawings (900) 2,760

Non-current liabilities:
Loan (repayable in 2 years) 1,0001,000

TOTAL FINANCE 3,760

ADJUSTMENTS FOR FINANCIAL STATEMENTS

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 Lecture Notes on Financial Analysis 2020

There are several adjustments to be made at the end of the financial year before financial statements are
prepared. These adjustments incudes accruals prepayments, depreciation, bad debt, provision for doubtful
debts, capital expenditures, revenue expenditures amongst others

1) ACCRUALS
These are expenses owing by the end of the financial year. They are also called outstanding expenses or
expense creditors. In the profit and loss account, accruals are added as expenses while in the balance sheet,
they are treated as current liabilities.

2) PREPAYMENT OR PREPAID EXPENSES

These are expenses made in advanced by the end of the financial year. They are also called expense debtors.
In the profit and loss account, prepayments are subtracted from the expense while in the balance sheet; they
are treated as current assets.

3) DEPRECIATION

These are reductions made on the value of fixed assets at the end of the financial year.in the profit and loss
account, depreciation are treated as expenses for that period, while in the balance sheet, it is accumulated
(accumulated depreciation) , and then subtracted from the fixed assets.

Depreciation is commonly calculated using either the straight line method (also known as constant method)
. Below is a formula

Depreciation expense = Original value x Rate = O.V x R

Or
Original value O. V
= =
useful life n

Or
Original value−scarp value O. V −s , v
= =
useful life n

Scarp value is also known as residual value or salvage value.

Accumulated depreciation = depreciation expense X number of years

And therefore,

NET BOOK VALUE (NBV) = Original value – Accumulated depreciation

4) PROVISION
This is a probable loss in the value of an asset. In the profit and loss account provisions are treated as
expense while in the balance sheet, they are subtracted from the assets.

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5) BAD DEBTS
These are debts that cannot be recovered, either because the debtor is bankrupt, death or has disappeared
without trace. In the profit and loss account, bad debts are treated as expenses while in the balance sheet;
they are subtracted from the debtors account.

6) PROVISION FOR DOUBTFUL DEBTS

It can also be called provision for bad debt.it is created only when the debtor has become doubtful. That’s
therefore a debt may not be recovered. It has the same treatment as bad debt both in the profit and loss
account and balance sheet. That is in the profit and loss account, doubtful debts are treated as expenses while
in the balance sheet; they are subtracted from the debtors account.

7) CAPITAL EXPENDITURES
These are expenditures on fixed assets that aim at increasing the earning capacity of that asset.
These fixed assets are also known as capital items such as buildings, van, equipment, plants and machinery.
Such items have long life span and can last in the enterprise for more than one year. This expenditure is treated
in the balance sheet by adding the additional value to the specific asset.

8) REVENUE EXPENDITURES
These are expenditures on current assets that aim at maintaining the earning capacity of the asset ( E.g
repairs and renewals). It also relates to the daily running of the business. This expenditure is treated in the
profit and loss account as an expense.

EXAMPLE 4 (MIXED WITH ADJUSTMENTS)

ELOE enterprise is involved in general trading. On the 31/12/2008, the following list of balances was provided
after the preparation of the trading account
FCFA (000)
Gross profit on trading 238,400
Stock on 13/12/2008 32,800
Trade creditors 134,030
Trade debtors 16,400
Capital 1,104,730
Cash at bank 360,000
Motor van 330,000
Furniture and fittings 430,000
General expenses 2,160
Insurance 65,800
Drawing 240,000
Additional information
i. A provision for doubtful debt was to be created at 8% OF THE BOOK DEBTs
ii. Insurance paid in advance amounted to 8,400,000frs
iii. General expenses owing by the end of 2008 amounted to 662,000frs
iv. Rents amounting to 6,684,000frs was due at the end of the year but was only paid on the 31/03/2009
v. All fixed assets were to be depreciated at 7.5% using the straight line method.

Required
Prepare
a. A trial balance as at 31/12/2008
b. Profit and loss account as at 31/12/2008
c. Balance sheet as at 31/12/2008
(As an assignment, prepare an adjusted trial balance)
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 Lecture Notes on Financial Analysis 2020

SOLUTION
ELOE enterprise
a. Trial balance as at 31/12/2008

Detail Dr (000 FCFA) CR (000

FCFA)

Totals

b.
ELOE enterprise
Profit and loss account as at 31/12/2008

FCFA (000) FCFA(000)

Gross profit on trading 238,400

Less Other expenses:

General expenses 2,160
General expenses owing ( from iii) 662
Insurance 65,800
Insurance prepaid (from ii) (8,400)
Provision for doubtful debt 1,312
( from i , 8% of 16,400)
Rent owing ( from iv) 6,684
Depreciation of motor van 24,750
( from v, 7.5% of 330,000)
Depreciation of Fixtures and fittings 32,250 (125,218)

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 Lecture Notes on Financial Analysis 2020

(from v, 7.5% of 430,000)

Net profit 113,182

c. ELOE enterprise
Balance sheet as at 31/12/2008

COST ACCUMULATED NBV

DEPRECIATION
FCFA(000) FCFA(000) FCFA(000)

Fixed Assets:
Motor van 330,000 (24,750) 305,250
Furniture and fittings 430,000 ( 32,250 ) 397,750
Total fixed assets 703,000

Current Assets:
Stock on 13/12/2008 32,800
Trade debtors 15,088
( from i, 16,400 – 1,312)
Cash at bank 360,000
Insurance prepaid (from ii) 8,400 416,288
Total assets 1,119,288

Less Current liabilities:

Trade creditors 134,030
General expenses owing ( from iii) 662
Rent owing ( from iv) 6,684 (141,376)
WORKING CAPITAL 977,912

FINANCED BY:

Owner’s equity;
Capital 1,104,730
Net profit 113,182
Drawing (240,000) 977,912

Non-current liabilities 0000

TOTAL FINANCE 977,912

CHAPTER FOUR

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 Lecture Notes on Financial Analysis 2020

FINANCIAL STATEMENT ANALYSIS

GENERAL OBJECTIVES

A financial statement is an official document of the firm, which explores the entire financial information of
the firm. The main aim of the financial statement is to provide information and understand the financial
aspects of the firm. Hence, preparation of the financial statement is important as much as the financial
decisions.

SPECIFIC OBJECTIVES
By the end of this chapter, the students should be able to

INTRODUCTION

Financial statements generally consist of two important statements:

(i) The income statement or profit and loss account.
(ii) Balance sheet or the position statement.

Financial statement analysis is interpreted mainly to determine the financial and operational performance of
the business concern. A number of methods or techniques are used to analyse the financial statement of the
business concern. But in this section, ratio analysis will be used

RATIO ANALYSIS
Ratio analysis is a commonly used tool of financial statement analysis. Ratio is a mathematical relationship
between one number to another number. Ratio is used as an index for evaluating the financial performance
of the business concern. An accounting ratio shows the mathematical relationship between two figures,
which have meaningful relation with each other. Ratio can be classified into various types. Classification
from the point of view of financial management is as follows:

● Liquidity Ratio

● Activity Ratio

● Solvency Ratio

● Profitability Ratio

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 SUMMARY OF THE FINANCIAL RATIOS
1. PROFITABILITY RATIO
Gross profit
a. Gross Profit OR gross margin Ratio = Net sales x 100

Where Gross profit = Net sales – Cost of goods sold

And Net sales = sales – sales return- discount - allowance
Gross profit ratio evaluates how much gross profit is generated from sales

Net income Net Profit after Tax

b. Net profit margin = Net sales x 100∨ Net sales
x 100

This is also known as Profit margin Or Return on sales. It measures the percentage of income
derived from dollar sales generated. The higher the net profit margin, the better.

Operating net profit

c. Operating profit ratio = sales
x 100

Net income
d. Return on Assets = Average Total Assets x 100

Net Profit after Tax

Or Average Total Assets x 100

It is abbreviated as ROA, and it measures management’s efficiency in using assets to generate

income
Net income
e. Return on Investment = x 100
Shareholder ' s Equity∨Funds
Net Profit after Tax
Or ¿ Net sales
x 100

It is abbreviated as ROI, and It measures the percentage of income derived from every dollar
of owner’s equity

Financial Analysis II 32 Course Facilitator: Ms. Nkwetta N. W

 Net Profit Before Interets∧Tax
f. Return On Capital Employed = Capital Employed
x 100

It is abbreviated as ROCE. Capital Employed is also known as working capital.

And it is calculated as :

Capital employed = Total Assets – Current liability

(Non-current assets + Current assets) – Current Liability Or
Capital Employed = Non- current liability + Shareholder’s Equity

2. LIQUIDITY RATIO
It is also called as short-term ratio. This ratio helps to understand the liquidity in a
business which is the potential ability to meet current obligations
Current Assets
a. Current ratio or working capital ratio = Current liabilities

It measures the ability of a company to pay short term obligations using current assets
(cash, marketable securities, receivable, prepayment and inventory). The significant ratio is 2:1

Current Assets−Inventory
b. Acid test ratio or Quick ratio = Current liabilities
It measures the ability of a company to pay short term obligations using the more liquid types of
current assets (cash, marketable securities, receivable, and prepayment).
The significant ratio is 1:1

( Cash+ Marketable securities )

c. Cash ratio =
Current liabilities
It measures the ability of a company to pay it current liabilities using cash and marketable
securities.

d. Net working capital = Current assets – current liabilities

Financial Analysis II 33 Course Facilitator: Ms. Nkwetta N. W
It determines if a company can meet current obligations with it current assets and how much
excess or deficiency there is.

3. EFFICIENCY RATIO OR ACTIVITY RATIO

This ratio is helpful to understand the performance of the business concern
Costof goods sold
a. Inventory or Stock Turnover Ratio = Average Inventory

Openinginventory + Closinginventory
Where Average inventory = 2

This represents the number of times inventory is sold and replaced. Take note that some authors
use sales in the place of cost of goods sold in the above formula. A high ratio indicates that the
company is efficient in managing it inventory

Net credit sales

b. Receivables or Debtors Turnover Ratio= Average Account receivables

This measures the efficiency of extending credit and collecting the same. It indicates the
average number of times in a year a company collects it open accounts. A high rate implies
efficiency credit and collection process.

360 days
c. Receivable turnover in days = Recievable turnover ratio

Also known as day’s sales outstanding, or collection period. It measures the average number of
days it takes a company to collect a receivable or it debt. The shorter the period, the better. Take
note that some use 365 instead of 360 commercial days

Net credit purchase

d. Account payable turnover = Average account payable

Financial Analysis II 34 Course Facilitator: Ms. Nkwetta N. W

Represents the number of times a company pays it account payable during a period.A low ratio
is favored because it is better to delay payment as much as possible so that the money can be
use for more productive purposes.

360
e. Account payable turnover days = Account payable turnover

Also known as day’s payable outstanding, or payment period. It measures the average
number of days spent before paying obligations to suppliers. The longer the period , the
better.

f. Working capital turnover or total assets turnover=

Net sales
Net working capital∨ Average total assets
Measures overall efficiency of a company in generating sales using tits assets. The formula is
similar to ROA , except that net sales is used instead of capital

g. Operating cycle = Inventory turnover in days + Receivable turnover in days

Measures the number of days a company makes one complete cycle i.e purchase mechanize,
sell the and later collect the amount due. A shorter operation cycle means that the company
generates sales and collect the cash faster.

h. Cash conversion cycle= operating cycle – Account payable outstanding in days

This measures how fast company converts cash into more cash.it represents the number of days
a company pays for purchases, sells them and then collect amount due. General like operating
cycle, the shorter the cash conversion cycle the better.

4. Capital gearing ration

Financial Analysis II 35 Course Facilitator: Ms. Nkwetta N. W

 Non−current liabilies
Gearing ratio = share holders equity =non cuurentliabilities x 100 Or

Long−term loan
Gearing ratio = Caital emploeyd x 100 Or
Non current liabilities
Gearing ratio = Shareholders equity +non current liabilities x 100

Measures the degree to which the capital of a business is financed from long term loan

5. LEVERAGE RATIO OR SOLVENCY RATIO

It measures the long-term obligation of the business concern. This ratio helps to understand,
how the long-term funds are used in the business concern.
Total liabilities
a. Debt ratio = Total Assets

Measures the portion of company’s assets that is financed by debt

Total Equity Shareholders Fund

b. Equity ratio or Proprietor ratio = Total Assets Or = Total Assets

Determine the portion of total assets provided by equity (i.e owner’s contribution
And the company’s accumulated profit)
Total liabilities
Equity ratio can also be computed using the formula : 1- Total Assets

The reciprocal of equity ratio is known as the equity multiplier, which is equals to the total
assets divided by the total equity.

Total liabilities External Equity

c. Debt-Equity ratio= Total Equity Or Internal Equity

This evaluates the capital structure of the company. If it is more than 1 then it implies that the
company is a leverage firm, but if less than 1 it is a conservative one
Financial Analysis II 36 Course Facilitator: Ms. Nkwetta N. W
 d. Interest coverage ratio or Time interest earned
EBIT
= ¿ Interest Charge

where EBIT stands for Earnings before interest and tax measures the number of times interest
expense is converted to income, and if the company can pay it interest expense using the profit
generate.

e. Average Credit Period Allowed ( Debtor ratio)

Debtors
= Sales x 360days or 52 weeks 0r 12 months

f. Average credit period taken(Creditor Ratio)

Creditors
= Purchases x 360days or 52 weeks 0r 12 months

6. MARKET PROSPECTS RATIO OR INVESTOR RATIO

OR DIVIDEND POLICY ( Valuation And Growth) Ratio
It provides valuable information to actual and potential investors or shareholders.
(Net profit∨income−Preferrence Dividends)
a. Earnings per share (EPS) = or
Average common shares outstanding

(Profit After Tax−Preferrence Dividends)

=
Number of ordinary shares

EPS shows the rate of earnings per share of common stocks.

Market price per shar

b. Price- Earnings Ratio = Earnings per share

Financial Analysis II 37 Course Facilitator: Ms. Nkwetta N. W

 Total market valueissued share capital
= Profit after Tax+ Dividends

profit for the year

Earnings per share = Number of issued shares

Use to evaluate if a stock is over or under priced. A relatively low P/E ratio could indicate that
the company is underpriced. Conversely, companies expect high growth rate from companies
with high P/E ratio

Dividend per share

c. Dividend pay-out ratio = Earnings per share

Determine the portion of net income that is distributed to the owners.

Dividend per share

d. Dividend yield ratio = market price per share x 100

Measures the percentage of return through dividends when compared to the price paid
for the stock. A high yield is attractive to investors who are after dividends rather
than long term capital appreciation

Profit after tax−Dividend

e. Ordinary dividend cover= Ordinary dividends

Common shareholders Equity

f. Book value per share = Average common stock

Indicates the value of the stock based on historical cost

Exercise
From the following balance sheet of Mr. Arvind Industries Ltd., as 31st March 2007.

Liabilities Rs. Assets Rs.

Equity Share Capital 10,000 Fixed assets (less 26,000
7% Preference Share Capital 2,000 depreciation Rs. 10,000)
Reserves and Surplus 8,000 Current Assets:

Financial Analysis II 38 Course Facilitator: Ms. Nkwetta N. W

 6% Mortgage Debentures 14,000 Cash 1,000
Current Liabilities: Investments (10%) 3,000
Creditors 1,200 Sundry debtors 4,000
Bills payable 2,000 Stock 6,000
Outstanding expenses 200

Tax Provision 2,600

40,000 40,000

Other information:
1. Net sales Rs. 60,000
2. Cost of goods sold Rs. 51,600
3. Net income before tax Rs. 4,000
4. Net income after tax Rs. 2,000
Calculate appropriate ratios.

Solution

Short-term solvency ratios

Current Ratio = Current Assets  14,000  2.33:1

Current Liability 6,000

Liquid Ratio = LiquidRatio  8,000

Current Liability 6,000  1.33 :1

Long-term solvency ratios

Proprietary ratio = Proprietor′s funds  20,000  0.5 :1

Total Assets 40,000
Proprietor’s fund or Shareholder’s fund=Equity share capital+Preference share capital+Reserve and
surplus
= 10,000+2,000+8,000=20,000

Debt-Equity ratio = External equities  20,000  1: 1

Internal equities 20,000

Interest coverage ratio = EBIT = 4,000+840 =5.7times

Fixed interest charges 840
Fixed interest charges = 6% on debentures of Rs.14,000
= Rs. 840
Activity Ratio
Financial Analysis II 39 Course Facilitator: Ms. Nkwetta N. W
 Stock Turnover Ratio = Cost of Sales = 51,600 =8.6times
AverageInventory 6,000
As there is no opening stock, closing stock is taken as average stock.

Credit Sales = 60,000 =10times

Debtors Turnover Ratio = Average Debtors 6,000

In the absence of credit sales and opening debtors, total sales is considered as credit sales and closing debtors
as average debtors.

Creditors turn over ratio = Credit Purchases  43,200  36times

AverageCreditors 1,200
In absence of purchases, cost of goods sold – gross profit treated as credit purchases and in the absence of
opening creditors, closing creditors are treated as average creditors.

Sales 60,000
Working Capital Turnover Ratio = Net WorkingCapital   7.5times
8,000

Profitability Ratios

Gross profit ratio = GrossProfit  100= 8,400  100=14%

Sales 60,000

Net profit ratio = Net Profit  100= 2,000  100=3.33%

Sales 60,000
In the absence of non-operating income, operating profit ratio is equal to net profit ratio.

Net Profit afterTax 2,000

Return of Investment =  100=  100=10%
Shareholder′sFund 20,000

Financial Analysis II 40 Course Facilitator: Ms. Nkwetta N. W