Professional Documents
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CHAPTER
Financial Statement
3 Analysis
1 Students to follow the web-link provided and would need to explain the points that they have
noted from the web-link. Answers to vary. In the main, students need to observe the comments
made, in particular in relation to how to interpret the results.
Hence, let the increase in stocks of raw materials and finished goods be ‘x’.
This means:
18,000,000 + x = 3
4,285,714 + x
Solving for ‘x’, we get x = (18,000,000 – 3 × 4,285,714) = 2,571,429
2
This means that DEF Sdn Bhd can increase its stock level by RM2,571,429, beyond which it will
breach the condition for current ratio as set by Maybank Berhad.
However, if the opening stock value is not provided, students may assume:
Credit purchases = cost of goods sold
institution whose primary source of profits is through financial asset transactions. Examples of
such financial institutions include banks, insurance companies, and complex multi-function
financial institutions.
8–9 Students to follow the web-links provided. There are several video presentations that students
can view and listen. Students would need to explain the points that they have noted from the
web-links. Answers to vary.
Year 1 2 3
Gross profit margin 580 600 670
× 100% × 100% × 100%
= gross profit × 100% 1,920 2,160 2,440
revenue = 30.21% = 27.78% = 27.46%
Net profit margin 34 32 30
× 100% × 100% × 100%
profit before tax 1,920 2,160 2,440
= × 100%
revenue = 1.77% = 1.48% = 1.23%
Net profit margin 30 30 28
× 100% × 100% × 100%
profit after tax 1,920 2,160 2,440
= × 100%
revenue = 1.56% = 1.39% = 1.15%
current assets 720 780 950
Current ratio = = 2.48 = 2.44 = 1.86
current liabilities 290 320 510
cost of sales 1,340 1,560 1,770
Stock turnover ratio = = 3.35 = 3.71 = 3.93
stocks 400 420 450
Debtors turnover days 320 360 500
× 365 × 365 × 365
trade debtors 1,920 2,160 2,440
= × 365 days
credit sales = 60.83 days = 60.83 days = 74.80 days
Credit turnover days 150 160 290
× 365 × 365 × 365
trade creditors 1,340 1,560 1,770
= × 365 days
credit purchases = 40.86 days = 37.44 days = 59.80 days
Debt ratio 240 160 80
= 0.47 = 0.30 = 0.14
total long term borrowings 510 540 560
=
total equity
Interest cover ratio 60 60 66
= 2.31 = 2.14 = 1.83
earnings before interest and tax 26 28 36
=
interest expense
• The position of the firm is not helped by the fact that the short term interest rates has been
rising (as mentioned in the question).
• Hence, despite the gross profit margins being somewhat maintained over the three year period,
the interest expenses have been increasing from RM26,000 (Year 1) to RM36,000 (Year 3)
• The interest cover ratio has also deteriorated over the same period, indicating that if the trend
remains unchanged, the firm is likely to face the possibility of being unable to service the
interest expense in time to come.
• Another indicator of cash flow difficulty faced by the firm is the increase in debtor turnover
days over the three year period, as debtors are now taking longer periods to settle their debts.
• But this impact may have been partially offset by the increase in creditor turnover days as the
firm has taken longer period to pay the creditors.
• In the longer term, this may lead to the problem of negative effect on the goodwill of the firm
in the eyes of the suppliers.
• Another indicator of the cash flow/liquidity problem faced by the firm is the measure of
approximate operating cash flows generated by the firm, which may be computed as follows:
Year 1 2 3
Profit before tax 34,000 32,000 30,000
Add: depreciation 36,000 26,000 22,000
70,000 58,000 52,000
The computations as shown above ignore the movements in trade debtors, trade creditors and
stocks over the same period.
In any case, the trend appears to be one of deteriorating cash flows by the firm.
• In conclusion, the finance director of ABC Sdn Bhd appears to be justified to be concerned
about the poor liquidity of the firm and steps ought to be taken to arrest the problem before it
gets out of hand and becomes un-manageable for the firm.