Question 26.Q3: Calculate liquidity and working capital ratios from the acco...

FIA – Foundations of Financial Accounting FFA

Calculate liquidity and working capital ratios from the accounts of the TEB Co, a business which provides service support (cleaning etc) to customers worldwide. Comment on the results of your calculations.

	20X7	20X6
	$m 2,176.2	$m 2,344.8
Sales revenue
Cost of sales	1,659.0	1,731.50
Gross profit	517.2	613.3
Current assets Inventories
Current assets Inventories	42.7	78.0
Receivables (note 1)	378.9	431.4
Short-term deposits and cash	205.2	145.0
	626.8	654.4
Current liabilities
Loans and overdrafts	32.4	81.1
Tax on profits	67.8	76.7
Dividend	11.7	17.2
Payables (note 2)	487.2	467.2
	599.1	642.2
Net current assets	27.7	12.2

Notes

1	Trade receivables	295.2	335.5
2	Trade payables	190.8	188.1

The blue check mark means that this solution has been answered and checked by an expert. This guarantees that the final answer is accurate.
Learn more on how we answer questions.

The company’s current ratio is a little lower than average but its quick ratio is better than average and very little less than the current ratio. This suggests that inventory levels are strictly controlled, which is reinforced by the low inventory turnover period. It would seem that working capital is tightly managed, to avoid the poor liquidity which could be caused by a long receivables collection and comparatively high payables.

\begin{array}{|c|c|c|c|c|} \hline {\text { Current ratio }} &&{20X 7} & &{20X6} \\ \hline & \frac{626.8}{599.1} & =1.05 & \frac{654.4}{642.2} & =1.02 \\ \hline \text { Quick ratio } & \frac{584.1}{599.1} & =0.97 & \frac{576.4}{642.2} & =0.90 \\ \hline \begin{array}{l} \text { Accounts receivable } \\ \text { collection period } \end{array} & \frac{295.2}{2,176.2} & \times 365=49.5 \text { days } & \frac{335.5}{2,344.8} & \times 365=52.2 \text { days } \\ \hline \text { Inventory turnover period } & \frac{42.7}{1,659.0} & \times 365=9.4 \text { days } & \frac{78.0}{1,731.5} & \times 365=16.4 \text { days } \\ \hline \begin{array}{l} \text { Accounts payable } \\ \text { payment period } \end{array} & \frac{190.8}{1,659.0} & \times 365=42.0 \text { days } & \frac{188.1}{1,731.5} & \times 365=40.0 \text { days } \\ \hline \end{array}

Related Answered Questions

Question: 26.Q11

Return on capital employed (ROCE) has increased from 28% in 20X2 to 35% in 20X3. Which of the following statements relating to this increase is/are correct? 1 An increase in profit margin in 20X3 could account for the increase in ROCE 2 The increase suggests the company is more efficient in ...

Verified Answer:

A Remember that: Profit margin × Asset turnover ...

Question: 26.Q10

Information on Beta for the previous two years is given below. ...

Verified Answer:

C The current ratio measures the ratio of curre...

Question: 26.Q9

“The ratio has increased in 20X8 compared to 20X7 because we have increased the length of time allowed for customers to pay their invoices”. A decrease in which ratio could be explained by the statement above? A The receivables collection period B The gearing ratio C Interest cover D The payables ...

Verified Answer:

A The receivables collection period measures the...

Question: 26.Q8

Information on Alpha for the previous two years is given below. ...

Verified Answer:

C The debt ratio has increased, which means th...

Question: 26.Q7

Which two of the following are valid reasons why the inventory turnover period of a company increases from one year to the next? 1 A slow down in trading 2 A marketing decision to reduce selling prices 3 Seasonal fluctuations in orders 4 Obsolete goods A 1 and 2 B 2 and 3 C 1 and 4 D 3 and 4 ...

Verified Answer:

C A slow down in trade increases the invento...

Question: 26.Q6

The income statements for Egriff are given below. ...

Verified Answer:

(a) (i) Gross profit percentage

\frac{\text...

Question: 26.Q5

The following information for Hadrian is available. ...

Verified Answer:

\text { ROCE }=\frac{\text { PBIT }}{\text ...

Question: 26.Q4

(a) Calculate the operating cycle for Moribund for 20X2 on the basis of the following information. ...

Verified Answer:

(a) The operating cycle can be found as follows. I...

Question: 26.Q2

Which of the following should the quick ratio include? A Inventory of finished goods B Raw materials and consumables C Long-term loans D Trade receivables ...

Verified Answer:

D Quick ratio =

\frac{\text{CA-Inventory}}{...

Question: 26.Q1

Returning to the example of Furlong above, what is the company’s interest cover? ...

Verified Answer:

Interest payments should be taken gross, from the ...