Question

9. The following information was extracted from the books of Abudhabi & Sons Ltd: Stock (opening) N30,000; Purchases N210,000; Stock (closing) N40,000; Sales N360,000; Salaries N92,500; Directors fees N5,000; Insurance N1,600; Travelling expenses N3,400; Utilities N4,000; General expenses N1,000; Depreciation N12,500; Taxation N10,000; Dividends N15,000; Retained profit brought forward N35,000. All sales and purchases were on credit. Balance sheet items: 400,000 Ordinary shares @ N0.25 each; Land and building N90,000; Motor vehicle N15,000; Stock N40,000; Debtors N30,000; Bank N17,000; Cash N3,000; Creditors N20,000; Dividend payable N15,000; Taxation N10,000. (a) Prepare the Trading, Profit and Loss Account for the year ended 31st December, 2014, and the Balance Sheet as at that date. You are required to calculate: (i) Stock turnover ratio; (ii) Gross profit margin; (iii) Net profit margin; (iv) Current ratio; (v) Acid test ratio.

Accepted Answer

See the Trading, Profit and Loss Account and Balance Sheet tables in the Diagram column, showing a Gross profit of N160,000, Net profit before tax of N40,000, and Shareholders' funds of N150,000.

(i) Stock turnover ratio = Cost of goods sold / Average stock = N200,000 / N35,000 = 5.71 times, approximately 6 times (Average stock = (N30,000+N40,000)/2 = N35,000).
(ii) Gross profit margin = (Gross profit/Sales) x 100 = (N160,000/N360,000) x 100 = 44.4%.
(iii) Net profit margin = (Net profit/Sales) x 100 = (N40,000/N360,000) x 100 = 11.1%.
(iv) Current ratio = Current assets/Current liabilities x 100 = (N90,000/N45,000) x 100 = 2:1.
(v) Acid test ratio = (Current assets - Stock)/Current liabilities x 100 = (N90,000-N40,000)/N45,000 x 100 = 1.11:1.

WAEC Accounting 2019 Theory — Question 9

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