Level: Easy
Easy Worked Examples: Analysis and Interpretation of Financial Statements for Decision Making
Six easy, single-step worked examples on calculating and interpreting basic profitability and liquidity ratios, using small round RM figures.
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Example 1: Gross Profit Margin
Question
Solution plan
First find Gross Profit: Gross Profit = Sales − Cost of sales. Then apply Gross Profit Margin = (Gross Profit ÷ Sales) × 100. The denominator must be Sales.
| Particulars | Amount (RM) |
|---|---|
| Sales | 50,000 |
| Less: Cost of sales | 30,000 |
| Gross Profit | 20,000 |
Gross Profit Margin = (Gross Profit ÷ Sales) × 100 = (20000 ÷ 50000) × 100 = 40%.
Answer
Gross Profit is RM20,000 and the Gross Profit Margin is 40%. This means every RM100 of sales generates RM40 of gross profit.
Where marks are usually lost
Example 2: Markup (Gross Profit Percentage on Cost of Sales)
Question
Solution plan
Markup measures gross profit against Cost of sales. Formula = (Gross Profit ÷ Cost of sales) × 100. The denominator is Cost of sales, not Sales.
| Particulars | Amount (RM) |
|---|---|
| Gross Profit | 10,000 |
| Cost of sales | 40,000 |
Markup = (Gross Profit ÷ Cost of sales) × 100 = (10000 ÷ 40000) × 100 = 25%.
Answer
The markup is 25%. This means the selling price is set 25% above the cost of each item.
Where marks are usually lost
Example 3: Net Profit Margin
Question
Solution plan
Use Net Profit (not Gross Profit). Formula = (Net Profit ÷ Sales) × 100. The denominator is Sales.
| Particulars | Amount (RM) |
|---|---|
| Net Profit | 12,000 |
| Sales | 80,000 |
Net Profit Margin = (Net Profit ÷ Sales) × 100 = (12000 ÷ 80000) × 100 = 15%.
Answer
The Net Profit Margin is 15%. This means every RM100 of sales generates RM15 of net profit after all expenses are deducted.
Where marks are usually lost
Example 4: Return on Capital
Question
Solution plan
Return on Capital measures the owner's reward on the capital invested. Formula = (Net Profit ÷ Capital) × 100.
| Particulars | Amount (RM) |
|---|---|
| Net Profit | 15,000 |
| Capital | 100,000 |
Return on Capital = (Net Profit ÷ Capital) × 100 = (15000 ÷ 100000) × 100 = 15%.
Answer
The Return on Capital is 15%. This means every RM100 of capital invested generates RM15 of net profit.
Where marks are usually lost
Example 5: Current Ratio
Question
Solution plan
Total the Current Assets (Inventory + Debtors + Bank). Current Liabilities is Creditors. Formula = Current Assets ÷ Current Liabilities, expressed as a ratio to 1.
| Particulars | Amount (RM) |
|---|---|
| Current Assets | |
| Inventory | 20,000 |
| Debtors | 15,000 |
| Bank | 25,000 |
| Total Current Assets | 60,000 |
| Current Liabilities | |
| Creditors | 30,000 |
Current Ratio = Current Assets ÷ Current Liabilities = 60000 ÷ 30000 = 2, i.e. 2:1.
Answer
The Current Ratio is 2:1. This means for every RM1 of current liabilities, the business has RM2 of current assets to settle it; the liquidity position is healthy.
Where marks are usually lost
Example 6: Acid Test Ratio
Question
Solution plan
The Acid Test Ratio excludes Inventory because it is the hardest current asset to turn into cash. Formula = (Current Assets − Inventory) ÷ Current Liabilities. Current Assets = Inventory + Debtors + Bank; then remove Inventory.
| Particulars | Amount (RM) |
|---|---|
| Current Assets | |
| Inventory | 24,000 |
| Debtors | 10,000 |
| Bank | 6,000 |
| Total Current Assets | 40,000 |
| Less: Inventory | 24,000 |
| Liquid Assets (Current Assets − Inventory) | 16,000 |
| Current Liabilities (Creditors) | 20,000 |
Acid Test Ratio = (Current Assets − Inventory) ÷ Current Liabilities = 16000 ÷ 20000 = 0.8, i.e. 0.8:1.
Answer
The Acid Test Ratio is 0.8:1. As it is below 1:1, the business may face difficulty settling current liabilities immediately without selling inventory.
Where marks are usually lost
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