Level: Intermediate
Intermediate Worked Examples: Analysis and Interpretation of Financial Statements for Decision Making
Six graded examples on calculating and interpreting profitability, liquidity and efficiency ratios, and on comparing performance across periods and between businesses to support decisions.
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Example 1: Basic Profitability Ratios
Question
Solution plan
Gross Profit = Sales - Cost of Sales = 120,000 - 80,000 = 40,000. Markup uses Gross Profit/Cost of Sales × 100. Gross Profit Margin uses Gross Profit/Sales × 100. Net Profit Margin uses Net Profit/Sales × 100.
| Item | Amount (RM) |
|---|---|
| Sales | 120,000 |
| Cost of Sales | 80,000 |
| Gross Profit | 40,000 |
| Net Profit | 24,000 |
| Ratio | Working | Result |
|---|---|---|
| Markup | 40000 / 80000 × 100 | 50% |
| Gross Profit Margin | 40000 / 120000 × 100 | 33.33% |
| Net Profit Margin | 24000 / 120000 × 100 | 20% |
Answer
Markup 50%, Gross Profit Margin 33.33%, Net Profit Margin 20%. Every RM1 of cost of sales generates 50 sen gross profit, and 20 sen of every RM1 of sales becomes net profit.
Where marks are usually lost
Example 2: Full Set of Profitability Ratios and Return on Capital
Question
Solution plan
Gross Profit = 200,000 - 140,000 = 60,000. Markup = GP/Cost × 100; GP Margin = GP/Sales × 100; NP Margin = NP/Sales × 100; Return on Capital = NP/Capital × 100.
| Item | Amount (RM) |
|---|---|
| Sales | 200,000 |
| Cost of Sales | 140,000 |
| Gross Profit | 60,000 |
| Net Profit | 30,000 |
| Capital | 150,000 |
| Ratio | Working | Result |
|---|---|---|
| Markup | 60000 / 140000 × 100 | 42.86% |
| Gross Profit Margin | 60000 / 200000 × 100 | 30% |
| Net Profit Margin | 30000 / 200000 × 100 | 15% |
| Return on Capital | 30000 / 150000 × 100 | 20% |
Answer
Markup 42.86%, Gross Profit Margin 30%, Net Profit Margin 15%, Return on Capital 20%. Every RM100 of capital invested earns RM20 net profit.
Where marks are usually lost
Example 3: Liquidity Ratios
Question
Solution plan
Current Assets = Inventory + Debtors + Bank + Cash = 18,000+12,000+8,000+2,000 = 40,000. Current Liabilities = Creditors + Accrued expenses = 16,000+4,000 = 20,000. Current Ratio = CA/CL. Acid Test = (CA - Inventory)/CL.
| Item | Amount (RM) |
|---|---|
| Current Assets | |
| Closing inventory | 18,000 |
| Debtors | 12,000 |
| Bank | 8,000 |
| Cash | 2,000 |
| Total Current Assets | 40,000 |
| Current Liabilities | |
| Creditors | 16,000 |
| Accrued expenses | 4,000 |
| Total Current Liabilities | 20,000 |
| Ratio | Working | Result |
|---|---|---|
| Current Ratio | 40000 / 20000 | 2 : 1 |
| Acid Test Ratio | (40000 - 18000) / 20000 | 1.1 : 1 |
Answer
Current Ratio 2:1 and Acid Test Ratio 1.1:1. The business has healthy liquidity: it can settle current liabilities even without selling inventory.
Where marks are usually lost
Example 4: Efficiency Ratios
Question
Solution plan
Average Inventory = (Opening + Closing)/2 = (20,000+30,000)/2 = 25,000. Inventory Turnover = Cost of Sales/Average Inventory. Debtors Collection Period = Debtors/Credit Sales × 365. Creditors Payment Period = Creditors/Credit Purchases × 365.
| Ratio | Working | Result |
|---|---|---|
| Average Inventory | (20000 + 30000) / 2 | RM25,000 |
| Inventory Turnover | 150000 / 25000 | 6 times |
| Debtors Collection Period | 18000 / 180000 × 365 | 36.5 days |
| Creditors Payment Period | 24000 / 120000 × 365 | 73 days |
Answer
Inventory Turnover 6 times a year, Debtors Collection Period 36.5 days, Creditors Payment Period 73 days. Inventory moves fairly quickly and the business collects from debtors faster than it pays creditors, which is good for cash flow.
Where marks are usually lost
Example 5: Comparing Performance Across Periods
Question
Solution plan
For each year: GP Margin = GP/Sales × 100 and NP Margin = NP/Sales × 100. Compare the percentages, not absolute amounts, to judge efficiency in earning profit per RM of sales.
| Ratio | 2023 | 2024 |
|---|---|---|
| Gross Profit Margin | 40000/100000 = 40% | 54000/150000 = 36% |
| Net Profit Margin | 20000/100000 = 20% | 24000/150000 = 16% |
Answer
Gross Profit Margin fell from 40% (2023) to 36% (2024); Net Profit Margin fell from 20% to 16%. Although sales and net profit amounts rose, efficiency in earning profit per RM of sales declined, probably because of higher purchase costs or expenses. Recommendation: review purchase costs, control expenses and revisit pricing policy.
Where marks are usually lost
Example 6: Choosing a Business for Investment
Question
Solution plan
For each business: NP Margin = NP/Sales × 100; Return on Capital = NP/Capital × 100; Current Ratio = Current Assets/Current Liabilities. Compare profitability and liquidity; choose based on the highest return to the investor with adequate liquidity.
| Ratio | Maju Jaya | Setia |
|---|---|---|
| Net Profit Margin | 30000/200000 = 15% | 28000/200000 = 14% |
| Return on Capital | 30000/120000 = 25% | 28000/200000 = 14% |
| Current Ratio | 50000/25000 = 2:1 | 60000/20000 = 3:1 |
Answer
Maju Jaya: NP Margin 15%, Return on Capital 25%, Current Ratio 2:1. Setia: NP Margin 14%, Return on Capital 14%, Current Ratio 3:1. Both are similarly profitable, but Maju Jaya gives a far higher return on capital (25% vs 14%) with an ideal current ratio of 2:1. Setia's 3:1 may indicate idle current assets. Recommendation: choose Kedai Runcit Maju Jaya for the highest return to the investor with adequate liquidity.
Where marks are usually lost
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