Analysis and Interpretation Notes and Questions

ACCOUNTING
ANALYSIS AND
INTERPRETATION
FOR A SOLE
PROPRIETOR
NOTES
AND
QUESTIONS
CONTENTS
TOPIC PAGE
THE PURPOSE OF ANALYSIS AND INTERPRETATION .................... 2

Steps To Analysis And Interpretation...................................................................... 2
SECTION ONE PROFITABILITY..................................................... 3

Measuring Profitability ............................................................................................ 3
Exercise 1.1 .................................................................................................................. 6
Exercise 1.2 .................................................................................................................. 8
Exercise 1.3 ................................................................................................................ 12
Exercise 1.4 ................................................................................................................ 14
Exercise 1.5 ................................................................................................................ 16
Exercise 1.6 ................................................................................................................ 20
Exercise 1.7 ................................................................................................................ 22
Exercise 1.8 ................................................................................................................ 26
Exercise 1.9 ................................................................................................................ 28
Exercise 1.10 .............................................................................................................. 30
SECTION TWO LIQUIDITY, FINANCIAL STABILITY AND

MANAGEMENT EFFICIENCY..............................................................33
Measuring Liquidity, Financial Stability And Management Efficiency ................... 33
Exercise 2.1 ................................................................................................................ 37
Exercise 2.2 ................................................................................................................ 39
Exercise 2.3 ................................................................................................................ 41
Exercise 2.4 ................................................................................................................ 43
Exercise 2.5 ................................................................................................................ 46
Exercise 2.6 ................................................................................................................ 49
Exercise 2.7 ................................................................................................................ 51
Exercise 2.8 ................................................................................................................ 54
Exercise 2.9 ................................................................................................................ 56
FORMULA SHEET ...............................................................................58
GOALS CHECKLIST - ARE YOU ABLE TO DO THE FOLLOWING? .59
PAGE 1
THE PURPOSE OF ANALYSIS AND
INTERPRETATION
The analysis and interpretation of financial statements is a useful technique which is

concerned with the evaluation of the worth, progress and prospects of a business.
This procedure may be carried out by accountants, stock-brokers, bankers,
investors, etc.
Ratios and percentages are calculated by extracting information from the Income
Statement and the Statement of Financial Position (Balance Sheet). These results
are then interpreted in order to establish the performance of the business, which in
turn provides management with valuable information on which to make decisions for
the future.
Four major areas of business activity are examined:
Profitability
Profitability is the ability of the business to make profits.
Liquidity
Liquidity is the ability of the business to meet its debts in the short and long
term.
Financial Stability
Financial Stability shows the extent to which the owners/shareholders are
financing the business in relation to external funds.
Management Efficiency
This refers to the effectiveness of management policies that in turn impacts on
areas of profitability and liquidity.
STEPS TO ANALYSIS AND INTERPRETATION

1 Calculate the percentage or ratio
2 Explain the meaning of the ratio and describe the trend
3 Suggest reasons for the trend
4 Make recommendations for improvement
Click here to watch a video introducing you to analysis and interpretation for a
sole proprietor
PAGE 2
SECTION ONE PROFITABILITY
MEASURING PROFITABILITY
The following financial statements were extracted from the accounting records of
ABC Business on 31 March 2025:
ABC Business
Income Statement
for the year ended 31 March 2025
$ $
Sales (net) 80,000
Less: Cost of Goods Sold 60,000
GROSS PROFIT 20,000
Less: Expenses
Distribution Costs
Advertising 2,000
Administrative Expenses
Wages 8,000
Bad Debts 400
Accountings Fees 1,000
9,400
11,400
Operating Profit Before Interest 8,600
Less Finance Costs
Interest 600
Profit for the Year 8,000
PAGE 3
ABC Business
Statement of Financial Position (Balance Sheet) as at 31 March 2025
$ $ $
2024 2025
Current Assets
5,000 Accounts Receivable 6,000
10,000 Inventory 12,000
1,000 Prepayments 2,000
16,000 Current Assets 20,000
74,000 Non-Current Assets 100,000
90,000 Total Assets 120,000
Current Liabilities
3,000 Bank Overdraft (secured) 4,000
6,500 Accounts Payable 10,000
500 GST Payable 800
1,000 Accrued Expenses 1,500
11,000 Total Current Liabilities 16,300
19,000 Non-Current Liabilities 33,700
30,000 Less Total Liabilities 50,000
60,000 Net Assets 70,000
60,000 Equity 70,000
From the above statements we can measure the profitability of ABC Business by
using the following percentages:
 Gross Profit Percentage

 Mark-up Percentage
 Expense Percentage
 Profit Percentage
PAGE 4
Percentage Formula Calculation Explanation (meaning)
Gross Profit % Gross Profit 20,000 For every $1 of sales, gross profit is 25 cents.
* 100 * 100
(GP%) Net Sales 80,000
= 25%
Mark-up % Gross Profit 20,000 * 100 An item costing 75 cents is sold for $1
Cost of Goods Sold * 100 60,000 OR The cost price has been increased by 33.3% to
calculate the selling price.
= 33.3%
Expense % Total Expenses 12,000 For every $1 of sales, 15 cents is used to cover
* 100 * 100
Net Sales 80,000 expenses.
= 15%
NB: Each group of expenses
can also be calculated as a
percentage of sales.
Profit % Profit 8,000 For every $1 of sales, 10 cents is net profit / profit
* 100 * 100
(NP%) Net Sales 80,000 for the period.
(Use Profit for
the Year) = 10.0%
It is also useful to calculate the percentage change between two years’ figures. The formula for this is:
(This year – Last year) * 100

Last year
PAGE 5
EXERCISE 1.1
Use the following information taken from the financial statements of S Trader to analyse
the profitability of this business.
2025
$
Sales 240,000
Gross Profit 120,000
Distribution costs 30,000
Administrative expenses 44,000
Finance costs 10,000
Note: In 2024 sales were $200,000 and profit for the year was $40,000.
REQUIRED:
1 Complete the table by calculating the relevant percentage. Calculate your answer to
two decimal places.
Percentage Working Answer 2025

Percentage change in sales
Percentage change in profit
Mark-up %
Gross profit %
Distribution cost %
PAGE 6
Administrative expenses %
Finance cost %
Profit %
2 State the meaning for each of the percentages you have calculated for 2025.
Percentage Meaning
Mark-up %
Gross profit %
Distribution cost %
Finance cost %
Profit %
PAGE 7
EXERCISE 1.2
Study the following extract and pie graph for Steve’s Sports Shop for the year ended 31
March 2022 and answer the questions that follow.
Steve Jones owns a shop which sells sporting equipment. His shop is called Steve’s
Sports Shop.
During the year, his shop has purchased new computer equipment and Steve has also
recently employed an office manager (he was previously doing this work himself).
Steve has also expanded the range of sporting equipment he sells and this has led to
an increased share of the market.
Steve's Sports Shop

Sales for the year ended 31 March 2022
$400,000
Profit for the Period
$100,000 Cost of Goods Sold
$180,000
Finance Costs
$32,000
Administration
Expenses
$40,000
Distribution Costs
$48,000
Additional Information:
Sales for the year ended 31 March 2021 were $300,000. Cost of Goods Sold was
$150,000.
PAGE 8
1 Complete the table below by calculating the missing figures. Calculate answers to
one decimal place.
Analysis Measure 2021 2022

Percentage change in sales 25.0%
Mark-up % 100.0%
Gross Profit % 50.0%
Distribution Costs % 10.5%
Administrative Expenses % 12.0%
Finance Costs % 7.0%
Profit % 20.0%
2 Describe the trend in the gross profit %. Indicate whether this trend is improving or
deteriorating.
3 Suggest ONE reason for the change in gross profit %.
4 Describe the trend in the mark-up %.
5 Suggest the reason for the change in mark-up %.
PAGE 9
6 Describe the trend in the distribution costs %. Indicate whether this trend is
improving or deteriorating.
7 Suggest a reason for the change in the distribution costs %.
8 Describe the trend in the administrative expenses %. Indicate whether this trend is
improving or deteriorating.
9 Suggest a reason for the change in the administrative expenses %.
10 Describe the trend in the finance costs %. Indicate whether this trend is improving or
deteriorating.
PAGE 10
11 Suggest a reason for the change in the finance costs %.
12 Comment on the trend for profitability for the year ended 31 March 2022. Suggest
ONE reason for this trend using the information provided.
PAGE 11
EXERCISE 1.3
SURF’S UP!
John runs a local surfing shop and he decided to sell a new type of surfboard this year.
He wants you to help him analyse his profitability.
1 Complete the table by calculating the missing figures. Calculate your answers to one
decimal place.
2026 % of sales 2027 % of sales

Sales 180,000 240,000
Cost of Goods Sold 120,000 180,000
Gross Profit 60,000 60,000
Distribution Costs 9,000 14,400
Administrative
7,200 8,400
Expenses
Finance Costs 5,400 7,200
Total Expenses 21,600 30,000
Profit for the Year 38,400 30,000
PAGE 12
2 Comment on the trends shown in the table. You must describe the trend and
suggest a reason for the trend.
.
Gross Profit %:
Distribution Costs %:
Administrative Expenses %:
Finance Costs %:
Profit %:
PAGE 13
EXERCISE 1.4
IMPROVING PROFITABILITY RATIOS

For each of the following ratios complete the table to suggest ways of improving them.
You should also be able to justify how this will improve profit for the business.
Percentage Suggestion for improvement Justification on

improving profit
Mark-up %
PAGE 14
Gross profit %
Distribution cost %
Finance cost %
Profit %
PAGE 15
EXERCISE 1.5
BANNATYNE’S DEPARTMENT STORE
Bannatyne’s Department Store has provided you with the following information. The
store has recently opened another branch in another city. It has also expanded its
website to cater for the demand for on-line shopping.
2024 2025
120,000 Sales 160,000
50,000 Cost of Goods Sold 60,000
30,000 Distribution Costs 40,000
15,000 Administrative Expenses 19,000
8,000 Finance Costs 14,000
17,000 Profit for the Year 27,000
2023: Sales $100,000; Profit $20,000
PAGE 16
1 Complete the table by calculating the relevant percentage. Show your answer to one
decimal place.
Percentage Answer 2024 Answer 2025

Gross profit %
Mark-up %
Distribution cost %
Finance cost %
Profit %
Percentage Meaning
Gross profit %
Mark-up %
Distribution cost %
Finance cost %
Profit %
PAGE 17
3 Describe the trend and suggest possible reasons for the trend for each of the
percentages you have calculated for 2025.
Gross Profit %:
Mark-up%:
Distribution Costs %:
Administrative Expenses %:
Finance Costs %:
PAGE 18
Profit %:
PAGE 19
EXERCISE 1.6
Thomas owns a stationery shop called Thomas’s Stationery. He is having difficulty

understanding his financial statements and has come to you for help.
His business is growing fast, and he has recently opened a second new shop.
The following information relates to the financial performance of Thomas’s Stationery

for the past two years.
2018 2019
Sales $200,000 $300,000
Gross Profit $150,000 $180,000
Distribution Costs $50,000 $60,000
Administration Expenses $20,000 $30,000
Finance Costs $2,000 $15,000
Net Profit (Profit for the Period) $78,000 $75,000
PAGE 20
1 Use the information provided and the formulae sheet to complete the following table.
Calculate your answers to zero decimal places.
Gross Profit % 75%
Mark-up % 150%
Distribution Cost % 25%
Administration Expense % 10% 10%
Finance Costs % 1%
Net Profit % 39% 25%
2 Explain what the mark-up percentage of 150% in 2019 means for Thomas’s
Stationery Shop.
3 Suggest a reason for the trend in the mark-up percentage.
PAGE 21
4 Give ONE likely reason for the trend in the finance costs percentage.
5 Give ONE likely reason for the trend in the distribution costs percentage.
PAGE 22
EXERCISE 1.7
Jack owns a shop selling the latest in cell phone and computer gadgets, called Upward
Technology. He has decided to expand his business and start selling online. He has
come to you for help in analysing his financial statements.
The following information relates to the financial performance of Upward Technology

for the past two years.
2019 2020
Sales $150,000 $200,000
Gross Profit $100,000 $150,000
Net Profit (Profit for the Period) $13,000 $65,000
PAGE 23
Calculate your answers to one decimal place.
Mark-up % 200.0%
Distribution Cost % 13.3%
Administration Expense % 16.7% 17.5%

Finance Costs % 1.3% 5.0%
Net Profit % 8.7%
2 Explain what the gross profit percentage you have calculated in 2020 means for
Upward Technology.
3 Explain the reason for the trend in the mark-up percentage.
4 Fully explain the likely reason for the trend in the finance costs percentage.
PAGE 24
5 Fully explain the likely reason for the trend in the distribution costs percentage.
PAGE 25
EXERCISE 1.8
Tessa’s Gifts is a gift shop located in a busy shopping mall in Rotorua and is owned by
Tessa Chan. Tessa sells a variety of gifts catering for the local market and tourists. She
has come to you for help in analysing her financial statements.
TESSA’S GIFTS SHOP

AS AT 30 SEPTEMBER 2020
VOF GHD YDZF DNCDC 30 EP
1 Calculate the sales for the year ended 30 September 2020.
PAGE 26
Net Profit % 28.6% 20.7%
Mark-up % 125.5%
3 Explain what the administrative expenses percentage for 2020 means for Tessa
Gifts.
4 Fully explain the likely reason for the trend in the finance costs percentage.
5 Suggest the reason for the trend in the gross profit percentage using the
information provided.
PAGE 27
EXERCISE 1.9
Muzza owns a pie shop called Muzza’s Pies. He is having difficulty understanding his
financial statements and has come to you for help.
His business is growing fast, and he has recently opened a second shop.
The following information relates to the financial performance of Muzza’s Pies for the
past two years.
Year ended Year ended

31 March 2018 31 March 2019
Sales $80,000 $110,000
Gross Profit $50,000 $70,000
Profit for the Period $8,000 $7,000
PAGE 28

Net Profit % 10% 6.4%
Mark-up % 166.7%
2 Explain what the administrative expenses percentage for 2019 means for
Muzza’s Pies.
3 Fully explain ONE likely reason for the trend in the net profit percentage.
PAGE 29
EXERCISE 1.10
Janice Chow owns a skin care business called Tonga Pure. She sells a range of
products including cleansers, moisturisers and body oils on-line.
Her business is growing fast, and she has recently opened a retail shop in the last three
months of the financial year. Janice is concerned that her profit for this financial year is
lower than last year despite the growth of her business.
The following information relates to the financial performance of Tonga Pure for the
past two years.
Year ended Year ended

31 March 2022 31 March 2023
Sales $40,000 $60,000
Gross Profit $20,000 $28,000
Profit for the Period $4,000 $2,000
PAGE 30

Net Profit % 10.0% 3.3%
Mark-up % 100.0%
2 Suggest the reason for the trend in the gross profit percentage.
3 Fully explain ONE likely reason for the trend in the net profit percentage. DO NOT
repeat your answer from Q2.
PAGE 31
Click here to watch a video about analysing profitability for a sole proprietor
Have you checked out the activities on Language Perfect?
PAGE 32
SECTION TWO
LIQUIDITY, FINANCIAL STABILITY AND
MANAGEMENT EFFICIENCY
MEASURING LIQUIDITY, FINANCIAL STABILITY

AND MANAGEMENT EFFICIENCY
The following financial statements were extracted from the accounting records
of ABC Business on 31 March 2025:
ABC Business
Income Statement
for the year ended 31 March 2025
$ $
Sales (net) 80,000
Less: Cost of Goods Sold 60,000
GROSS PROFIT 20,000
Less: Expenses
Distribution Costs
Advertising 2,000
Administrative Expenses
Wages 8,000
Bad Debts 400
Accountings Fees 1,000
9,400
11,400
Operating Profit Before Interest 8,600
Less Finance Costs
Interest 600
PAGE 33
ABC Business
Statement of Financial Position (Balance Sheet) as at 31 March 2025
$ $ $
2024 2025
Current Assets
5,000 Accounts Receivable 6,000
10,000 Inventory 12,000
1,000 Prepayments 2,000
16,000 Current Assets 20,000
74,000 Non-Current Assets 100,000
90,000 Total Assets 120,000
Current Liabilities
3,000 Bank Overdraft (secured) 4,000
6,500 Accounts Payable 10,000
500 GST Payable 800
1,000 Accrued Expenses 1,500
11,000 Total Current Liabilities 16,300
19,000 Non-Current Liabilities 33,700
30,000 Less Total Liabilities 50,000
60,000 Net Assets 70,000
60,000 Equity 70,000
From the above statements we can measure the Liquidity, Financial

Stability and Management Efficiency of ABC Limited by using the following
percentages:
Liquidity Financial Stability Management Efficiency

Working Capital Equity Ratio Accounts Receivable Turnover
Current Ratio Inventory Turnover
Liquid Ratio
PAGE 34
LIQUIDITY
Ratio Formula Calculation Explanation (meaning)
Working Current Assets – Current $20,000 –  The business has $3,700 of current assets remaining after deducting
Capital Liabilities $16,300 the current liabilities.
 This is the capital that the business has to work with in the short term.
= $3,700
Current Current Assets 20,000  The business has $1.23 of current assets to meet every $1 of current
Ratio Current Liabilities 16,300 liabilities.
 Shows whether the business can pay its debts within the next
= 1.23 : 1 accounting period. 12 months
 Should be between 1.5:1 and 2:1.
 If the ratio is too low the business may have difficulty meeting its
short-term debts.
 If the ratio is too high the business may not be using its assets wisely
e.g. having a large proportion of funds in the bank account when it
could be on term deposit.
Liquid CA – (inventory + prepayments) 6,000  The business has 49 cents of immediate assets to meet every $1 of
Quick/Ratio CL – secured bank overdraft 12,300 immediate debts (debts which need to be paid in the next 3 months).
 Shows whether the business can pay its debts within the next 3
= 0.49 : 1 months.
 Should be at least 1: 1.
Notes
 Inventory and Prepayments are not liquid as difficult to turn into cash quickly.
 A secured bank overdraft is a non-liquid liability as it does not have to be paid in 1 – 3 months as the bank has security (a charge over
assets that could be sold it the debt was not repaid).
PAGE 35
FINANCIAL STABILITY
Equity Equity 70,000  For every $1 of total assets the owners have
Ratio Total Assets 120,000 contributed (financed/ invested) 58 cents. The other 42
cents has been financed by outsiders.
E.g: 1:1 = 0.58 : 1  Shows the stability of the business in terms of total
2.5:1 asset financing.
 Should be at least 0.5:1.
0.25:1  A business with a high equity ratio e.g. 0.70:1 is able to
borrow more if necessary in order to expand the
business.
MANAGEMENT EFFICIENCY
Inventory Cost of Goods Sold 60,000  On average, inventory was sold 5.5 times per year.
Turnover Average Inventory 11.000  Shows on average how long an item of inventory is kept
in the shop before it is sold.
= 5.5 times p.a.  Will depend on the type of business e.g. baker should
Average Inventory have a high turnover, jeweller a low turnover.
= Inv beg + Inv end 10,000 + 12,000  Generally high inventory turnover is associated with low
2 2 mark-up goods.
= 11,000
Accounts Ave Accounts Receivable *365 5,500____
* 365  On average, debtors are taking 22 days to pay their
Receivable Credit Sales + GST (15%) 80,000 + 12,000 accounts.
Turnover = 22 days  Shows on average how long it takes to collect money
Ave Accounts Receivable = (Whole) 80000*0.15 from customers we have sold goods on credit to.
Accs Rec beg + Accs Rec end 5,000 + 6.000=12000
2 2
PAGE 36
EXERCISE 2.1
The following information was extracted from the final accounts of Another Sole
Trader.
ASSETS 2025
Bank 5,000
Accounts Receivable 3,000
Inventory 15,000
Prepayments 4,000
Non–Current Assets 122,000
LIABILITIES and EQUITY
Accounts Payable 4,200
GST Payable 1,200
Accrued Expenses 6,000
Mortgage 60,000
Capital 77,600
OTHER INFORMATION
Cash Sales 35,000
Credit Sales 40,000
Cost of Goods Sold 32,000
Inventory (2024) 12,000
Accounts Receivable (2024) 4,000
REQUIRED:
1 Complete the tables by calculating the relevant percentage. Show your answer to
2 decimal places (except for accounts receivable turnover).

Working capital
Current ratio
Liquid ratio
Equity ratio
PAGE 37
Inventory turnover
Accounts receivable turnover
Percentage Meaning
Working capital
Current ratio
Liquid ratio
Equity ratio
Inventory turnover
Accounts receivable turnover
PAGE 38
EXERCISE 2.2
The following information has been extracted from the financial information of
Steve’s Sports Shop for the year ended 31 March 2022.
Sales 400,000
Cost of Goods Sold 180,000
Current Assets 130,000 Current Liabilities 55,000

Non-Current Assets 126,500 Non-Current Liabilities 46,500
Total Assets 256,500 Owner’s Equity 155,000
• Current Assets include inventory of $60,000 and $11,000 of prepayments.

• The business does not have a bank overdraft.
2020 2021 2022

Accounts Receivable 35,000 30,000 40,000
Inventory 50,000 55,000 60,000
1 Complete the table below by calculating the missing figures.

Current Ratio 2.1:1
Liquid Ratio 0.75:1
Equity Ratio 0.76:1
Accounts Receivable Turnover 34 days
Inventory Turnover 2.86 times p.a.
2 Describe the trend in the liquid ratio. Explain what this trend means for the
business.
PAGE 39
3 Fully explain the meaning of the equity ratio calculated for 2022.
4 Describe the trend in the accounts receivable turnover.
5 Suggest what management could have done to have caused the trend in
accounts receivable turnover.
6 Describe the trend in the inventory turnover.
7 Suggest what management could have done to have caused the trend in
inventory turnover. Refer back to the information in Exercise 1.2.
PAGE 40
EXERCISE 2.3
The owner of a local garage has come to you for advice about his liquidity.
The following balances have been extracted from the ledger of a local garage:
Accounts Receivable 4,500 Accounts Payable 2,000

Inventory of parts 3,600 Prepayments 300
Tools and Equipment 7,500 Bank overdraft (secured) 1,500
GST Payable 500 Bank Loan (5 years) 10,000
1 Calculate working capital.
2 Calculate the current ratio. Fully explain what the current ratio tells the owner
about his business.
PAGE 41
3 The current ratio last year was 1.9:1. Give an example of a transaction that could
have caused this change.
4 Calculate the liquid ratio. Fully explain what the liquid ratio tells the owner about
his business.
5 If the owner’s equity ratio is 0.60:1, what does this mean? What does it mean for
the owner if he wishes to borrow in the future?
PAGE 42
EXERCISE 2.4
Funtastic Ltd is a manufacturer and distributor of professional sports gear for clubs
and various sports teams. Management has been concerned with their increasing
bank overdraft in recent months and has asked you to comment on their liquidity and
management efficiency. They provide you with the following information:
2023 2024 2025 Industry Average

Current Ratio 3:1 2.5 : 1 1.8 : 1 1.8 : 1
Liquid Ratio 1:1 0.9 : 1 0.8 : 1 0.8 : 1
Inventory Turnover 8 times 6 times 5 times 8 times
A/c Receivable Turnover 49 days 56 days 69 days 45 days
1 What is the main reason for the substantial difference between the Current Ratio
and the Liquid Ratio over the three years?
PAGE 43
2 Give one possible reason for the trend in the Current Ratio.
3 Give one possible reason for the trend in the Liquid Ratio.
4 What management strategies could have led to the trends shown by the
Inventory Turnover?
5 What management strategies could have led to the trends shown by the
Accounts Receivable Turnover?
PAGE 44
6 Make a suitably justified recommendation to management that would improve
their present liquidity situation.
PAGE 45
EXERCISE 2.5
The following information relates to the financial position of Susan’s Bargains as at

31 March 2020.
Susan's Bargains
Total Assets $90,000
as at 31 March 2020
Accounts Bank, 3%
Receivable, 5%
Inventory, 25%
Property, Plant and

Equipment, 62%
Investment, 5%
Liabilities as at 31 March 2020
Accounts Payable $15,000

Loan due 2024 $12,000
PAGE 46
1 Use the information above to complete the following ratios for 2019 and 2020.
Round calculations to two decimal places.
Analysis
2019 2020
Measure
Current Ratio 1.40:1
Liquid Ratio 0.70:1
Equity Ratio 0.30:1
2 Fully explain what the current ratio of 1.40:1 for 2019 means for Susan’s
Bargains.
3 Fully explain what the equity ratio in 2020 tells Susan about Susan’s Bargains.
PAGE 47
4 Susan wishes to expand in the future. What does the equity ratio indicate about
the ability of the business to borrow in the future?
2019 2020
Inventory Turnover 5.50 times p.a.
Cost of Goods Sold: $95,000
Inventory: 2019: $20,000, 2020: $25,000
1 Calculate the inventory turnover for 2020.
2 Give TWO recommendations to Susan’s Bargains to improve the inventory

turnover.
PAGE 48
EXERCISE 2.6
The following information relates to the financial position of Upwards Technology

as at 30 June 2020.
$
Bank 50,000
Inventory 60,000
Property, Plant and Equipment 85,000
Loan due 2027 65,000
Capital 90,000
1 Use the information above to complete the following ratios for 2020. Round
calculations to two decimal places.
Analysis
2019 2020
Measure
Liquid Ratio 1.50:1
Equity Ratio 0.50:1
PAGE 49
2 Fully explain what the liquid ratio of 1.50:1 for 2019 means for Upwards
Technology.
3 Fully explain what the equity ratio in 2020 tells the owner about Upwards
Technology.
4 If Upwards Technology wishes to borrow more in the future to expand, would the
bank be likely to lend the business more? Explain your answer using the ratios
you have calculated above.
PAGE 50
EXERCISE 2.7
Sparkling Clean a window cleaning business in Tauranga and is owned by Tom Liu.
He has come to you for help in analysing his financial statements.
The following information relates to the financial position of Sparkling Clean as at

30 September 2020.
$
Bank 8,643
Inventory 10,113
Prepayments 673
GST Payable 1,234
Loan (5% p.a.30/6/26) 23,489
Capital 44,337
PAGE 51
Analysis
2019 2020
Measure
Liquid Ratio 0.95:1
Equity Ratio 0.30:1
2 Is Sparkling Clean able to pay its immediate debts? Explain your answer.
3 Fully explain what the equity ratio in 2020 tells Tom about Sparkling Clean.
PAGE 52
Sparkling Clean is a window cleaning business. Tom Liu, the owner, has provided
you with the accounts receivable turnover for the last three years.
2018 2019 2020

Accounts Receivable
37 days 48 days 53 days
Turnover
1 Fully explain what the trend in the accounts receivable turnover tells Tom about
Sparkling Clean.
2 Give TWO recommendations to Tom to improve the accounts receivable

turnover.
PAGE 53
EXERCISE 2.8
The following information relates to the financial position of Janet's Jackets as at

31 March 2020.
$
Bank 7,546
Inventory 8,280
Prepayments 560
GST Payable 545
Loan (5% p.a.30/6/26) 10,000
Capital 70,741
Analysis
2019 2020
Measure
Liquid Ratio 1.02:1
Equity Ratio 0.56:1
PAGE 54
2 Fully explain what the trend in the current ratio for 2020 means for Janet’s
Jackets.
3 Fully explain what the equity ratio in 2020 tells Janet about Janet’s Jackets.
Janet’s Jackets has provided you with its inventory turnover for the last three years.
2018 2019 2020

Inventory Turnover 8 times 7 times 5 times
1 Fully explain what the trend in the inventory turnover tells the owner about
Janet’s Jackets.
2 Give TWO recommendations to Janet’s Jackets to improve the inventory

turnover.
PAGE 55
EXERCISE 2.9
The following information relates to the financial position of Joe's Sports Equipment
as at 31 March 2020.
Assets Liabilities and Equity

Accounts Receivable 19,000 Accounts Payable 25,300
Inventory 62,100 GST Payable 5,000
Bank 3,200 Loan (due 30 June 2030) 80,000
Shop Fittings 110,000 Capital 84,000
Analysis
2019 2020
Measure
Liquid Ratio 1.2:1
Equity Ratio 0.56:1
2 Fully explain what the trend in the liquid ratio for 2020 means for Joe’s Sports
Equipment.
PAGE 56
3 Fully explain what the equity ratio in 2020 tells Joe about Joe’s Sports
Equipment.
Joe’s Sports Equipment has provided you with the accounts receivable turnover
figures for the last two years.
2019 2020
Accounts Receivable Turnover 60 days
Credit sales 2020: $90,000 (excluding GST)

Accounts Receivable: 2019: $19,000; 2020: $22,000
1 Calculate the accounts receivable turnover for 2020.
2 Give TWO recommendations to Joe’s Sports Equipment to improve the accounts

receivable turnover.
Click here to watch videos about analysing liquidity, financial stability and
management effectiveness for a sole proprietor
Have you checked out the activities on Language Perfect?
PAGE 57
FORMULA SHEET
(THIS FORMULA SHEET WILL BE PROVIDED FOR THE EXAMINATION)
Measurement Formula
Gross Profit x 100
Gross Profit %
Net Sales
Gross Profit x 100
Mark-up %
COGS
Total Expenses x 100
Expenses %
Net Sales
Profit % Profit x 100
(Use Profit for the Period) Net Sales
Working Capital Current Assets – Current Liabilities
Current Assets
Current Ratio
Current Liabilities
Liquid Ratio Current Assets – (Inventory + Prepayments)
Current Liabilities – Secured Bank Overdraft
Equity
Equity Ratio
Total Assets
COGS
Inventory Turnover
Average Inventory
Average Accounts Receivable x 365
Accounts Receivable Turnover
Net Credit Sales + GST (15%)
PAGE 58
GOALS CHECKLIST - ARE YOU ABLE TO DO THE
FOLLOWING?
1 Calculate analysis measures from formulae that are provided (see

formulae sheet on previous page).
2 Explain the meaning of the analysis measure.
3 Suggest a reason for the trend in analysis measures.
4 Make a recommendation for improvement based on analysis
measures calculated.
PAGE 59

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ACCOUNTING

THE PURPOSE OF ANALYSIS AND INTERPRETATION .................... 2

SECTION ONE PROFITABILITY..................................................... 3

SECTION TWO LIQUIDITY, FINANCIAL STABILITY AND

FORMULA SHEET ...............................................................................58

GOALS CHECKLIST - ARE YOU ABLE TO DO THE FOLLOWING? .59

The analysis and interpretation of financial statements is a useful technique which is

Four major areas of business activity are examined:

STEPS TO ANALYSIS AND INTERPRETATION

 Gross Profit Percentage

(This year – Last year) * 100

Percentage Working Answer 2025

Percentage change in profit

Percentage change in profit

Steve's Sports Shop

Analysis Measure 2021 2022

3 Suggest ONE reason for the change in gross profit %.

4 Describe the trend in the mark-up %.

5 Suggest the reason for the change in mark-up %.

7 Suggest a reason for the change in the distribution costs %.

9 Suggest a reason for the change in the administrative expenses %.

2026 % of sales 2027 % of sales

IMPROVING PROFITABILITY RATIOS

Percentage Suggestion for improvement Justification on

Percentage change in profit

BANNATYNE’S DEPARTMENT STORE

Percentage Answer 2024 Answer 2025

Percentage change in sales

Percentage change in profit

Thomas owns a stationery shop called Thomas’s Stationery. He is having difficulty

The following information relates to the financial performance of Thomas’s Stationery

Analysis Measure 2018 2019

Gross Profit % 75%

Distribution Cost % 25%

Administration Expense % 10% 10%

Net Profit % 39% 25%

3 Suggest a reason for the trend in the mark-up percentage.

The following information relates to the financial performance of Upward Technology

Analysis Measure 2019 2020

Gross Profit % 66.7%

Distribution Cost % 13.3%

Administration Expense % 16.7% 17.5%

Net Profit % 8.7%

3 Explain the reason for the trend in the mark-up percentage.

TESSA’S GIFTS SHOP

1 Calculate the sales for the year ended 30 September 2020.

Analysis Measure 2019 2020

Distribution Cost % 20.1%

Administration Expense % 9.3% 8.2%

Finance Costs % 3.4%

Net Profit % 28.6% 20.7%

Gross Profit % 64.3%

Year ended Year ended

Analysis Measure 2018 2019

Distribution Cost % 12.5%

Year ended Year ended

Analysis Measure 2022 2023

Distribution Cost % 12.5%

Have you checked out the activities on Language Perfect?

MEASURING LIQUIDITY, FINANCIAL STABILITY

From the above statements we can measure the Liquidity, Financial

Liquidity Financial Stability Management Efficiency

Percentage Working Answer 2025