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Dunedin Ratios for 2002 and 2003 Case Solution Worksheet

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Accounting

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December 2003 Examiner's Solution
Case S o l u t i o n 1
1. In order to assess the validity of the opinions of the Dunedin 6, compute the following ratios for Dunedin for both 2002 and
2003:
a. Current ratio
b. Quick ratio
c. Gross Profit Margin
d. Profit Margin
e. Return on Capital Employed
f. Return on Total Assets
g. Inventory Turnover
h. Average Collection Period
i. Times Interest Earned
j. Debt ratio
(20 marks)
2003
2002
Current ratio (times)
1.43
1.26
Quick ratio (times)
0.85
0.77
Gross profit margin

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27.44%
33.93%
Profit margin
0.14%
5.77%
Return on capital employed
0.16%
5.55%
Return on total assets
0.1%
3.6%
Inventory turnover ratio (times)
2.24
2.41
Average collection period (days)
176
155
Times interest earned

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December 2003 Examiner's Solution C a s e S ol u t i o n 1 1. In order to assess the validity of the opinions of the Dunedin 6, compute the following ratios for Dunedin for both 2002 and 2003: a. Current ratio b. Quick ratio c. Gross Profit Margin d. Profit Margin e. Return on Capital Employed f. Return on Total Assets g. Inventory Turnover h. Average Collection Period i. Times Interest Earned j. Debt ratio (20 marks) 2003 2002 1.43 1.26 0.85 0.77 Current ratio (times) Quick ratio (times) Gross profit margin 27.44% 33.93% 0.14% 5.77% 0.16% 5.55% 0.1% 3.6% 2.24 2.41 176 155 Profit margin Return on capital employed Return on total assets Inventory turnover ratio (times) Average collection period (days) Times interest earned 1.4 19 43.0% 35.7% Debt ratio 2. From the ratio analysis above, separate the ratios into: a. those ratios which support the arguments of the Dunedin 6 b. those ratios which counter the arguments of the Dunedin 6 Provide adequate supporting explanations and comments on each of the ratios to substantiate why they have been classified as either (a) or (b). Make reference to industry averages, where appropriate. (10 marks) c. Ratios which support the arguments of Dunedin 6 Current ratio has strengthened during 2003 from 1.26 to 1.43, but remains well below industry average of 1.85. The improvement stems from an unhealthily high level of debtors and a major surge in inventory. 2. Quick ratio is weak at 0.85 in 2003. Whilst it ...
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