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# December 2005 Accounting Examiners Case Solution Paper

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December 2005 Examiner's Solution
C a s e S o l u t i o n 1
1. In advance of the meeting, compute the following ratios for Pearsman for both 2004 and 2005:
i. Current ratio
ii. Quick ratio
iii. Gross profit margin
iv. Profit margin
v. Return on capital employed
vi. Return on owner's equity
vii. Fixed to current asset ratio
viii. Average collection period
ix. Times interest earned
x. Dividend cover
(15 marks)
2005
2004
i.
Current ratio (times)
4.53
4.56
ii.
Quick ratio (times)
3.25
2.34
iii.
Gross profit margin

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51.55%
53.25%
iv.
Profit margin
28.59%
29.69%
v.
Return on capital employed
24.12%
25.34%
vi.
Return on owners' equity
23.6%
23.4%
vii.
Fixed to current asset ratio
182.5%
172.5%
viii.
Average collection period (days)
91
64
ix.
Times interest earned
14
15

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December 2005 Examiner's Solution Case Solution 1 1. i. ii. iii. iv. v. vi. vii. viii. ix. x. In advance of the meeting, compute the following ratios for Pearsman for both 2004 and 2005: Current ratio Quick ratio Gross profit margin Profit margin Return on capital employed Return on owner's equity Fixed to current asset ratio Average collection period Times interest earned Dividend cover (15 marks) i. ii. iii. 2005 2004 4.53 4.56 3.25 2.34 Current ratio (times) Quick ratio (times) Gross profit margin iv. v. vi. vii. viii. ix. 51.55% 53.25% 28.59% 29.69% 24.12% 25.34% 23.6% 23.4% 182.5% 172.5% 91 64 14 15 Profit margin Return on capital employed Return on owners' equity Fixed to current asset ratio Average collection period (days) Times interest earned x. Dividend cover 2.9 2. 14 From the ratio analysis above, identify Pearsman's financial strengths and weaknesses. (10 marks) Pearsman's financial strengths ▪ ▪ ▪ ▪ Very strong current ratio over both years Very strong quick ratio over both years Consistent return on owners' equity over the two years Investment in fixed assets strengthened fixed assets to current assets ratio Pearsman's financial weaknesses Some weakening in gross profit margin between 2004 and 2005 Slight dip in profit margin ratio in 2005 Modest decrease in return on capital employed over two years Serious increase in average collection period, up from 64 days to 91 days Modest decline in interest cove ...
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