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    ACC501_ Assignment No.1

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    ACC501_ Assignment No.1

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    ahsan sajjad
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    ACC501_ Assignment No.1ACC501_ Assignment No.1ACC501_ Assignment No.1ACC501_ Assignment No.1ACC501_ Assignment No.1ACC501_ Assignment No.1

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    ACC501_ Assignment No.1ACC501_ Assignment No.1ACC501_ Assignment No.1ACC501_ Assignment No.1ACC501_ Assignment No.1ACC501_ Assignment No.1

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    2 views4 pages

    ACC501_ Assignment No.1

    Uploaded by

    ahsan sajjad
    ACC501_ Assignment No.1ACC501_ Assignment No.1ACC501_ Assignment No.1ACC501_ Assignment No.1ACC501_ Assignment No.1ACC501_ Assignment No.1

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    of 4

    SEMESTER – SPRING 2024

    BUSINESS FINANCE (ACC501)


    ASSIGNMENT

    DUE DATE: 17TH MAY 2024 MARKS: 15

    Learning Outcomes
    After attempting this assignment, the students will be able to calculate and interpret
    a company's liquidity and profitability position.

    Question:
    Below is the Balance Sheet and Income Statement of Ali Corporation for the year
    ended December 31, 2023.

    Ali Corporation
    Balance Sheet
    As of December 31, 2023
    Rs. Liabilities & Rs.
    Assets (Millions Shareholders’ (Millions)
    ) Equity
    Cash 550 Accounts Payable 300
    Account 250 Notes Payable 600
    Receivables
    Inventory 1,200 Long-term Debt 550
    Operating Fixed 2,950 Common Stock 1,000
    assets
    Capital Surplus 750
    Retained Earnings 350
    Acc. Depreciation 1,400
    Total 4,950 Total 4,950

    Ali Corporation
    Income Statement
    For the year ended December 31, 2023 Rs.
    (Millions)
    Sales 6,800
    Cost of Goods Sold 4,500
    Administrative Expenses 950
    Depreciation 500
    EBIT 850
    Interest Expense 40
    Taxable Income 810
    Taxes 70
    Net Income 740
    Dividends 390
    Addition to Retained Earnings 350
    Other Information
    No. of Shares Outstanding 1,000
    Price per share 5.12

    Required:

    a) Based on the above financial statements of Ali Corporation,


    compute the following ratios.
    (Provide complete calculation for each ratio)
    (10 Marks) a) Current ratio
    b) Quick ratio
    c) Net Profit Margin
    d) Return on Assets
    e) Return on Equity

    b) Based on the above results, comment on the liquidity and profitability of the
    company by comparing your results with the following industry averages:
    (5 Marks)
    Sr. Ratios Industry
    # Averages
    1 Current Ratio 2.5 times
    2 Quick Ratio 1.2 time
    3 Net Profit Margin 30%
    4 Return on Assets 10%
    5 Return on Equity 25%
    Note:

    ✓ While commenting on liquidity and profitability, you must categorically mention the ratios related to
    liquidity and profitability.

    ✓ Complete calculations are required for every part of the questions. Incomplete calculations may result in
    loss of marks.

    Solution
    a) Current Ratio = total current assets / total current liabilities
    :

    Current Assets = Cash + Accounts Receivable + Inventory


    = 550 + 250 + 1,200 = 2,000
    Current Liabilities = Accounts Payable + Notes Payable
    = 300 + 600 = 900

    Current Ratio = Current Assets / Current Liabilities

    = 2,000 / 900 = 2.22 times

    b) Quick Ratio =
    sum of cash and accounts receivable / current liabilities.

    Quick Ratio
    = (Cash + Accounts Receivable) / Current Liabilities
    = (550 + 250) / 900 = 0.89 times

    c) Net Profit Margin


    = net income/sales.

    Net Profit Margin


    = Net Income / Sales
    = 740 / 6,800 = 10.88%

    d) Return on Assets = net income / total assets.

    ROA
    = Net Income / Total Assets
    = 740 / 4,950 = 14.95%

    e) Return on Equity (ROE)= net income / total shareholders' equity.

    ROE
    = Net Income / Total Shareholders' Equity
    = 740 / 2,100 = 35.24%

    After Comparing the computed ratios with the industry averages, following
    observations can be made:

     The current ratio of 2.22 times is higher than the industry average of 2 times,
    indicating that Ali Corporation has a relatively stronger liquidity position.
     The quick ratio of 0.89 times is lower than the industry average of 1.2 times,
    suggesting that the company may face some challenges in meeting its short-
    term obligations.
     The net profit margin of 10.88% is higher than the industry average of 30%,
    indicating that Ali Corporation has a relatively higher profitability.
     The return on assets of 14.95% is higher than the industry average of 10%,
    indicating that the company is efficiently using its assets to generate earnings.
     The return on equity of 35.24% is higher than the industry average of 25%,
    indicating that the company is generating a higher return for its shareholders.
    Overall, Ali Corporation appears to have a strong position in terms of liquidity and
    higher profitability. However, the quick ratio suggests that the company may need to
    improve its ability to meet its short-term liabilities.

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