MKBerry Is the Managing Director of CE Ltd CE Ltd's Latest Financial Statements Are as Follows

question 73

Essay

M.K.Berry is the managing director of CE Ltd.a small,family-owned company that manufactures cutlery.His company belongs to a trade association that publishes a monthly magazine.The latest issue of the magazine contains a very brief article based on the analysis of the accounting statements published by the 40 companies that manufacture this type of product.The article contains the following table:
$\begin{array}{lrr} & \text { Average for All Companies } \\\text { Return on Shareholders' Equity } & \text { In the Industry } \\\text { Return on Total Assets } & 33 \% \\\text { Gross Margin Percentage } & 29 \% \\\text { Current Ratio } & 30 \% \\\text { Average Sale Period } & 1.9: 1 \\\text { Average Collection Period } & 37 \text { days } \\& 41 \text { days }\end{array}$ CE Ltd's latest financial statements are as follows: $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ CE Lid.
$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ Income Statement
$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ for the year ended 31 October
$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ (in thousands)

$\begin{array}{lr}\text { Sales } & £ 900 \\\text { Cost of Goods Sold } & £ 720 \\\text { Gross Margin } & £ 180 \\\text { Selling and Administrative Expenses } & £ 55 \\\text { Interest } & £ 15 \\\text { Net Income } & £ 110\end{array}$ The country in which the company operates has no corporate income tax.No dividends were paid during the year.All sales are on account. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ CE Lid.
$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\quad$ Balance Sheets
$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\quad$$\quad$$\quad$ as of 31 October
$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\quad$ (in thousands)


$\begin{array}{l}\begin{array}{lrr}&\text { This Year }& \text { Last Year }\\\text { Current assets: }\\\text { Cash } & £ 5 & £ 20 \\\text { Accounts receivable } & 120 & 110 \\\text { Inventories } & 96 & 80 \\\text { Noncurrent assets: } & \underline{500} & \underline{460} \\\text { Total assets } & \underline{£ 721} & \underline{\underline{£ 670}}\end{array}\end{array}$ $$\begin{array}{l}\text { Current liabilities: }\\\begin{array} { l c r } \quad \text { Accounts payable } & £ 147 & £ 206 \\\text { Noncurrent liabilitics: } & & \\\quad \text { Bonds payable } & 150 & 150 \\\text { Common shares } & 100 & 100 \\\text { Retained earnings } & \underline { 324 } & \underline { 214 } \\\quad \text { Total liabilities and } & £ 721 & \\\quad \text { shareholders' equity } & & £ 670 \\\hline\end{array}\end{array}$$ Required:
a)Calculate each of the ratios listed in the magazine article for this year for CE,and comment briefly on CE Ltd.'s performance in comparison to the industry averages.
b)Explain why it could be misleading to compare CE Ltd.'s ratios with those taken from the article.

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Definitions:

Willingness To Pay

The maximum amount an individual is prepared to spend on a good or service, reflecting their valuation of it.

Trade Agreement

A contractual arrangement between countries regarding their trade relationships and tariffs.

Microeconomics

Branch of economics that deals with the behavior of individual economic units—consumers, firms, workers, and investors—as well as the markets that these units comprise.

Benefit

The advantage or profit gained from something.