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DK Cosmetics (DKC) DK
DK Cosmetics (DKC) DK.Cosmetics (DKC) is a cosmetics manufacturer, specializing in the production of shower, hand, body and soap products using organic and non-animal tested ingredients. DKC has two types of distribution methods: Method 1: B2C using their own e-commerce website Method 2: DKC sells its products to a wholesaler that distributes these items to local cosmetic retailers The finance director, Dorothy, noted that DKC's sales have increased significantly through internal growth. As the millennials are more concerned about the products they use and their impact on the environment, DKC's production capacity is at its maximum. A new production facility is planned, but a large bank loan must be obtained to finance that. The local bank manager asked DKC to provide a complete set of final accounts along with a ratio analysis for the past two years of operations. Some financial information for 2020 is shown below: • The opening stock is $120,000 and closing stock is $160,000 at the end of 2020 • Sales revenue was $1,100,000, and gross profit was $490,000 The industry standard of credit terms is for debtors (customers) to pay in 40 to 50 days; the amount of debtors is $150,000 and the creditors is $167,000 • Capital employed is $2,060,000, share capital is $460,000, accumulated retained profit (end of 2020) is $800,000 .
(e) Calculate the gearing ratio for DKC in 2020 (show all your working) [2 marks] Calculate the creditor days ratio for DKC in 2020. [1 marks)
Expert Solution
DKC is a cosmetic manufacturer company specilaizing in production of shower,hand,body and soap products using organic and non animal tested ingredients.
it has 2 types of distribution methods they are by using its own website and by selling to a wholeseller from there the products goes to a local retailer
the finance director dorothy observed that sales had gone higher through internal sellings itself.as well from these causes dkc production capacity is at its high.though a new production facility was planned which needs some sort of finance from the bank.
so from here the bank asked dkc to produce its complete set of final accounts including ratio analysis for the past 2 years till 2020.
the above given problem has the following financial information:
opening stock=$120000(ASSET AT THE START)
closing stock =$160000(ASSET AT THE END)
sales revenue =$1100000(ASSET DUE TO OUR PRODUCTION AND SERVICES OFFERED)
gross profit =$490000(ASSET EQUAL TO SALES REVENUE MINUS OPERATING COSTS)
the debitors should pay the credit in nearly 40 to 50 days
amount of debitors =$150000(ASSET)
amount of creditors =$167000(*** LIABILITY EQUAL TO SHORT TERM DEBT ***)
capital employed =$2060000(ASSET - CURRENT LAIBILLTIES (IF ANY))=ASSET
share capital =$460000(*** LIABILITY EQUAL TO LONG TERM DEBT FROM SHARE HOLDERS ***)
accumulated retained profit =$800000(***** SHARE HOLDERS EQUITY *****)
gearing ratio : a gearing ratio is a general discription of a financial ratio that shows the variance to the owners equity to the debt of the company,it is simply equal to (total debt/shareholders equity).
GEARING RATIO = (LONG TERM DEBT+SHORT TERM DEBT+BANK OVERDRAFTS)/(SHARE HOLDERS EQUITY)
GR=(($4,60,000+$1,67,000+0)/(8,00,000))=0.78375=78.3%(WELL ESTABLISHED COMPANY)
2.now coming to creditors ratio and to calculate the creditors days ratio it means that
how many days are required for the compant to repay its creditors is called as a creditors days ratio
given that creditors=$1,67,000
sales revenue=$11,00,000
so creditors days ratio =(creditors/sales revenue)*365
=(167000/1100000)*365
=(55.413)days ~~~55 days.
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