Institute of Chartered Accountants of Nigeria (ICAN) Exam 2

Explanation: Operating income is calculated as follows: $\text{Operating Income}=\text{Total Sales}-\text{Cost of Goods Sold}-\text{Operating Expenses}$

$\text{Operating Income}=₦2,000,000-₦1,200,000-₦500,000=₦300,000$

Explanation: The debt-to-equity ratio is calculated as follows: Debt-to-Equity Ratio=Total LiabilitiesTotal Equity\text{Debt-to-Equity Ratio} = \frac{\text{Total Liabilities}}{\text{Total Equity}}Debt-to-Equity Ratio=Total EquityTotal Liabilities​

Debt-to-Equity Ratio=₦300,000₦200,000=1.5\text{Debt-to-Equity Ratio} = \frac{₦300,000}{₦200,000} = 1.5Debt-to-Equity Ratio=₦200,000₦300,000​=1.5

Explanation: The average collection period is calculated as follows: Average Collection Period=Average ReceivablesSales×365\text{Average Collection Period} = \frac{\text{Average Receivables}}{\text{Sales}} \times 365Average Collection Period=SalesAverage Receivables​×365

Average Collection Period=₦150,000₦1,000,000×365=54.75≈50 days\text{Average Collection Period} = \frac{₦150,000}{₦1,000,000} \times 365 = 54.75 \approx 50 \text{ days}Average Collection Period=₦1,000,000₦150,000​×365=54.75≈50 days

Explanation: The current ratio is calculated as follows: Current Ratio=Current AssetsCurrent Liabilities\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}Current Ratio=Current LiabilitiesCurrent Assets​

Rearranging to solve for current assets: $\text{Current Assets}=\text{Current Ratio}\times \text{Current Liabilities}$

$\text{Current Assets}=2.5\times ₦250,000=₦625,000$

Explanation: The interest coverage ratio is calculated as follows: Interest Coverage Ratio=EBITInterest Expense\text{Interest Coverage Ratio} = \frac{\text{EBIT}}{\text{Interest Expense}}Interest Coverage Ratio=Interest ExpenseEBIT​

Rearranging to solve for EBIT: $\text{EBIT}=\text{Interest Coverage Ratio}\times \text{Interest Expense}$

$\text{EBIT}=4\times ₦100,000=₦400,000$

Explanation: The return on equity (ROE) is calculated as follows: ROE=Net IncomeTotal Equity×100\text{ROE} = \frac{\text{Net Income}}{\text{Total Equity}} \times 100ROE=Total EquityNet Income​×100

Rearranging to solve for net income: $\text{Net Income}=\text{ROE}\times \text{Total Equity}$

$\text{Net Income}=15\%\times ₦500,000=₦75,000$

Explanation: Retained earnings at the end of the period is calculated as follows: $\text{Ending Retained Earnings}=\text{Beginning Retained Earnings}+\text{Net Income}-\text{Dividends Paid}$

$\text{Ending Retained Earnings}=₦1,200,000+₦500,000-₦150,000=₦1,550,000$

Explanation: Net working capital is calculated as follows: $\text{Net Working Capital}=\text{Current Assets}-\text{Current Liabilities}$

Current assets include cash, accounts receivable, and inventory: $\text{Current Assets}=\text{Cash}+\text{Accounts Receivable}+\text{Inventory}=₦50,000+₦100,000+₦150,000=₦300,000$

Current liabilities include accounts payable and accrued liabilities: $\text{Current Liabilities}=\text{Accounts Payable}+\text{Accrued Liabilities}=₦70,000+₦30,000=₦100,000$

$\text{Net Working Capital}=₦300,000-₦100,000=₦200,000$

Explanation: Gross profit is calculated as follows: $\text{Gross Profit}=\text{Net Sales}-\text{Cost of Goods Sold}$

$\text{Gross Profit}=₦2,400,000-₦1,600,000=₦800,000$

Explanation: The amount of dividends paid is calculated as follows: $\text{Dividends Paid}=\text{Dividend Payout Ratio}\times \text{Net Income}$

$\text{Dividends Paid}=40\%\times ₦500,000=₦200,000$

Explanation: The operating profit margin is calculated as follows: Operating Profit Margin=Operating ProfitTotal Revenue×100\text{Operating Profit Margin} = \frac{\text{Operating Profit}}{\text{Total Revenue}} \times 100Operating Profit Margin=Total RevenueOperating Profit​×100

First, calculate the operating profit: $\text{Operating Profit}=\text{Total Revenue}-\text{Total Expenses}=₦1,200,000-₦900,000=₦300,000$

Operating Profit Margin=₦300,000₦1,200,000×100=25%\text{Operating Profit Margin} = \frac{₦300,000}{₦1,200,000} \times 100 = 25\%Operating Profit Margin=₦1,200,000₦300,000​×100=25%

Explanation: The current ratio is calculated as follows: Current Ratio=Current AssetsCurrent Liabilities\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}Current Ratio=Current LiabilitiesCurrent Assets​

Current assets include cash, accounts receivable, and inventory: $\text{Current Assets}=\text{Cash}+\text{Accounts Receivable}+\text{Inventory}=₦80,000+₦120,000+₦150,000=₦350,000$

Current liabilities include accounts payable and short-term notes payable: $\text{Current Liabilities}=\text{Accounts Payable}+\text{Short-term Notes Payable}=₦90,000+₦60,000=₦150,000$

Current Ratio=₦350,000₦150,000=2.33≈2.0\text{Current Ratio} = \frac{₦350,000}{₦150,000} = 2.33 \approx 2.0Current Ratio=₦150,000₦350,000​=2.33≈2.0

Explanation: Cash flow from operations is calculated as follows: $\text{Cash Flow from Operations}=\text{Net Income}+\text{Depreciation}-\text{Change in Working Capital}$

$\text{Cash Flow from Operations}=₦350,000+₦50,000-₦20,000=₦400,000$

Explanation: Earnings per share (EPS) is calculated as follows: EPS=Net IncomeNumber of Common Shares Outstanding\text{EPS} = \frac{\text{Net Income}}{\text{Number of Common Shares Outstanding}}EPS=Number of Common Shares OutstandingNet Income​

EPS=₦300,00060,000=₦5.00\text{EPS} = \frac{₦300,000}{60,000} = ₦5.00EPS=60,000₦300,000​=₦5.00

Explanation: The net profit margin is calculated as follows: Net Profit Margin=Net IncomeTotal Revenue×100\text{Net Profit Margin} = \frac{\text{Net Income}}{\text{Total Revenue}} \times 100Net Profit Margin=Total RevenueNet Income​×100

First, calculate the net income: $\text{Net Income}=\text{Total Revenue}-\text{Cost of Goods Sold}-\text{Operating Expenses}-\text{Income Tax Expense}$

$\text{Net Income}=₦2,000,000-₦1,200,000-₦500,000-₦60,000=₦240,000$

Net Profit Margin=₦240,000₦2,000,000×100=12%\text{Net Profit Margin} = \frac{₦240,000}{₦2,000,000} \times 100 = 12\%Net Profit Margin=₦2,000,000₦240,000​×100=12%

Explanation: The dividends paid is calculated as follows: $\text{Dividends Paid}=\text{Beginning Retained Earnings}+\text{Net Income}-\text{Ending Retained Earnings}$

$\text{Dividends Paid}=₦1,000,000+₦250,000-₦1,250,000=₦300,000$

Explanation: The inventory turnover ratio is calculated as follows: Inventory Turnover Ratio=Cost of Goods SoldAverage Inventory\text{Inventory Turnover Ratio} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}}Inventory Turnover Ratio=Average InventoryCost of Goods Sold​

Inventory Turnover Ratio=₦900,000₦300,000=3.0\text{Inventory Turnover Ratio} = \frac{₦900,000}{₦300,000} = 3.0Inventory Turnover Ratio=₦300,000₦900,000​=3.0

Explanation: Retained earnings at the end of the period is calculated as follows: $\text{Ending Retained Earnings}=\text{Beginning Retained Earnings}+\text{Net Income}-\text{Dividends Paid}$

$\text{Ending Retained Earnings}=₦1,500,000+₦900,000-₦200,000=₦2,200,000$

Explanation: The contribution margin ratio is calculated as follows: Contribution Margin Ratio=Sales−Variable CostsSales×100\text{Contribution Margin Ratio} = \frac{\text{Sales} - \text{Variable Costs}}{\text{Sales}} \times 100Contribution Margin Ratio=SalesSales−Variable Costs​×100

Contribution Margin Ratio=₦2,400,000−₦1,440,000₦2,400,000×100=₦960,000₦2,400,000×100=40%\text{Contribution Margin Ratio} = \frac{₦2,400,000 - ₦1,440,000}{₦2,400,000} \times 100 = \frac{₦960,000}{₦2,400,000} \times 100 = 40\%Contribution Margin Ratio=₦2,400,000₦2,400,000−₦1,440,000​×100=₦2,400,000₦960,000​×100=40%

Explanation: The quick ratio is calculated as follows: Quick Ratio=Quick AssetsCurrent Liabilities\text{Quick Ratio} = \frac{\text{Quick Assets}}{\text{Current Liabilities}}Quick Ratio=Current LiabilitiesQuick Assets​

Quick assets include cash and accounts receivable: $\text{Quick Assets}=\text{Cash}+\text{Accounts Receivable}=₦70,000+₦120,000=₦190,000$

Current liabilities include accounts payable and short-term notes payable: $\text{Current Liabilities}=\text{Accounts Payable}+\text{Short-term Notes Payable}=₦80,000+₦50,000=₦130,000$

Quick Ratio=₦190,000₦130,000=1.46≈1.5\text{Quick Ratio} = \frac{₦190,000}{₦130,000} = 1.46 \approx 1.5Quick Ratio=₦130,000₦190,000​=1.46≈1.5

Explanation: The debt-to-equity ratio is calculated as follows: Debt-to-Equity Ratio=Total LiabilitiesTotal Equity\text{Debt-to-Equity Ratio} = \frac{\text{Total Liabilities}}{\text{Total Equity}}Debt-to-Equity Ratio=Total EquityTotal Liabilities​

Debt-to-Equity Ratio=₦300,000₦200,000=1.5\text{Debt-to-Equity Ratio} = \frac{₦300,000}{₦200,000} = 1.5Debt-to-Equity Ratio=₦200,000₦300,000​=1.5

Explanation: The debt ratio is calculated as follows: Debt Ratio=Total LiabilitiesTotal Assets\text{Debt Ratio} = \frac{\text{Total Liabilities}}{\text{Total Assets}}Debt Ratio=Total AssetsTotal Liabilities​

Rearranging to solve for total liabilities: $\text{Total Liabilities}=\text{Debt Ratio}\times \text{Total Assets}$

$\text{Total Liabilities}=50\%\times ₦1,000,000=₦500,000$

Explanation: The inventory turnover ratio is calculated as follows: Inventory Turnover Ratio=Cost of Goods SoldAverage Inventory\text{Inventory Turnover Ratio} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}}Inventory Turnover Ratio=Average InventoryCost of Goods Sold​

Inventory Turnover Ratio=₦1,080,000₦240,000=4.5≈4.0\text{Inventory Turnover Ratio} = \frac{₦1,080,000}{₦240,000} = 4.5 \approx 4.0Inventory Turnover Ratio=₦240,000₦1,080,000​=4.5≈4.0

Explanation: The book value per share is calculated as follows: Book Value per Share=Total Assets−Total Liabilities−Preferred StockNumber of Common Shares Outstanding\text{Book Value per Share} = \frac{\text{Total Assets} - \text{Total Liabilities} - \text{Preferred Stock}}{\text{Number of Common Shares Outstanding}}Book Value per Share=Number of Common Shares OutstandingTotal Assets−Total Liabilities−Preferred Stock​

Book Value per Share=₦5,000,000−₦2,000,000−₦500,000300,000=₦2,500,000300,000=₦8.33\text{Book Value per Share} = \frac{₦5,000,000 - ₦2,000,000 - ₦500,000}{300,000} = \frac{₦2,500,000}{300,000} = ₦8.33Book Value per Share=300,000₦5,000,000−₦2,000,000−₦500,000​=300,000₦2,500,000​=₦8.33

Explanation: The operating profit margin is calculated as follows: Operating Profit Margin=Operating ProfitNet Sales×100\text{Operating Profit Margin} = \frac{\text{Operating Profit}}{\text{Net Sales}} \times 100Operating Profit Margin=Net SalesOperating Profit​×100

First, calculate the operating profit: $\text{Operating Profit}=\text{Net Sales}-\text{Cost of Goods Sold}-\text{Operating Expenses}=₦2,200,000-₦1,320,000-₦660,000=₦220,000$

Operating Profit Margin=₦220,000₦2,200,000×100=10%\text{Operating Profit Margin} = \frac{₦220,000}{₦2,200,000} \times 100 = 10\%Operating Profit Margin=₦2,200,000₦220,000​×100=10%

Explanation: Return on assets (ROA) is calculated as follows: ROA=Net IncomeTotal Assets×100\text{ROA} = \frac{\text{Net Income}}{\text{Total Assets}} \times 100ROA=Total AssetsNet Income​×100

ROA=₦400,000₦2,000,000×100=20%\text{ROA} = \frac{₦400,000}{₦2,000,000} \times 100 = 20\%ROA=₦2,000,000₦400,000​×100=20%

Explanation: The gross profit margin is calculated as follows: Gross Profit Margin=Gross ProfitTotal Sales×100\text{Gross Profit Margin} = \frac{\text{Gross Profit}}{\text{Total Sales}} \times 100Gross Profit Margin=Total SalesGross Profit​×100

Gross Profit Margin=₦360,000₦900,000×100=40%\text{Gross Profit Margin} = \frac{₦360,000}{₦900,000} \times 100 = 40\%Gross Profit Margin=₦900,000₦360,000​×100=40%

Explanation: Cash flow from operations is calculated as follows: $\text{Cash Flow from Operations}=\text{Net Income}+\text{Depreciation}+\text{Increase in Accounts Payable}$

$\text{Cash Flow from Operations}=₦600,000+₦80,000+₦20,000=₦700,000$

Explanation: The times interest earned ratio is calculated as follows: Times Interest Earned Ratio=EBITInterest Expense\text{Times Interest Earned Ratio} = \frac{\text{EBIT}}{\text{Interest Expense}}Times Interest Earned Ratio=Interest ExpenseEBIT​

First, calculate EBIT: $\text{EBIT}=\text{Total Sales}-\text{Cost of Goods Sold}-\text{Operating Expenses}$

$\text{EBIT}=₦2,500,000-₦1,500,000-₦600,000=₦400,000$

Times Interest Earned Ratio=₦400,000₦150,000=2.67≈3.0\text{Times Interest Earned Ratio} = \frac{₦400,000}{₦150,000} = 2.67 \approx 3.0Times Interest Earned Ratio=₦150,000₦400,000​=2.67≈3.0

Explanation: Return on assets (ROA) is calculated as follows: ROA=Net IncomeTotal Assets×100\text{ROA} = \frac{\text{Net Income}}{\text{Total Assets}} \times 100ROA=Total AssetsNet Income​×100

ROA=₦150,000₦2,000,000×100=7.5%\text{ROA} = \frac{₦150,000}{₦2,000,000} \times 100 = 7.5\%ROA=₦2,000,000₦150,000​×100=7.5%

Explanation: The net profit margin is calculated as follows: Net Profit Margin=Net IncomeTotal Revenue×100\text{Net Profit Margin} = \frac{\text{Net Income}}{\text{Total Revenue}} \times 100Net Profit Margin=Total RevenueNet Income​×100

First, calculate the net income: $\text{Net Income}=\text{Total Revenue}-\text{Cost of Goods Sold}-\text{Operating Expenses}-\text{Income Tax Expense}$

$\text{Net Income}=₦3,000,000-₦1,800,000-₦900,000-₦90,000=₦210,000$

Net Profit Margin=₦210,000₦3,000,000×100=7%\text{Net Profit Margin} = \frac{₦210,000}{₦3,000,000} \times 100 = 7\%Net Profit Margin=₦3,000,000₦210,000​×100=7%

Explanation: The debt-to-equity ratio is calculated as follows: Debt-to-Equity Ratio=Total LiabilitiesTotal Equity\text{Debt-to-Equity Ratio} = \frac{\text{Total Liabilities}}{\text{Total Equity}}Debt-to-Equity Ratio=Total EquityTotal Liabilities​

Rearranging to solve for total liabilities: $\text{Total Liabilities}=\text{Debt-to-Equity Ratio}\times \text{Total Equity}$

$\text{Total Liabilities}=1.5\times ₦1,200,000=₦1,800,000$

Explanation: The gross profit margin is calculated as follows: Gross Profit Margin=Gross ProfitTotal Revenue×100\text{Gross Profit Margin} = \frac{\text{Gross Profit}}{\text{Total Revenue}} \times 100Gross Profit Margin=Total RevenueGross Profit​×100

First, calculate the gross profit: $\text{Gross Profit}=\text{Total Revenue}-\text{Cost of Goods Sold}=₦1,500,000-₦900,000=₦600,000$

Gross Profit Margin=₦600,000₦1,500,000×100=40%\text{Gross Profit Margin} = \frac{₦600,000}{₦1,500,000} \times 100 = 40\%Gross Profit Margin=₦1,500,000₦600,000​×100=40%

Explanation: Total shareholders' equity is calculated as follows: $\text{Total Shareholders’ Equity}=\text{Total Assets}-\text{Total Liabilities}$

$\text{Total Shareholders’ Equity}=₦4,000,000-₦2,500,000=₦1,500,000$

Explanation: The cost of goods sold is calculated as follows: $\text{Cost of Goods Sold}=\text{Inventory Turnover Ratio}\times \text{Average Inventory}$

$\text{Cost of Goods Sold}=5\times ₦200,000=₦1,000,000$

Explanation: Earnings per share (EPS) is calculated as follows: EPS=Net Income−Preferred DividendsWeighted Average Common Shares\text{EPS} = \frac{\text{Net Income} - \text{Preferred Dividends}}{\text{Weighted Average Common Shares}}EPS=Weighted Average Common SharesNet Income−Preferred Dividends​

EPS=₦600,000−₦50,000100,000=₦550,000100,000=₦5.50\text{EPS} = \frac{₦600,000 - ₦50,000}{100,000} = \frac{₦550,000}{100,000} = ₦5.50EPS=100,000₦600,000−₦50,000​=100,000₦550,000​=₦5.50

Explanation: Earnings per share (EPS) is calculated as follows: EPS=Net IncomeNumber of Common Shares Outstanding\text{EPS} = \frac{\text{Net Income}}{\text{Number of Common Shares Outstanding}}EPS=Number of Common Shares OutstandingNet Income​

EPS=₦250,00050,000=₦5.00\text{EPS} = \frac{₦250,000}{50,000} = ₦5.00EPS=50,000₦250,000​=₦5.00