6.2. Interpretation of accounting ratios
A subsection of Accounting, 7707, through 6. Analysis and interpretation
Listing 10 of 32 questions
The directors of JKY Limited provided the following information. For the year to 30 April 2020: $ Revenue 209 510 Purchases 121 618 At 30 April 2020: Inventory 11 050 Trade receivables 28 700 Bank overdraft 6 280 All sales and purchases were made on credit terms. Inventory at 1 May 2019 was valued at $8000 REQUIRED Calculate the following ratios. Show your workings. Rate of inventory turnover workings answer (to two decimal places) Trade receivables turnover workings answer (round up to nearest whole day) The rate of inventory turnover for the year ended 30 April 2020 was lower than that of the previous year. The trade receivables turnover for the year ended 30 April 2020 was higher than that of the previous year. REQUIRED Explain the effects of the change in: inventory turnover trade receivables turnover The directors are concerned about the level of trade receivables. They are considering introducing cash discount of 1% for payment within 21 days or charging interest on amounts outstanding after 30 days. REQUIRED Advise the directors whether they should introduce the cash discount policy or the interest charge policy. Justify your answer by providing one advantage and one disadvantage of each policy. The information in the accounting statements is affected by the company’s accounting policies. REQUIRED Explain to the directors of JKY Limited the importance of the following objectives in selecting the company’s accounting policies. comparability relevance
7707_s20_qp_22
THEORY
2020
Paper 2, Variant 2
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Q Limited prepares its financial statements to 31 March each year. The company’s retained earnings at 1 April 2022 were $16 250. During the year ended 31 March 2023, the company made a profit of $43 500 (after charging all expenses and interest). The total dividends of $39 000 for the year were paid by 31 March 2023. The following balances were extracted from the company’s ledger accounts after the income statement had been prepared. $ Fittings and equipment at cost 150 000 Provision for depreciation of fittings and equipment 40 650 Motor vehicles at cost 72 000 Provision for depreciation of motor vehicles 31 125 Inventory 51 790 Balance at bank 1 076 debit Trade receivables 19 700 Provision for doubtful debts Trade payables 31 450 5% Debentures (repayable 2029) 40 000 Bank loan (repayable 2027) 10 000 Ordinary share capital 120 000 REQUIRED Calculate the retained earnings of Q Limited at 31 March 2023. Prepare the statement of financial position for Q Limited at 31 March 2023. Q Limited Statement of Financial Position at 31 March 2023 $ $ $ Calculate the liquid (acid test) ratio to two decimal places. The directors (who are also the shareholders) would like to expand the company and wish to borrow $50 000 to fund the expansion. They are considering whether to issue further ordinary shares or to request another long-term bank loan. REQUIRED Suggest two reasons why although the company has made a profit, there is little cash available in the bank account to fund the expansion. Advise the directors whether they should fund the expansion by issuing ordinary shares or requesting a bank loan. Justify your answer.
7707_s23_qp_21
THEORY
2023
Paper 2, Variant 1
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Ajay is a retailer. He has provided the following information. $ At 1 April 2023 Inventory 5 200 Trade receivables 6 875 Cash at bank 1 946 Trade payables 5 115 For the year ended 31 March 2024 Revenue – credit sales 86 400 – cash sales 10 600 Purchases 51 300 Expenses 23 750 At 31 March 2024 Inventory 6 500 Trade receivables 9 550 Cash at bank 1 200 Trade payables 6 000 REQUIRED Complete the following table. ratio working answer Gross margin (to 2 decimal places) Profit margin (to 2 decimal places) Rate of inventory turnover (to 2 decimal places) Trade receivables turnover days (round up to next whole day) Liquid (acid test) ratio (to 2 decimal places) Ajay has been trading for 3 years and he has established a good reputation. He has never changed his selling price. His gross margin for the year ended 31 March 2024 is higher than for the previous years. REQUIRED Suggest one reason why Ajay’s gross margin has increased. State one reason why Ajay’s customers might be interested in his financial statements. Ajay is concerned about the levels of his inventory and trade receivables. He is considering reducing his selling price. REQUIRED Advise Ajay whether or not he should reduce his selling price. Justify your answer by providing advantages and disadvantages of reducing his selling price. Although Ajay’s gross margin has increased, his profit margin has fallen for each of the last two years. Sales revenue is Ajay’s only income. REQUIRED State two reasons why Ajay should be concerned about his falling profit margin.
7707_s24_qp_22
THEORY
2024
Paper 2, Variant 2
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Carlos owns a business selling computer equipment. He provided the following information for the year ended 31 July 2020. $ Sales 240 000 Cost of sales 169 000 Operating expenses 55 000 Drawings 18 000 Capital employed 62 000 REQUIRED Calculate the profit for the year ended 31 July 2020. Workings Profit for the year ended 31 July 2020 31 July 2019 $11 550 Calculate the following ratios correct to two decimal places. Profit margin Workings Year ended 31 July 2020 31 July 2019 8.56% Gross margin Workings Year ended 31 July 2020 31 July 2019 34.26% Return on capital employed (ROCE) Workings Year ended 31 July 2020 31 July 2019 32.08% Comment on the performance of Carlos’s business over the two years (2019 and 2020). Carlos is concerned that the business bank balance has shown a large decrease. He is considering either investing more cash from his private funds or obtaining a two-year bank loan. REQUIRED Advise Carlos which option he should select. Justify your answer by providing one advantage and one disadvantage of each option. State the name of one party, other than himself and his employees, who would be interested in Carlos’s financial statements. State one reason for their interest. Interested party The interest they would have
7707_w20_qp_22
THEORY
2020
Paper 2, Variant 2
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Haziq has not maintained full accounting records for his business. Haziq provided the following information for the year ended 31 July 2020. At 1 August $ At 31 July $ Bank loan 6 000 4 500 Inventory 8 400 ? Non-current assets at net book value 35 580 32 450 Rent prepaid – Trade payables 6 280 7 460 Wages accrued – Summary of bank account for the year ended 31 July 2020 Date Details $ Date Details $ July 31 Sales receipts 166 000 Aug 1 Balance b/d 2 150 Balance c/d 6 600 July 31 Payments to credit suppliers 96 220 Bank loan repayments 1 500 Bank loan interest Rent 2 640 Wages 41 400 General expenses 10 890 Drawings 17 500 172 600 172 600 Additional information The gross margin was 40%. All sales were for cash and all cash received was banked. REQUIRED Prepare the income statement for the year ended 31 July 2020. Haziq Income Statement for the year ended 31 July 2020 $ $ …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… ……………. ……………. ……………. …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… Advise Haziq whether or not he should maintain a double entry bookkeeping system for his business. Justify your answer with two advantages and two disadvantages.
7707_w20_qp_23
THEORY
2020
Paper 2, Variant 3
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Questions Discovered
32