O-LevelAccountingAnalysis and interpretation7707/22 · Oct/Nov 2018 · Q420 Marks

Hema is a trader, buying and selling goods on credit. The following information is available. Balances at 1 September 2018 | Account | $ | | :----------------- | ---: | | Inventory | 20000| | Trade receivables | 50000| | Trade payables | 12000| | Bank overdraft | 25000| | Other receivables | 4000 | REQUIRED

(a)Calculate the following at 1 September 2018 to two decimal places. | | Workings | Answer | | :---------------------------------- | :------- | :----- | | Working capital ratio (current ratio) | | | | | | | | Quick ratio (acid test ratio) | | | | | | |[4]
(b)Comment on the liquidity of Hema's business on 1 September 2018.[4]
(c)During the month of September 2018 the summarised transactions were: Credit purchases $35000 Credit sales $60000 Received from trade receivables by cheque $80000 Paid to trade payables by cheque $27000 Paid for expenses by cheque 15000 Hema marks up all goods by 50% for resale. REQUIRED (c) Calculate the following balances at 30 September 2018. | | Workings | Answer () | | :---------------- | :------- | ---------: | | Inventory | | | | | | | | Trade receivables | | | | | | | | Trade payables | | | | | | | | Bank | | | | | | |[9]
(d)State the effect of each of the following on the working capital. The first item has been completed as an example. | | Working capital ($) | | :---------------------------------------------- | ------------------: | | Sold non-current assets for cash $1200. | + 1200 | | Trade receivables paid $485 in full settlement of debts of $500. | | | Converted $2500 of the bank overdraft to a five year bank loan. | | | Hema brought additional capital into the business: motor van $900 and inventory $600. | |[3]

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2018). The mark or mark type is shown in brackets.

[1] Working capital ratio: Current Assets calculation ($20000 + $50000 + $4000)
[1] Working capital ratio: Current Liabilities calculation ($12000 + $25000)
[1] Working capital ratio: Result 2.00:1
[1] Quick ratio: Quick Assets calculation ($50000 + $4000)
[1] Quick ratio: Result 1.46:1
[1] The working capital ratio is at the 'benchmark' acceptable level of 1.5–2:1
[1] The quick ratio is above the 'benchmark' acceptable level of 0.7–1:1
[1] Need to improve collection of trade receivables
[1] This would reduce the bank overdraft
[2] Inventory: $20000 (opening) + $35000 (purchases) - $40000 (cost of sales = $60000/1.5) = $15000
[1] Inventory: $15000
[2] Trade receivables: $50000 (opening) + $60000 (credit sales) - $80000 (received) = $30000
[1] Trade receivables: $30000
[2] Trade payables: $12000 (opening) + $35000 (credit purchases) - $27000 (paid) = $20000
[1] Trade payables: $20000
[2] Bank: -$25000 (overdraft opening) + $80000 (received) - $27000 (paid trade payables) - $15000 (paid expenses) = $13000
[1] Bank: $13000
[1] Trade receivables paid $485 in full settlement of debts of $500: -$15
[1] Converted 2500 of the bank overdraft to a five year bank loan: +2500
[1] Hema brought additional capital into the business: motor van $900 and inventory $600: +$600

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