O-LevelAccountingAnalysis and interpretation7707/21 · Oct/Nov 2019 · Q420 Marks

Indu is in business buying and selling goods on credit. The following information is available. At 1 October 2018 Inventory $35000 For the year ended 30 September 2019 Revenue $400000 Expenses $52000 At 30 September 2019 Inventory $68000 Owner's capital $150000 5% bank loan – repayable 2025 $50000 Mark-up was 25%. REQUIRED

(a)Calculate the following for the year ended 30 September 2019. Comparative figures for the year ended 30 September 2018 are shown in the last column. | | Workings | Answer | Year ended 30 September 2018 | | :---------------------- | :------- | :----- | :--------------------------- | | Cost of sales | | | $270000 | | Purchases | | | $260000 | | Percentage of gross profit to revenue (gross profit margin) | | | 25% | | Percentage of profit for the year to revenue (profit margin) | | | 10% | | Return on capital employed (ROCE) | | | 18% |[10]
(b)Suggest four possible reasons for the change in the profitability ratios of the business over the two years.[4]
(c)Complete the table by placing a tick (✔) to indicate the effect on the profit for the year of each proposal. Name the accounting principle or concept not being applied. The first one has been completed as an example. | Proposal | Effect on profit for the year | Accounting principle or concept not applied | | :---------------------------------------------------------- | :---------------------------- | :------------------------------------------ | | | Increase Decrease No effect | | | Value closing inventory at cost price plus mark-up. | ✔ | Historic cost | | Remove provision for doubtful debts from financial statements. | | | | Place a value on the satisfaction and loyalty of customers. | | | | Make no adjustment for expenses prepaid at year end. | | |[6]

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2019). The mark or mark type is shown in brackets.

[1] Cost of sales: 400000 × 100 / 125 (1) = $320 000 (1)
[1] Purchases: 320 000 – 35000 + 68 000 = (1) two correct elements = $353 000 (1)OF
[1] Percentage of gross profit to revenue (gross profit margin): Gross profit 80000 (1) ×100 / Revenue 400000 = 20% (1)OF
[1] Percentage of profit for the year to revenue (profit margin): Profit for the year 28000 (1) ×100 / Revenue 400000 = 7% (1)OF
[1] Return on capital employed (ROCE): 28000 of ×100 / 150000+50000 (1) = 14% (1)OF
[1] Own figure rule applies.
[1] Percentage of gross profit to revenue: Lower percentage possibly due to high purchasing costs
[1] Increased competition
[1] Selling price reduction
[1] Lower mark-up
[1] Percentage of profit for the year to revenue: Lower percentage due to higher expenses
[1] Lower gross profit
[1] Higher expenses
[1] Return on capital employed: Lower return due to increase in bank loans
[1] Increase in capital
[1] Reduction in drawings
[1] 4 x (1) per valid point. Max 2 marks for any ratio.
[1] Remove provision for doubtful debts from financial statements: Increase (1), Prudence (1)
[1] Place a value on the satisfaction and loyalty of customers: Increase (1), Money measurement (1)
[1] Make no adjustment for expenses prepaid at year end: Decrease (1), Accruals/matching (1)

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