O-LevelAccountingAnalysis and interpretation7707/22 · Oct/Nov 2020 · Q420 Marks

Carlos owns a business selling computer equipment. He provided the following information for the year ended 31 July 2020. | $ --- | --- Sales | 240000 Cost of sales | 169000 Operating expenses | 55000 Drawings | 18000 Capital employed | 62000 REQUIRED

(a)Calculate the profit for the year ended 31 July 2020. Workings | Profit for the year ended --- | --- | 31 July 2020 | 31 July 2019 | | $11550[1]
(b)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%[6]
(c)Comment on the performance of Carlos's business over the two years (2019 and 2020).[6]
(d)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.[5]
(e)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[2]

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2020). The mark or mark type is shown in brackets.

[1] (a) Workings: 240000 – 169000 – 55000; Profit for the year $16000
[1] (b) Profit margin Workings: 16000 OF / 240000 x 100/1 (1) whole formula; Answer: 6.67% (1) OF
[1] (b) Gross margin Workings: (240000 – 169000) / 240000 x 100/1 (1) whole formula; Answer: 29.58% (1)
[1] (b) Return on capital employed (ROCE) Workings: 16000 OF / 62000 x 100/1 (1) whole formula; Answer: 25.81% (1) OF
[1] (c) Profit margin General comment: Has worsened from 8.56% to 6.67% (1)
[1] (c) Profit margin Possible causes: Increase in expenses (1) / Poor control over expenses (1) / Accept other valid responses Max (1) from possible causes All comments to be based on Own Figures from (b)
[1] (c) Gross margin General comment: Has worsened from 34.26% to 29.58% (1)
[1] (c) Gross margin Possible causes: Reduction in selling price (1) / Purchasing from more expensive suppliers / increased cost of sales (1) / Accept other valid responses Max (1) from possible causes All comments to be based on Own Figures from (b)
[1] (c) Return on capital employed General comment: Has worsened from 32.08% to 25.81% (1)
[1] (c) Return on capital employed Possible causes: Increased capital employed (1) / Less efficient use of its resources (1) / Accept other valid responses Max (1) from possible causes All comments to be based on Own Figures from (b)
[1] (d) Introduce additional capital Advantages: Does not have to be repaid (1) / No interest cost (1) / Accept other valid responses Max (1)
[1] (d) Introduce additional capital Disadvantages: May not have enough available funds (1) / Greater personal risk (1) / Accept other valid responses Max (1)
[1] (d) Loan Advantages: Instantly available (1) / Has two years to pay it off (1) / Accept other valid responses Max (1)
[1] (d) Loan Disadvantages: Annual interest is charged (1) / Must be repaid (1) / Security may be required (1) / Accept other valid responses Max (1)
[1] (d) Recommendation (1)
[1] (e) Interested party: Suppliers/potential suppliers; Interest: To assess whether outstanding debts are likely to be paid
[1] (e) Interested party: Bank; Interest: To assess the likelihood of loan/overdraft being repaid when due / To assess the ability to pay interest on a loan/overdraft / To assess the availability of security for a loan
[1] (e) Interested party: Lenders/potential lenders; Interest: To assess the likelihood of a loan being repaid when due / To assess the ability to pay interest on a loan / To assess the availability of security for a loan
[1] (e) Interested party: Investors/potential partners; Interest: To assess future prospects of the business / To assess profitability
[1] (e) Interested party: Government/tax authorities; Interest: To assess the tax due from the owner of the business
[1] (e) Accept other suitable parties and reasons (1) for one named party + (1) for reason