Nazim owns a wholesale business and has prepared draft financial statements for the year ended 30 June 2020, his first year of trading. After the preparation of these financial statements, some errors were discovered. Nazim compared his results with those of his brother Aziz, who has a similar business. Nazim Aziz Current ratio 1.71:1 2.12:1 Liquid (acid test) ratio 0.77:1 1.28:1 Return on capital employed 13.65% 15.25% Nazim discovered that his rate of inventory turnover (times) was also lower than that of Aziz.

1. (a)Complete the table to indicate the effect of each error on the profit for the year and on working capital at 30 June 2020. Write 'understated', 'overstated' or 'no effect'. The first one has been completed as an example. Error Repairs to office equipment had been entered in the office equipment account. No adjustment had been made for insurance prepaid. An irrecoverable debt had not been written off. No record had been made of additional capital introduced in cash. Closing inventory had been overstated. Effect on profit for the year Overstated Effect on working capital No effect[8]
2. (b)(i)Suggest two reasons for the differences in each ratio. Current ratio[2]
3. (b)(ii)Liquid (acid test) ratio[2]
4. (b)(iii)Return on capital employed (ROCE)[2]
5. (c)Suggest one reason for this difference.[1]
6. (d)Advise Nazim whether or not he should introduce this strict credit control policy. Justify your answer by providing two advantages and two disadvantages.[5]