Nala is a retailer who sells toys and games. All sales are on a cash basis and all purchases are on credit. She has provided the following information. At 31 August 2023: Inventory $6265 Cash at bank $992 Trade payables $4880 Capital $125000 For the year to 31 August 2023: Revenue $98420 Purchases $78130 Expenses $11325 Inventory at 1 September 2022 was valued at $6175. REQUIRED

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2023). The mark or mark type is shown in brackets.

1. [1] (a) Gross margin working: (98420 - (6175+78130 – 6265)) / 98420 = 20380 / 98420
2. [1] (a) Gross margin answer: 20.71% OF
3. [1] (a) Profit margin working: (20380-11325) / 98420 = 9055 / 98420 OF
4. [1] (a) Profit margin answer: 9.20% OF
5. [1] (a) Return on capital employed (ROCE) working: 9055 OF / 125000
6. [1] (a) Return on capital employed (ROCE) answer: 7.24% OF
7. [1] (a) Rate of inventory turnover (times) working (numerator): (6175+78130-6265)
8. [1] (a) Rate of inventory turnover (times) working (denominator): ((6175+6265) / 2)
9. [1] (a) Rate of inventory turnover (times) answer: 12.55 times OF
10. [1] (a) Liquid (acid test) ratio working: 992/4880
11. [1] (a) Liquid (acid test) ratio answer: 0.20:1 OF
12. [1] (b) The gross profit margin will be lower than her competitor's
13. [1] (b) Reduction in gross profit margin may result in a lower gross profit OR increase in sales my result in a higher gross profit
14. [1] (b) The profit for the year or profit margin will reduce because of the increase in (advertising) expenses OR the profit for the year may increase because of the increase in gross profit / increase in sales from extra advertising
15. [1] (b) Selling her inventory faster does not mean her sales will be more than her competitor
16. [1] (b) Needs to sell more inventory to significantly increase profit
17. [1] (c) If business expands profit may increase (For)
18. [1] (c) Once the loan is paid off, there will be no further liability to the bank (For)
19. [1] (c) 5 years before loan is due allows time for repayment (For)
20. [1] (c) Interest will have to be paid on the loan (Against)
21. [1] (c) Loan interest will reduce profit for the year (Against)
22. [1] (c) The bank may require security (Against)
23. [1] (c) Assets may be at risk if unable to repay loan (Against)
24. [1] (c) The loan will have to be repaid (Against)
25. [1] (c) Bank may not be prepared to offer a loan (Against)
26. [1] (c) Recommendation
27. [1] (d) Assess whether loan can be repaid
28. [1] (d) Assess whether loan interest can be paid
29. [1] (d) Assess security available for the loan