Refer to Tables 2 and 3. Calculate for 2019: inventory turnover

Mark scheme

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

1. [1] Inventory turnover = cost of sales / value of inventories
2. [1] OR cost of sales / average inventories
3. [2] = 3400 / 2000 = 1.7 times
4. [2] 1.7
5. [1] $1.7 or 1.7%
6. [1] 3400 / 1000 = 3.4
7. [1] 365 / 1.7 = 215 days
8. [1] 2000/3400 x 365 = 215 days
9. [1] Gearing = debt / (debt + equity) x 100
10. [1] Or Gearing = Non-current liabilities / capital employed x 100
11. [1] Or Gearing = Fixed cost capital / capital employed x 100
12. [1] Or Gearing = debt / equity x 100
13. [1] Debt + equity = 800 + 900 + 45 = 1745
14. [1] Or Equity = 900 + 45 = 945
15. [4] Gearing = 800 / 1745 x 100 = 45.8% (Allow 45.84%)
16. [4] Or Gearing = 800 / 945 x 100 = 84.7% or 84.66%
17. [3] Gearing = 45.8 or 84.7
18. [3] Possible errors: Partial calculation of capital employed 800 / (800+45) x 100 = 94.7%
19. [3] 800 / (800+900) x 100 = 47.1%
20. [3] 800 / 45 x 100 = 1778%
21. [3] 800 / 900 x 100 = 88.9%
22. [3] 845 / 900 x 100 = 89.4%
23. [1] CR = CA / CL (if no relevant calculation)
24. [1] CA = 2000 + 1200 = $3.2bn
25. [1] CL = 370 + 2211 + 20 = 2601
26. [3] CR = 3200 / 2601 = 1.23 or 1.23:1 (Allow 1.2 if 3200 / 2601 shown)
27. [2] $1.23 or 1.23%
28. [2] Possible answers allow rounding to 1dp if working shown 1200 / 2601 = 0.46
29. [2] 2000 / 2601 = 0.77
30. [2] 3200 / 2581 = 1.24
31. [2] 3200 / 2231 = 1.43
32. [2] 3200 / 390 = 8.21
33. [K] Ratios used to assess business performance / efficiency /liquidity / shareholder
34. [K] Help with decisions regarding budgets/shareholder dividends / borrowing
35. [K] Knowledge of what different accounting ratios show - Gearing - dependence on debt finance
36. [K] Inventory turnover – measure of financial efficiency. Higher the number the more efficient the business
37. [K] Liquidity ratios – ability to meet short term debt
38. [K] Profitability ratios – ability to generate profit from sales / assets
39. [K] Knowledge of other business ratios, e.g. labour turnover
40. [APP] Need for finance for expansion plans – extension to factory / new factory / takeover will impact gearing
41. [APP] Gearing is not high though it is close to 50%
42. [APP] Appropriate interpretation of current ratio, e.g. shows FE has sufficient short term assets to cover short term debt
43. [APP] Calculation of other ratios, e.g. Acid test 0.46:1, Operating profit margin 9.5%, Gross profit margin 19%
44. [AN] Gearing helps make decisions about finance. High gearing indicates increased level of risk in terms of being unable to service the debt so whether or not to borrow money and how much to borrow
45. [AN] Gearing will impact decisions about how to finance expansion and be used to support application for finance as FE has low gearing so managers may consider further borrowing
46. [AN] Liquidity ratios help make decisions regarding working capital requirements
47. [AN] Profitability ratios can highlight where managers need to take action; for example, to control costs
48. [AN] Shareholder ratios may be used to make decisions about dividends to be paid to ensure that financial strain isn't placed on business
49. [AN] Quantitative nature of ratio analysis will make decisions more scientific and add validity to decisions made
50. [AN] Ratio analysis may not be useful as there may be disagreement about interpretation of ratios / competition for resources / bias in departmental perspective / window dressing
51. [EVAL] One ratio by itself is not very useful. Need to be able to see trends.
52. [EVAL] Inter-firm comparisons may be necessary to make judgements about performance of FE
53. [EVAL] Only a quantitative technique. Managers increasingly consider qualitative factors when making decisions
54. [EVAL] Ratios alone do not necessarily indicate the true cause of business problems.
55. [EVAL] Decisions also depend on other factors, e.g. external environment – forecast increase interest rates will impact decision to increase borrowing
56. [EVAL] Too much emphasis may be placed on ratios at expense of more qualitative factors