Refer to Table 1.1. Calculate the acid test ratio.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2024). The mark or mark type is shown in brackets.

1. [1] (a) Formula/definition: ATR = Current assets – inventory/Current liabilities OR ATR = Liquid assets/current liabilities (1 mark for formula if no correct calculation)
2. [1] (a) Current assets – inventory = trade receivables + cash = 1.4 + 0.6 = 2 OR 2/3 OR 0.67
3. [2] (a) = 0.67:1 OR 2:3
4. [1] (b) Trade receivables/credit sales × 365 days (1 mark for formula if no correct calculation)
5. [1] (b) OR 1.4/5 × 365
6. [2] (b) = 102.2 days OR 103 days OR 102.2 OR 103
7. [2] (b) Allow 102
8. (c) Definition of liquidity: Liquidity is the ability to convert assets into cash quickly and efficiently. It can also refer to the availability of cash to pay bills and other short-term obligations.
9. (c) Measurement of liquidity by ratios including the current ratio and acid test ratio. High gearing can also impact liquidity.
10. (c) Link to cash flow – faster cash flow may equate to greater liquidity.
11. (c) Methods of improving liquidity: Decrease overhead costs.
12. (c) Sell unused or unproductive assets.
13. (c) Monitor accounts and obtain prompter payments from customers.
14. (c) Negotiate longer payment terms with suppliers.
15. (c) Monitor and reduce dividends payment to owners.
16. (c) Monitor cash to maximise cash held in interest-bearing accounts.
17. (c) Increase borrowing e.g. bank loan.
18. (c) TC manufacture premium quality boxed chocolates, so assets include stocks of cocoa and other ingredients.
19. (c) High prices are charged for the luxury chocolate.
20. (c) Cash flow is a possible problem, as many sales are on credit.
21. (c) Rate of interest in Country R is high.
22. (c) Reference to contents of Table 1 and impact on liquidity e.g. 83% of sales are on credit.
23. (c) Dividends paid of $750 000 will reduce liquidity.
24. (c) Reducing inventory of $1m will improve liquidity.
25. (c) Calculation of current ratio = 3/3 = 1:1.
26. (c) Calculation of efficiency ratios: Trade Receivables turnover = 1.4/5 × 365 = 103 days Inventory turnover = 3/1 = 3 times (or 122 days).
27. (c) Decrease overhead costs may result in reduced cash outflows on administration and services.
28. (c) Assets such as unused land that don't generate revenue to be sold to generate cash and therefore increase liquid assets and therefore improving liquidity.
29. (c) Monitor accounts and obtain prompter payments from customers to speed-up cash inflows and increase liquid assets.
30. (c) Negotiate longer payment terms with suppliers to enable more money retained in the business for longer.
31. (c) Monitor and reduce dividends to owners to enable more money retained in business.
32. (c) Monitor current account and move money into savings account as far as is practicable to gain interest therefore increasing liquid assets.
33. (c) Increase cash sales to increase cash inflows and improve ATR.
34. (c) Reduce sales on credit to retailers so that cash is received more quickly increasing cash holdings and therefore improving liquidity.
35. (c) Inventory turnover is low and could be improved by using JIT, this would delay having to pay for raw materials such as cocoa enabling TC to hold on to more cash and improve liquidity.
36. (c) Changing accounts receivable or payable might be difficult as retailers will expect trade credit and suppliers will not want to be paid late. Much will depend on buyer and supplier power in the market.
37. (c) Need information of cost of any actions undertaken such as changing to JIT.
38. (c) Recommendation and/or assessment of appropriate methods, based on analysis of the relative merits of different approaches.
39. (c) Quantitatively, based on Fig 1.1 it is clear that building a new factory is a wise choice, assuming the data is accurate.
40. (c) Identification of most important point or weighting of factors.
41. (c) Factors decision depends on: This also assumes that it will be possible to obtain employees, a site, permissions and supply of materials.
42. (c) These other factors need to be carefully researched to before a decision is made.
43. (c) Can TC find $5.5m to finance the venture?