O-LevelAccountingAnalysis and interpretation7707/22 · May/June 2014 · Q422 Marks

Najla provided the following information for the year ended 31 March 2014. $ Revenue 168000, Inventory 1 April 2013 20000, Inventory 31 March 2014 16000, Purchases 122000, Trade receivables 24500, Trade payables 35000, Capital 100000, Bank 1500 Dr. REQUIRED

(a)Calculate the: Cost of goods sold Gross profit/sales percentage Rate of inventory turnover Working capital ratio (current ratio)[10]
(b)In the previous year, ended 31 March 2013, Najla calculated the following ratios: Gross profit /sales percentage 20%, Rate of inventory turnover 6 times, Working capital ratio (current ratio) 1.7:1. REQUIRED Comment upon the performance of Najla under the following headings, using the information above and your answer in (a). Controlling inventory Ability to pay trade payables[4]
(c)Suggest two possible reasons for the change in gross profit/sales percentage. 1 2[2]
(d)Najla is considering the following proposals to improve his working capital. 1 Sell obsolete inventory costing $1000 for cash $500. 2 Sell non-current assets for $3000 cash. 3 Allow trade receivables to pay debts of $4000 less 5% cash discount. 4 Bring $5000 additional capital into the business: Motor vehicle $3000 and cash 2000. REQUIRED Complete the following table showing the changes to working capital. The first proposal has been completed as an example. Working capital Proposals increase decrease Amount of change () 1 ✓ $500 2 3 4[6]

Mark scheme

Marking points from the official mark scheme (May/June 2014). The mark or mark type is shown in brackets.

[10] (a) Opening inventory 20000 Purchases 122000 142000 Closing inventory 16000 Cost of sales 126000 (1) 42000 (1) × 100 = 25% (1) 168 000 (1) 126 000 (1) = 7 times (1) (20 000 + 16 000)/2 (1) 16 000 + 24 500 + 1500 (1) 35 000 (1) = 1.2:1 (1) (1)
[4] (b) Najla has controlled the inventory well/better/improved/efficiently The closing inventory is lower than the opening inventory Najla is selling goods faster (1) × 2 points The ability to pay trade payables is decreasing (1), but has sufficient current assets to cover trade payables (1) Trade payables considerably higher than 'quick' assets/trade receivables Little cash in the bank (1) × 2 points
[max 2] (c) Higher/increased selling prices (1) Cheaper purchases (1) lower cost of sales (1) bulk buying (1) more trade discount (1) (1) × 2 points
[6] (d) Proposals Working capital Amount of change increase decrease ($) 1 ✓ (1) 500 (1) 2 ✓ (1) 3000 (1) 3 ✓ (1) 200 (1) 4 ✓ (1) 2000 (1)

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