O-LevelAccountingAnalysis and interpretation7707/21 · May/June 2010 · Q422 Marks

Zaynah is in business buying and selling goods on credit. The following balances were extracted from her books on 30 April 2010. $ Revenue (Sales) 200 000 Cost of sales 130000 Expenses 65000 Inventory (stock) 1 May 2009 20000 Inventory (stock) 30 April 2010 60000 Trade receivables (debtors) 16000 Trade payables (creditors) 35000 Loans repayable within 12 months 5000 (Bank overdraft) Closing capital 100000 In the previous year, ended 30 April 2009, the business of Zaynah achieved the following ratios: Gross profit to revenue (sales) percentage 50% Working capital ratio (current ratio) 1.7:1

(a)(i)Calculate, to one decimal place, the following ratios for the year ended 30 April 2010. Clearly show all workings. Gross profit to revenue (sales) percentage[3]
(a)(ii)Calculate, to one decimal place, the following ratios for the year ended 30 April 2010. Clearly show all workings. Working capital ratio (current ratio)[3]
(a)(iii)Calculate, to one decimal place, the following ratios for the year ended 30 April 2010. Clearly show all workings. Quick ratio (acid test)[4]
(a)(iv)Calculate, to one decimal place, the following ratios for the year ended 30 April 2010. Clearly show all workings. Profit for the year (net profit) to capital percentage[4]
(b)(i)Comment on the following ratios at 30 April 2010: Quick ratio (acid test)[2]
(b)(ii)Comment on the following ratios at 30 April 2010: Profit for the year (net profit) to capital percentage.[2]
(c)(i)Suggest one possible reason for the change over the year ended 30 April 2010 in the: gross profit to sales percentage;[2]
(c)(ii)Suggest one possible reason for the change over the year ended 30 April 2010 in the: working capital ratio (current ratio).[2]

Mark scheme

Marking points from the official mark scheme (May/June 2010). The mark or mark type is shown in brackets.

[1] Gross profit = $200000 - $130000 = $70000
[1] ($70000 / $200000) x 100 = 35%
[1] Current Assets = $60000 + $16000 = $76000
[1] Current Liabilities = $35000 + $5000 = $40000
[1] ($60000 + $16000) / ($35000 + $5000) = 1.9:1
[2] Quick Assets = $16000
[1] Current Liabilities = $35000 + $5000 = $40000
[1] $16000 / ($35000 + $5000) = 0.4:1
[2] Net Profit = ($200000 - $130000) - $65000 = $5000
[1] ($5000 / $100000) x 100 = 5%
[2] At 0.4:1 this is low for a business buying and selling goods on credit.
[2] Inventory (stock) levels are high resulting in high trade payables (creditors).
[2] The business has no cash available to meet trade payables (creditors).
[2] At 5% the level of return is low when compared to the risk of the business.
[2] Reduced selling price
[2] Increased purchase costs of goods
[2] Higher levels of inventory (stock)
[2] Difficulty in collecting debts.
[2] Increased expenses reducing cash available to pay trade payables (creditors).

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