O-LevelAccountingAnalysis and interpretation7707/22 · May/June 2016 · Q420 Marks

Lache's accounting year ends on 31 December. The following information is available. | | 2015 | 2014 | |:---|:---|:---| | | $ | $ | | Revenue | 750000 | 600000 | | Expenses | 200000 | 175000 | | Profit for the year | 100000 | 50000 | | Capital | 250000 | 250000 | | Bank loan repayable 30 December 2014 | – | 120000 | | Bank loan repayable 30 December 2020 | 80000 | – | | Inventory | 60000 | 260000 | | Trade receivables | 22000 | 40000 | | Trade payables | 50000 | 60000 | | Other receivables | 1500 | 2500 | | Other payables | 8500 | 3500 | | Bank | 28000 Debit | 40000 Credit | REQUIRED

(a)Calculate the following ratios for 2015. Comparative figures for 2014 are shown. Your answers should be calculated to one decimal place. | | Workings | Answer | 2014 | |:---|:---|:---|:---| | Gross profit to revenue (Gross profit margin) | | | 37.5% | | Return on capital employed (ROCE) based on profit for the year | | | 20% | | Current ratio (Working capital ratio) | | | 2.9:1 | | Quick ratio (acid test ratio) | | | 0.4:1 |[12]
(b)(i)Using the ratios calculated in (a) and the information provided, comment on the: profitability over the two years[4]
(b)(ii)liquidity over the two years.[4]

Mark scheme

Marking points from the official mark scheme (May/June 2016). The mark or mark type is shown in brackets.

[1] (a) Gross profit/sales percentage: Gross profit = Revenue - Expenses - Profit for the year (This is a simplified assumption based on given values for Income Statement. A more accurate gross profit calculation would require Cost of Sales). Assuming GP = Profit + Expenses = 100000 + 200000 = 300000. So, (300000 / 750000) x 100 = 40%
[1] (a) Return on capital employed (ROCE): (100000 / (250000 + 80000)) x 100 = 30.3%
[1] (a) Working capital ratio (current ratio): (60000 + 22000 + 1500 + 28000) / (50000 + 8500) = 1.9:1
[1] (a) Quick ratio (acid test ratio): (22000 + 1500 + 28000) / (50000 + 8500) = 0.9:1
[1] (b)(i) The Gross profit to sales has increased in 2015
[1] (b)(i) this may be due to higher selling prices charged / or more efficient/bulk buying / purchase costs reduced.
[1] (b)(i) Expenses have been controlled / reduced.
[1] (b)(i) The ROCE has increased in 2016.
[1] (b)(i) The profit for the year has increased.
[1] (b)(ii) Although the Working capital ratio has reduced
[1] (b)(ii) the liquidity of the business has improved.
[1] (b)(ii) Working capital is below 2:1 the ideal ratio
[1] (b)(ii) Inventory holding of unsold stock has been reduced.
[1] (b)(ii) The quick ratio has improved from a dangerous level / towards 1:1.
[1] (b)(ii) Trade receivables collection has been improved.
[1] (b)(ii) Lache has a positive bank balance to meet expenditure.

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