O-LevelAccountingAnalysis and interpretation7707/22 · May/June 2017 · Q420 Marks

Irfan's accounting year ends on 30 April. The following information is available for the years ended 30 April 2015, 2016 and 2017. 2015 $ 2016 $ 2017 $ Revenue 128000 155000 200000 Cost of sales 96000 124000 164000 Opening inventory 10200 13800 11000 Expenses 27500 23000 22000 Capital 50000 50000 50000 Bank loan (repayable May 2020) 40000 30000 20000 Gross profit margin 25% 20% ? Rate of inventory turnover 8 times 10 times ? Return on capital employed (ROCE) 5% 10% ? Additional information Inventory on 30 April 2017 was valued at $9500. REQUIRED

(a)(i)Gross profit margin[2]
(a)(ii)Rate of inventory turnover[2]
(a)(iii)Return on capital employed (ROCE)[2]
(b)(i)Suggest two possible reasons for the change in the gross profit margin over the 3 years.[2]
(b)(ii)Suggest two possible reasons for the change in the rate of inventory turnover over the 3 years.[2]
(b)(iii)Suggest two possible reasons for the change in the return on capital employed (ROCE) over the 3 years.[2]
(c)Complete the following table, by placing a tick (✔) in the appropriate box, to show the effect of each proposal on the profit for the year and the return on capital employed (ROCE). The first item has been completed as an example. Proposal Profit for the year Return on capital employed (ROCE) increase decrease no effect increase decrease no effect 1 ✔ ✔ 2 3 4[6]
(d)Name the accounting concept or principle which would not be complied with if Irfan implemented his proposals. Proposal 5 Proposal 6[2]

Mark scheme

Marking points from the official mark scheme (May/June 2017). The mark or mark type is shown in brackets.

[1] Gross profit / Revenue = 36000 / 200000
[1] x 100 = 18%
[1] Cost of sales / Average inventory = 164000 / ((11000 + 9500) / 2)
[1] = 16 times
[1] Profit of the year / Capital Employed = 14000 / (50000 + 20000)
[1] x 100 = 20%
[1] Irfan may have reduced selling prices
[1] Irfan may have to pay more for purchases / cost of sales
[1] The rate of inventory turnover has increased / increased sales / sales promotion / increased demand
[1] Inventory has been controlled / decreased
[1] Capital employed may have reduced as the loan is repaid / reduced
[1] Expenses have been controlled, reduced increasing the profit for the year
[1] Increased profits
[1] Proposal 2: Profit increase
[1] Proposal 2: ROCE increase
[1] Proposal 3: Profit decrease
[1] Proposal 3: ROCE decrease
[1] Proposal 4: Profit no effect
[1] Proposal 4: ROCE no effect
[1] Proposal 5 Consistency
[1] Proposal 6 Prudence or Accrual (matching)

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