The directors of JKY Limited provided the following information. For the year to 30 April 2020: Revenue $ 209510 Purchases 121618 At 30 April 2020: Inventory $ 11050 Trade receivables 28700 Bank overdraft 6280 All sales and purchases were made on credit terms. Inventory at 1 May 2019 was valued at $8000 REQUIRED

Mark scheme

Marking points from the official mark scheme (May/June 2020). The mark or mark type is shown in brackets.

1. [1] Cost of sales (8000+121618-11050)
2. [1] Average inventory (8000+11050 / 2)
3. [1] Rate of inventory turnover 12.45 times (OF)
4. [1] Trade receivables turnover (28700 / 209510) x 365 (whole formula)
5. [1] = 50 days (OF)
6. [1] Risk of obsolete inventory
7. [1] Risk of damage to inventory
8. [1] Increased storage costs
9. [1] May need to reduce selling price to sell old inventory
10. [1] Cash is tied up longer in inventory
11. [1] May mean missed business opportunities if insufficient cash
12. [1] Risk of irrecoverable debts
13. [1] A provision for doubtful debts may be required
14. [1] Credit control may need to be reviewed
15. [1] Cash tied up in trade receivables
16. [1] May mean missed business opportunities if insufficient cash
17. [1] Effect may be significant as all sales are on credit
18. [1] Cash discount advantages: Cash will be received significantly earlier
19. [1] Cash discount advantages: Good customer relationships are maintained
20. [1] Cash discount advantages: Credit control costs may be reduced
21. [1] Cash discount advantages: Irrecoverable debts may be reduced
22. [1] Cash discount disadvantages: Less cash will be received
23. [1] Cash discount disadvantages: 1% may not be enough to encourage earlier payment
24. [1] Cash discount disadvantages: If customers have insufficient funds to pay the cash discount may have no effect
25. [1] Interest advantages: More cash may be received
26. [1] Interest advantages: Cash may be received earlier
27. [1] Interest advantages: Interest received will increase profit
28. [1] Interest advantages: Irrecoverable debts may be reduced
29. [1] Interest disadvantages: Customer relationships may worsen
30. [1] Interest disadvantages: Increased administration costs
31. [1] Interest disadvantages: Customers may refuse to pay the interest
32. [1] Interest disadvantages: Customers may find an alternative supplier
33. [1] Recommendation (1)
34. [1] Accounting policies should be applied consistently so that financial statements can be compared from year to year
35. [1] Financial statements can be compared with similar businesses
36. [1] Any change in the company's accounting policies, and the effect of the change, should be disclosed
37. [1] Information is relevant if it is capable of influencing the decisions being made
38. [1] Information must be available in time for decisions to be taken
39. [1] Relevant information helps the directors to evaluate past, present and future events