Ekua is a trader who sells household furnishings. She has provided the following information. At 30 April 2022: $ Inventory 14650 Trade receivables 12700 Bank overdraft 5375 Trade payables 7125 For the year to 30 April 2022: Revenue 112300 Purchases 72250 Expenses 19820 All sales and purchases are on credit. Inventory at 1 May 2021 was valued at $12800. REQUIRED

Mark scheme

Marking points from the official mark scheme (May/June 2022). The mark or mark type is shown in brackets.

1. [1] Gross margin: (112300 – (12800 + 72250 – 14650)) / 112300 × 100 = 41900 / 112300 × 100 (for calculation steps)
2. [1]OF Gross margin: 37.31% (for final answer)
3. [1] Profit margin: (41900 OF – 19820) / 112300 × 100 = 22080 / 112300 × 100 (for calculation steps)
4. [1]OF Profit margin: 19.66% (for final answer)
5. [1] Rate of inventory turnover: (12800 + 72250 – 14650)
6. [1] Rate of inventory turnover: ((12800 + 14650) / 2)
7. [1]OF Rate of inventory turnover: 5.13 times (for final answer)
8. [1] Current ratio: (14650 + 12700) : (7125 + 5375) = 27350 : 12500 (for calculation steps)
9. [1]OF Current ratio: 2.19 : 1 (for final answer)
10. [1] Liquid ratio: 12700 : (7125 + 5375) = 12700 : 12500 (for calculation steps)
11. [1]OF Liquid ratio: 1.02 : 1 (for final answer)
12. [2] Max (2) Advantages: May be able to increase sales/gain more customers by reducing selling price; OR May be able to increase sales/gain more customers by extra advertising; Profit may increase if sales increase; The gross margin may improve; Can respond to increase in demand; The inventory should not lose value; Accept other valid points
13. [2] Max (2) Disadvantages: Expenses increase/profit decreases due to the increased advertising costs; Demand for that particular type of inventory may decrease; Inventory may deteriorate over time; Goods may be of inferior quality; Already has a large amount of inventory; May increase storage costs; May require an increased bank overdraft/reduce liquidity/decrease liquid ratio; Advertising does not guarantee increase in sales; Accept other valid points
14. [1] for recommendation
15. [1] Either Accounting methods must be used consistently from one accounting period to the next; Or Accounting methods should not be changed unless there is a good reason for doing so (Meaning)
16. [1] Either This means that accurate comparisons can be made from year to year; Or The profit of a particular year will not be distorted (Importance)
17. [1] Business reputation/goodwill
18. [1] Reliability of workforce/skills of workforce/ staff morale/working conditions
19. [1] Actions of competitors
20. [1] Government decisions
21. [1] Location of business
22. Max (2)