George is a trader who buys and sells goods on credit. He provided the following information: For the year ended 30 April Sales Gross profit Expenses At 30 April Inventory Capital Bank Trade receivables Trade payables Ratios/percentages Percentage net profit/sales Percentage net profit/capital Working capital ratio (current ratio) Quick ratio (acid test) 2010 $ 220 000 110 000 66 000 2010 $ 46 000 160 000 20 000 (overdraft) 50 000 60 000 2010 ? ? 1.2:1 0.6:1 2011 $ 180 000 72000 63 000 2011 $ 35 000 180 000 15 000 40 000 60 000 2011 5% 5% ? ? REQUIRED (a) Calculate the following to one decimal place.

Mark scheme

Marking points from the official mark scheme (May/June 2011). The mark or mark type is shown in brackets.

1. [3] (a) (i) Net profit/Revenue ×100 = (44 000/220 000) ×100 = 20% (1) Net profit = Gross Profit (110 000) – Expenses (66 000) = $44 000
2. [3] (ii) Net profit/Capital ×100 = (44 000/160 000) ×100 = 27.5% (1)
3. [3] (iii) Current assets/Liabilities due in less than one year = (35 000 + 40 000 + 15 000)/60 000 = 1.5:1 (1) Current assets: Inventory $35 000 + Trade receivables $40 000 + Bank $15 000 = $90 000 Liabilities due in less than one year: Trade payables $60 000
4. [3] (iv) (Current assets - Inventory)/Liabilities due in less than one year = (40 000 + 15 000)/60 000 = 0.9:1 (1) (Current assets - Inventory): Trade receivables $40 000 + Bank $15 000 = $55 000 Liabilities due in less than one year: Trade payables $60 000
5. [4] (b) Revenue is reduced by $40 000 Gross profit % appears to be reduced Expenses have reduced, but not in proportion to the revenue. (2) per point × 2
6. [4] (c) Increased capital which could have been in cash Possible reduced drawings Reduced inventory Improved collection of debts Reduced expenses. (2) per point × 2