Q4 / P22 / N20 – ANALYSIS AND INTERPRETATION

Question Answer Marks

1
4 (a) – Calculate the profit Profit for the year ended
for the year ended 31 July Workings 31 July 2020 31 July 2019
2020. $
Sales 240 000 $16 000 $11 550
less: Cost of sales 169 000
Gross profit 71 000
less: operating expenses 55 000
Profit for the year 16 000

6
4 (b) – Calculate the Year ended
following ratios correct to Workings 31 July 2020 31 July 2019
two decimal places:
Profit margin = Profit for the year x 100 6.67 % 8.56 %
Sales
 Profit margin
$ 16 000 x 100
 Gross margin 240 000
 Return on capital
employed (ROCE) Year ended
Workings 31 July 2020 31 July 2019

Gross margin = Gross profit x 100 29.58 % 34.26 %

Sales
$71 000 x 100
240 000

Year ended
Workings 31 July 2020 31 July 2019

ROCE = Profit for the year x 100 25.81 % 32.08 %

Capital employed
$16 000 x 100
62 000

4 (c) – Comment on the
performance of Carlos’s
business over the two years
(2019 and 2020)
 Profit margin has decreased from 8.56% in 2019 to 6.67% in 2020. The decrease might have been caused 6
by increase in expenses and poor control over expenses.
 Gross margin has decreased from 34.26% in 2019 to 29.45% in 2020. The decrease might have been
caused by reduction in selling price, increased cost of sales and purchasing from more expensive suppliers.
 ROCE has decreased from 32.08 % in 2019 to 25.81 % in 2020. The decrease might have been caused by
increased in capital employed and less efficient use of its resources.

5
4 (d) – Advise Carlos which Options Advantages Disadvantages
option he should select. Investing more cash from his 1. Does not have to be repaid. 1. May not have enough
Justify your answer by private funds 2. No interest costs. available funds.
providing one advantage 2. Greater personal risks.
Obtaining a two-year bank loan 1. Instantly available. 1. Must be repaid.
and one disadvantage of
2. Has 2 years to pay it off. 2. Annual interest charges.
each option. 3. Security may be required.
Recommendation / Advise:
 I would advise Carlos to invest more cash if he has that enough private funds available. Otherwise,
I would recommend to obtain that 2-year bank loan.

4 (e) – State the name of one 2

party, other than himself Interested party The interest they would have
and his employees, who suppliers / potential suppliers To assess whether outstanding debts are likely to be paid.
would be interested in banks To assess the likelihood of loan / overdraft being repaid when due.
Carlos’s financial To assess the ability to pay interest on loan / overdraft.
To assess the availability of security for a loan.
statements. State one
lenders / potential lenders To assess the likelihood of loan / overdraft being repaid when due.
reason for their interest.
To assess the ability to pay interest on loan / overdraft.
To assess the availability of security for a loan.
investors / potential partners To assess future prospects of the business.
To assess profitability.
government authorities To assess the tax due from the owner of the business.