Principles of Accounts for CSEC by David Austen Answers to Review questions – Financial statements

Review questions – Financial statements

Multiple-choice questions – p. 211

1 C 2 B 3 A 4 A 5 C
6 D 7 B 8 D 9 B 10 C
11 A 12 A 13 D 14 A 15 C
16 B 17 D 18 B 19 C 20 D
21 D 22 A

Case studies

Case study 1: Azure Stores – p. 213

Answer included in ‘Model answers to selected questions’ in book

Case study 2: Marlin Wholesale – p. 214

Part A
Marlin Wholesale
Income Statement (Trading Account)
for the year ended 30 September 2011
$ $000 $00
Revenue 1,997
less Returns inwards 17
1,980
Opening inventory 148
Purchases 1,250
less Returns outwards 28
1,222
Carriage inwards 9
1,231
1,379
Closing inventory 151
Cost of sales 1,228
Gross profit 752

ISBN 978-1-4085-0911-1 151

Principles of Accounts for CSEC by David Austen Answers to Review questions – Financial statements

Income Statement (Profit and Loss Account)

for the year ended 30 September 2011
$000 $000
Gross profit 752
Rent received 44
796
Bad debts 11
Operating expenses 172
Increase in provision for doubtful debts 3
Depreciation of non-current assets 320
506
Profit 290

Balance Sheet at 30 September 2011

$000 $000 $000 $000
NON-CURRENT ASSETS Cost Total Net
deprcn
1,600 960 640

CURRENT ASSETS
Inventory 151
Trade receivables 163
less Provision for doubtful debts 9

154
Prepayments 2
307
CURRENT LIABILITIES
Trade payables 116
Income received in advance 4
Bank overdraft 31
151
WORKING CAPITAL/NET CURRENT ASSETS 156
796

CAPITAL
Opening balance 575
Profit 290
865
Drawings 69
796

ISBN 978-1-4085-0911-1 152

Principles of Accounts for CSEC by David Austen Answers to Review questions – Financial statements

Part B
Last year
Gross profit margin 38% 39%
Mark-up 61% 64%
Profit/revenue 15% 14%
Operating expenses/revenue 9% 10%
Return on capital employed (based on 50% 52%
opening capital)
Working capital ratio 2.0:1 1.6:1
Liquid capital ratio 1.0:1 0.9:1
Rate of inventory turnover 8 times 7 times
Receivables collection period 34 days 30 days
Payables payment period 34 days 30 days

Report on performance
Note: This answer should be taken as guide only – there are alternative approaches and other valid points could be made.
Sales have increased comparing the year ended 30 September 2011 and 2010 by $101,000 (5.3%).
Profitability
Strengths
 The profit/revenue ratio has increased and the operating expenses/revenue ratio has decreased. This indicates that the
business is making more profit per $1 of sales and has controlled costs more effectively.
 The increase in sales could have resulted from the decrease in the gross profit margin and mark-up percentages, which
have made the business more competitive, resulting in increased demand.
Weaknesses
 The return on capital employed has decreased by 2%. The business is making less profit per $1 of capital invested than
previously. This could be due to an increase in capital invested or a decrease in profit.
 The gross profit margin and mark-up percentages have decreased. This could be due to a deliberate policy of reducing
prices, or could be because there has been an increase in the cost of goods sold.
Liquidity
Weakness
 The working capital and liquid capital ratios were already larger than the typical figures for this type of business and have
now become even larger. The business has too many funds tied up as current and liquid assets resulting in a waste of
resources.
Efficiency
Strengths
 The rate of inventory turnover has increased, which could indicate that the business is selling goods more quickly. This fits
with the idea that there has been increased demand following the possible decrease in prices.
 The payables payment period has increased, which means that cash flows are likely to have improved.
Weaknesses
 There is an increase in the receivables collection period which means that cash is received more slowly from customers
than before, which could have had a negative effect on cash flows.
Summary and recommendations
Overall, there is a mixed picture of the business’s performance comparing the years ended 30 September 2011 and 2010.
There has been an improvement in sales and in the profit/revenue percentage. However, the return on capital employed has
decreased. The liquidity position has declined because the business appears to have too many resources tied up as current and
liquid assets. The business is generally more efficient in the use of inventories than previously and is more efficient in paying
suppliers. However, the business is less efficient in regard to the collection of amounts due from trade receivables.

ISBN 978-1-4085-0911-1 153

Principles of Accounts for CSEC by David Austen Answers to Review questions – Financial statements

To improve the business’s performance the owner should aim to make improvements in the following areas:
 Profitability: improve the return on capital employed – this is likely to result from measures to control costs even further or
to increase the profit from sales.
 Liquidity: reduce the funds tied up as current and liquid assets.
 Efficiency: consider reducing the time taken to collect money owed by customers as long as this does not have a negative
effect on demand.

ISBN 978-1-4085-0911-1 154