Exam code: 4AC1
On 31 December 2023, another trader, Louise, provided the following information.
31 December | Current ratio | Quick ratio |
|---|---|---|
2022 | 2.8:1 | 1.6:1 |
2023 | 1.2:1 | 0.8:1 |
Evaluate the change in the liquidity of Louise’s business over the two years and discuss the implications of this for the business’s credit suppliers.
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On 1 April 2022 Yola’s current (working capital) ratio was 1.8:1
On 31 March 2023 the ratio had fallen to 1.1:1
Evaluate the change in the current (working capital) ratio over the year.
Explain one way Yola can improve her working capital position.
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State the formula for each ratio.
Ratio | Formula | 2021 | 2022 |
|---|---|---|---|
Profit for the year as a percentage of revenue | 15% | 18% | |
Return on capital employed | 7% | 5% |
Evaluate the change in profitability from 2021 to 2022.
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Yamani provided the following information at 30 September 2022.
30 September | ||
|---|---|---|
2021 | 2022 | |
Current (working capital) ratio | 2:1:1 | 2.3:1 |
Liquid (acid test) ratio | 1.2:1 | 0.8:1 |
Evaluate the change in liquidity from 2021 to 2022.
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The partners believed that the liquidity of the business had improved and provided the following ratios.
Ratio | 2021 | 2022 |
|---|---|---|
Current (working capital) | 1.89 : 1 | 1.56 : 1 |
Liquid (acid test) | 0.81 : 1 | 1.01 : 1 |
State the formula for each ratio.
Ratio | Formula |
|---|---|
Current (working capital) | |
Liquid (acid test) |
Evaluate whether the partners are correct that liquidity has improved.
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Thomas provided the following ratios for the years ended 31 March 2020 and 31 March 2021.
Ratio | 2020 | 2021 |
|---|---|---|
Current (working capital) | 1.8 : 1 | 2.2 : 1 |
Liquid (acid test) | 0.8 : 1 | 1.2 : 1 |
Thomas stated that his liquidity position has improved.
Evaluate whether liquidity has improved.
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Leo, a manufacturer, provided the following information for the year ended 31 March 2021.
1 April 2020 $ | 31 March 2021 $ | |
|---|---|---|
Premises Cost Accumulated depreciation | 500 000 100 000 | 500 000 To be calculated |
Plant and machinery Cost Accumulated depreciation | 250 000 90 000 | 250 000 To be calculated |
Inventory Raw materials Work in progress Finished goods | 56 000 64 000 108 000 |
44 000 68 400 112 000 |
Carriage inwards on raw materials | 1 300 | |
Carriage outwards | 2 100 | |
Direct wages | 82 400 | |
Electricity | 18 000 | |
Factory insurance paid | 9 000 | |
Indirect factory expenses | 79 500 | |
Indirect wages paid | 83 650 | |
Other payables – indirect wages | 1 350 | |
Other receivables – factory insurance | 500 | |
Purchases of raw materials | 167 500 | |
Returns inwards | 12 000 | |
Returns outwards | 17 500 | |
Revenue | 630 000 | |
Royalties | 15 000 | |
Plant and machinery is depreciated at 20% per annum using the reducing balance method.
Premises are depreciated at 10% per annum using the straight line method.
Both electricity and depreciation on premises are apportioned 75% to the factory.
Leo believes that an increase in revenue for this year has led to an improvement in profitability, even though both his gross profit percentage and return on capital employed percentage have decreased.
Evaluate whether Leo is correct.
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Hyat provided the following ratios.
Ratio | 2018 | 2019 |
|---|---|---|
Current (working capital) | 1.50:1 | 1.50:1 |
Liquid (acid test) | 1.02:1 | 0.85:1 |
Evaluate the change in liquidity.
Hyat believes that the liquidity of the business has improved.
State whether he is correct.
Explain one way Hyat could improve his liquidity.
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State the formula for each ratio.
Ratio | Formula | 2019 | 2018 |
|---|---|---|---|
Current (working capital) | 1.8:1 | 2:1 | |
Liquid (acid test) | 0.5:1 | 1:1 |
Evaluate the change in liquidity.
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