Acct1501 practice exam questions solutions 2014s1 4

This preview shows page 22 - 24 out of 34 pages.

ACCT1501 Practice Exam Questions & Solutions 2014S1 4 Required Analyse BPS’s profitability, asset management, liquidity and financial structure for 2012 using the ratio information shown above. Profitability ROE has increased from 12 per cent to 13 per cent while the return on assets has fallen from 9 per cent to 8 per cent. Given that ROA = Profit Margin × Asset Turnover (e.g. 20 x 0.4 per cent = 8 per cent for 2012), the fall in ROA is due to the fall in asset turnover. While the profit margin has increased from 18 per cent to 20 per cent, asset turnover has decreased from 0.50 to 0.40, thus overall ROA has decreased. [2 marks fully correct; 1 mark partially correct] Asset management: The average time to collect debtors has stayed constant. However, the days in inventory has increased from 55 days to 72 days, meaning that, on average, it is taking much longer to sell inventory. These extra days need to be financed by the company. The reasons for the build up in inventory should be investigated (e.g. stocking up for some large orders, as opposed to lack of demand, for the product, require very different actions). [2 marks fully correct; 1 mark partially correct] Liquidity: The current ratio has increased (mainly due to the build up in inventory, see above) while the quick ratio has dropped below 1 to 0.7 indicating the company may have problems paying their bills in the short term. [2 mark fully correct; 1 mark partially correct] Financial structure: Debt-to-equity ratio has increased substantially from 1 to 1.4. The ability of the company to pay its interest bill needs to be considered, particularly given the decrease in profitability as indicated by the lower ROA. [2 marks fully correct; 1 mark partially correct] Distributing prohibited | Downloaded by: [email protected] [email protected] | E-mail address: [email protected]
ACCT1501 Practice Exam Questions & Solutions 2014S1 5 QUESTION 3 (7 marks) Accounts Receivable On 1stJanuary 2011, Parker Company has a debit balance of $21,000 in Accounts Receivable and a credit balance of $1,550 in the Allowance for Doubtful Debts. During the year to 31stDecember 2011, Parker made sales on credit terms for $99,100 and collected cash from customers on accounts receivable amounting to $82,000. On 1stAugust 2011, Parker wrote off a bad debt on an account for $230. An ageing analysis at 31stDecember 2011 indicates that the allowance for doubtful debts account should have a credit balance of $2,150. Parker Company’s financial year ends on 31stDecember 2011. Required: a) (i) Prepare the journal entry to record credit sales. (1 mark)

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture