Current assets inventory current liabilities total

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Current Assets - Inventory Current Liabilities Total Liabilities Total Shareholders' Equity Distributing prohibited | Downloaded by Ye Liu ([email protected]) lOMoARcPSD
ACCT1501 Practice Exam Questions & Solutions 2013S1 Required Analyse BPS’s profitability, asset management, liquidity and financial structure for 2012 using the ratio information shown above. (8 marks) lOMoARcPSD
6 [2 marks fully correct; 1 mark partially correct] Asset management : The average time to collect debtors has increased marginally from 45 days to 47 days. However, the days in inventory has increased significantly from 50 days to 71 days, meaning that, on average, it is taking longer to sell inventory. These extra days need to be financed by the company. The build up in inventory is not necessarily a good indicator, and must be investigated as it could be intentional stocking piling for some large orders; a sale or because the cost price is likely to go up. But it could also be caused by a lack of stock control or a fall in the demand for the product. The outcome of the investigation will require different responses. [2 marks fully correct, must make reference to both Debtors increasing & inventory; 1 mark partially correct] Liquidity: The current ratio has increased probably due to a build up in inventory while the quick ratio has dropped below 1 to 0.7 indicating the company may have short term cash problems. [2 mark fully correct; 1 mark partially correct] Financial structure: The level of financial leverage has increased from 1.23 to 1.53 indicating that the growth in equity is slower than the growth in assets. The ability of the company to pay its interest bill is an important consideration, particularly given the decrease in the quick ratio. The company should calculate the interest coverage ratio. [2 marks fully correct; 1 mark partially correct] Distributing prohibited | Downloaded by Ye Liu ([email protected])
ACCT1501 Practice Exam Questions & Solutions 2013S1 7

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