Disadvantages Low or no profits dividends may have to be paid or provided

Disadvantages low or no profits dividends may have to

This preview shows page 138 - 141 out of 152 pages.

Disadvantages: Low or no profits, dividends may have to be paid or provided. Debentures/Long term loans: Advantages: Fixed rates of interest, repayment date known. Disadvantages: Interest needs to be paid even if no profit made, security may be required by the lender. (2 × 3 marks to max 6) [6] [Total: 30] Compiled by D. El-Hoss All questions copyright of Cambridge International Examinations 138
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Page 4 Mark Scheme Syllabus Paper GCE AS/A LEVEL – October/November 2013 9706 21 © Cambridge International Examinations 2013 2 (a) Gross profit ratio = 1 100 Sales Net Profit Gross × It tests the profitability of sales. It is affected by change in cost of sales which may be due to incorrect stock valuation, increased carriage on purchases not passed on to customers, breakages, embezzlement etc. Also affected by changes in sales margin. Inventory turnover = (days) 365 sold goods of Cost Inventory Average × OR (times) inventory Average sold goods of Cost Tests the efficiency of stock control. Tells how often, on average, a batch of inventory is sold and replaced during the year. Changes in opening and closing inventory. Affected by changes in demand levels due to quality of inventory, damage to inventory, fashion changes, obsolescence etc. Quick (acid test) ratio = s liabilitie Current inventory assets Current - Tests the liquidity of the business. The ability to satisfy current liabilities from liquid current assets. Affected by changes in cash/bank, trade receivables or trade payables. Return on capital employed = 1 100 employed Capital interest before profit Net × Tests the profitability of the business and the efficiency to generate profits from capital. Affected by any increase or decrease in profit or in capital employed. For instance, better control of expenses would increase profitability. Trade receivables turnover = 365 sales Credit s receivable Trade × Identifies liquidity/efficiency by measuring time taken by debtors to pay their debts; may be thought of as how long resources are tied up in debt. Is compared to previous years – if rising suggests debtors are taking longer to pay. Controlled by personal approach to debtor, introduction of cash discounts for early payment, employment of factor to collect debt etc. Award one mark for each formula, one mark for each area and up to two marks for reasons. (Maximum 20 marks) Compiled by D. El-Hoss All questions copyright of Cambridge International Examinations 139
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Page 5 Mark Scheme Syllabus Paper GCE AS/A LEVEL – October/November 2013 9706 21 © Cambridge International Examinations 2013 (b) Reliability – information from which ratios are prepared may not be reliable as there could be errors. Seasonal variations – date of accounts may affect ratios; for example a toy-maker might have low stock during the month before his busy season but have many debtors at that time.
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