Interpretation of Accounts The following information has been taken from the accounts of Kennedy Ltd for the year ended 31/12/2018: Trading and Profit and Loss Account for the year ended 31/12/2018 Credit sales € 650,000 Less: Cost of sales Stock 01/01/2018 € 300,000 Add: credit purchases € 342,000 Less: stock 31/12/2018 € 375,000 Gross profit € ?????? Less: Total expenses (including interest) € 150,000 Net profit for the year € 155,000 Balance Sheet as at 31/12/2018 Cost Depreciation NBV Fixed Assets € 970,000 € 50,000 € 920,000 Current Assets (including trade debtors €32,000) Trade creditors € 33,000 Falling due within 1 year Trade creditors € 55,000 Financed by: Creditors: amounts falling due after more than 1 year 7% Debentures (2023/2024) € 100,000 Capital and Reserves Authorised Issued Ordinary shares at €1 each € 950,000 € 720,000 € 720,000 Profit and loss account € 155,000 Total € 975,000 (a) You are required to calculate: (to 2 decimal places where appropriate) - Leaving Cert Accounting - Question 5 - 2019

The Acid Test Ratio is calculated as:

$Acid\ Test\ Ratio = \frac{Current\ Assets - Closing\ Stock}{Current\ Liabilities}$

Where:

• Current Assets = Trade Debtors (€32,000) + Other Current Assets (€88,000)
• Current Liabilities = Trade Creditors (€33,000) + Other Liabilities (€55,000)

Thus, the Acid Test Ratio = $\frac{(32,000 + 88,000 - 30,000)}{(33,000 + 55,000)} = \frac{90,000}{88,000} \approx 1.02$

To find the period of credit received from trade creditors, we use:

$Period\ of\ Credit = \frac{Creditors}{Credit\ Purchases} \times 365$

Where:

• Creditors = €33,000
• Credit Purchases = €342,000

Thus, the calculation is:

$Period\ of\ Credit = \frac{33,000}{342,000} \times 365 \approx 35.22\ days$

The Rate of Stock Turnover is calculated as follows:

$Rate\ of\ Stock\ Turnover = \frac{Cost\ of\ Sales}{Average\ Stock}$

Where: Average Stock = $\frac{Opening\ Stock + Closing\ Stock}{2} = \frac{300,000 + 375,000}{2} = 337,500$

Now, substituting in:

$Rate\ of\ Stock\ Turnover = \frac{267,000}{337,500} \approx 0.79\ (times)$

Depreciation refers to the allocation of the cost of a fixed asset over its useful life. In the accounts, we see a depreciation expense of €50,000 which reflects the reduction in value of assets like machinery during the year due to wear and tear.

Shareholders’ funds represent the equity capital contributed by the shareholders of the business. It is shown in the balance sheet as the sum of issued share capital (€720,000) and retained profit (€155,000), leading to a total of €875,000.

Intangible assets are non-physical assets that have value, such as goodwill, patents, or trademarks. In the given accounts, no specific intangible assets are presented, but they usually contribute to the overall valuation of the business.

These are long-term loans that the company has undertaken, which will mature after more than one year. The 7% refers to the interest rate charged on these debentures, indicating the cost of borrowing that the company will incur.

Kennedy Ltd appears to have a current ratio of 1.02, indicating that for every €1 of liabilities, it has €1.02 of assets. This suggests that the company should, theoretically, be able to cover its short-term obligations without difficulty, and thus should not face immediate liquidity issues.

The Return on Capital Employed (ROCE) for 2018 is calculated as follows:

$ROCE = \left( \frac{Net\ Profit + Interest}{Capital\ Employed} \right) \times 100$

Where:

• Net Profit = €155,000
• Interest (Assuming it's negligible or part of expenses)
• Capital Employed = Total Equity = €975,000

Thus:

$ROCE = \left( \frac{155,000}{975,000} \right) \times 100 \approx 15.87\%$

The ROCE for 2018 of 15.87% indicates an increase from the previous year’s 12%. This is a positive trend, showing improved profitability and efficiency in using capital, suggesting that Kennedy Ltd is becoming more profitable compared to prior performance.