Interpretation of Accounts The following information has been taken from the accounts of Summer Ltd for the year ended 31/12/2021: Trading and Profit and Loss Account for the year ended 31/12/2021 Credit sales € Cost of sales Stock 01/01/2021 ????? Add: credit purchases (including Carriage Inwards €5,000) 386,000 ????? Less: stock 31/12/2021 ?????? Cost of sales ????? Gross profit 410,000 Less: Total expenses (including interest) 250,000 Net profit for year 160,000 Balance Sheet as at 31/12/2021 € € € Cost Depreciation NBV Fixed Assets (including trade debtors €38,000) € 890,000 40,000 850,000 Current Assets 94,000 Less Creditors: amounts falling due within 1 year 44,000 Trade creditors 50,000 900,000 Financed by: Creditors: amounts falling due after more than 1 year 200,000 8% Debentures (2026/2027) 200,000 Capital and Reserves Authorised Issued Ordinary shares at €1 each 800,000 540,000 540,000 Profit and loss account 160,000 900,000 (a) You are required to calculate: (to 2 decimal places where appropriate) - Leaving Cert Accounting - Question 5 - 2022

The acid test ratio, or quick ratio, is calculated as follows:

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

Where:

• Current Assets = €94,000
• Current Liabilities = Trade Creditors = €44,000

Assuming stock is determined as per the above calculations: $\text{Acid Test Ratio} = \frac{94,000 - \text{Stock}}{44,000}$

Substituting in the calculated value of stock will yield the final answer.

This is calculated using:

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

Where:

• Trade Creditors = €44,000
• Purchases = €386,000

Thus: $\text{Period of Credit} = \frac{44,000}{386,000} \times 365$

Calculating this will give the average credit period in days.

The rate of stock turnover formula is:

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

Where:

• Average Stock = \frac{\text{Opening Stock} + \text{Closing Stock}}{2}

Assuming stock levels are known, this will yield:

1. Calculate average stock
2. Use at the point of calculation to derive turnover rate.

Depreciation refers to the decrease in value of tangible fixed assets over time due to wear and tear. In the financial statements, it indicates the long-term sustainability and efficiency of asset utilization. Depreciation is accounted as an expense against revenue, thereby influencing profit calculations.

This term defines the maximum amount of share capital that a company can issue to raise funds from shareholders. Summer Ltd has an Authorised Share Capital of €800,000, providing the company with flexibility in raising equity.

Carriage Inwards refers to the costs incurred to bring in raw materials or goods into the company's premises. It typically is added to purchase costs and is hence a part of the overall cost of goods sold.

Debentures are a form of long-term loan. Summer Ltd has 8% Debentures in place, meaning it has borrowed funds with an interest obligation of 8% per annum. The company will need to ensure it can meet these payments as they fall due.

Based on the current ratio and acid test ratio calculated previously, if both ratios are above 1, Summer Ltd will have sufficient liquidity to meet its obligations. A detailed analysis of current assets vs. liabilities will offer clarity on this matter.

Return on Capital Employed (ROCE) is calculated using:

$\text{ROCE} = \frac{\text{Operating Profit}}{\text{Capital Employed}} \times 100$

Where:

• Operating Profit = €160,000
• Capital Employed = €900,000

Thus:

$\text{ROCE} = \frac{160,000}{900,000} \times 100 = 17.78\%$

The ROCE of 17.78% indicates that Summer Ltd has improved profitability from the previous year (14%). This upward trend suggests that the company is using its capital more efficiently. With a significant margin over typical bank interest rates, it reflects positively on its financial health and operational efficiency.