Leaving Cert Accounting Interpretation of Accounts: You are required to calculate:

Question

You are required to calculate:

(i) The figure for Purchases:

Gross Profit = Credit Sales - Cost of Sales
Cost of Sales = Opening Stock + Purchases - Closing Stock

Using the figures:

Gross Profit = €670,000 - €530,000 = €140,000

From the Cost of Sales formula, if we let Purchases = x:

Cost of Sales = €30,000 + x - €42,000
€530,000 = €30,000 + x - €42,000

Solving for x yields:
x = €542,000

(ii) The Percentage mark-up on cost:

Percentage Mark-up on Cost = (Gross Profit / Cost of Sales) x 100
= (€140,000 / €530,000) x 100 
= 26.41%

(iii) The Period of credit given to debtors:

Period of credit = (Debtors / Credit Sales) x 365
= (€38,000 / €670,000) x 365 
= 20.7 days

(iv) The Acid Test ratio:

Acid Test Ratio = (Current Assets - Closing Stock) / Current Liabilities
= (€120,000 - €42,000) / €86,000 
= 0.91

Explain the following:

(i) Debentures (2010/2011). Debentures are long-term loans. They will be repaid in full during the years 2010/2011. They carry a fixed rate of interest at 5% per annum.

(ii) Ordinary Dividend: The ordinary dividend is the portion of earnings paid to ordinary shareholders. The ordinary shareholders are the owners of the company. This dividend is paid after the performance of the company has been assessed.

(iii) Capital employed: This is the total amount invested in the business. It is made up Issued Share Capital plus reserves plus long-term liabilities.

(iv) Depreciation: This is a value of an asset that declines due to use or the passage of time. This amount is deducted over time and reduces the asset's value.

Would the above firm have difficulty paying its bills as they fall due? Give reasons for your answer.

Yes, if the acid test ratio is low, it indicates a potential struggle to pay short-term obligations. An acid test ratio of 0.91 is close to the norm of 1.

If the 'return on capital employed' for 2005 was 11%, comment on the current profitability of the year.

The return on capital employed for 2006 is calculated as follows:
Return on Capital Employed = (Net Profit / Total Capital Employed) x 100
= (€67,500 + €7,500) / €824,000 x 100 
= 8.79%

Ye: The return on capital employed has decreased from 11% to 8.79%, indicating a decline in profitability.

The figure for Purchases:

The Percentage mark-up on cost:

The Period of credit given to debtors:

The Acid Test ratio:

Debentures (2010/2011):

Ordinary Dividend:

Capital employed:

Depreciation:

Would the above firm have difficulty paying its bills as they fall due? Give reasons for your answer.

If the 'return on capital employed' for 2005 was 11%, comment on the current profitability of the year.

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