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11 4 Indu Is in Business Buying and Selling Goods On Credit

The document provides financial information for a business for the years ending September 2018 and September 2019. It asks to calculate various profitability ratios for 2019 and compare to 2018, suggest reasons for changes in ratios, and identify accounting principles not followed by proposed changes to increase reported profit.

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155 views

11 4 Indu Is in Business Buying and Selling Goods On Credit

The document provides financial information for a business for the years ending September 2018 and September 2019. It asks to calculate various profitability ratios for 2019 and compare to 2018, suggest reasons for changes in ratios, and identify accounting principles not followed by proposed changes to increase reported profit.

Uploaded by

parwez_0505
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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11

4 Indu is in business buying and selling goods on credit.

The following information is available.


$
At 1 October 2018
Inventory 35 000

For the year ended 30 September 2019


Revenue 400 000
Expenses 52 000

At 30 September 2019
Inventory 68 000
Owner’s capital 150 000
5% bank loan – repayable 2025 50 000

Mark‑up was 25%.

REQUIRED

(a) Calculate the following for the year ended 30 September 2019.
Comparative figures for the year ended 30 September 2018 are shown in the last column.

Workings Answer Year ended


30 September
2018
Cost of sales
$270 000

Purchases
$260 000

Percentage of gross
profit to revenue 25%
(gross profit margin)

Percentage of
profit for the year 10%
to revenue (profit
margin)
Return on capital
employed (ROCE) 18%

[10]

© UCLES 2019 7110/21/O/N/19 [Turn over


12

(b) Suggest four possible reasons for the change in the profitability ratios of the business over
the two years.

1 ................................................................................................................................................

...................................................................................................................................................

...................................................................................................................................................

2 ................................................................................................................................................

...................................................................................................................................................

...................................................................................................................................................

3 ................................................................................................................................................

...................................................................................................................................................

...................................................................................................................................................

4 ................................................................................................................................................

...................................................................................................................................................

...................................................................................................................................................
[4]

Indu wishes to increase her profit for the year and has made some proposals. A friend has advised
that each proposal may not comply with an accounting principle or concept.

REQUIRED

(c) Complete the table by placing a tick (3) to indicate the effect on the profit for the year of each
proposal. Name the accounting principle or concept not being applied.
The first one has been completed as an example.

Proposal Effect on profit for the year Accounting principle or


concept not applied
Increase Decrease No effect
Value closing inventory at cost 3 Historic cost
price plus mark‑up.

Remove provision for doubtful


debts from financial statements.

Place a value on the satisfaction


and loyalty of customers.

Make no adjustment for expenses


prepaid at year end.

[6]

[Total: 20]
© UCLES 2019 7110/21/O/N/19

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