SECTION A

There is one question in this section

Answer 1

Date Accounts Debit Credit

4 - September Bank A/c £16,500
Capital A/c £16,500
7- September Accounts Receivable A/c £11,500
Sales A/c £11,500
17- September Equipment A/c £10,000
Cash A/c £10,000
23- September Purchases A/c £7,550
Accounts Payable A/c £7,550
29- September Accounts Payable A/c £2950
Cash A/c £2950

Utilities A/c £750

30- September Bank A/c £750

SECTION B
There is one question in this section

Answer 1

Answer 1a
Year 2021 2022 2023 2024
Accounts
129000 149000 139000 169000
Receivable

Year 2021 2022 2023 2024

PDD 5805 6705 6255 7605

Answer 1b

Year 2021 2022 2023 2024

169000
Accounts Receivable 129000 149000 139000
PDD 5805 6705 6255 7605

Net Receivable 123195 142295 132745 161395

Answer 1c
-Explain the prudence concept, mentioning that it requires taking caution in order not to
overstate profits/assets or understate expenses or liabilities. Also do explain that this implies
creating a provision for bad debts such that profits/assets are not overstated.

SECTION C
There is one question in this section.
Answer 1a)

Boxing Gym Ltd’s Statement of Cash Flow

Operating Activities £000

Profit for the Year 570
Depreciation expense 64
Profit on disposal of non-current assets -27
Increase in Inventory 36
Allowance for Doubtful Debt 30
Increase in AR -66
Decrease in AP -39
Increase in prepaid rent -14
Net Cash from Operating Activities 554

1b)
Boxing Gym Ltd’s
Statement of Change in Equity
Details Amount (£)
Opening Share capital 2,500,000
Add Profits 570,000
3,070,000
Less Dividends 280,000
Owners' Equity 2,790,000

SECTION D

Answer 1a
Calculate one ratio from each type of ratio for 2020 and 2021.

2020 2021

Profitability ratio
Gross margin 61500 47000
x 100 x 100
85000 70000
Gross Profit = = 67.1
x 100
Sales 72.3% %

Operating margin 51250 37200

x 100 x 100
85000 70000
Operating Profit = =
x 100
Sales 60.2% 53.1%

Liquidity ratio

Current ratio 13,550 9,230

12050 10030
Current Assets = 1.12 = 0.92
Current Liabilities

Quick ratio 13,550−5500 9,230−2,500

Current Assets−Stock 12050 10030
Current Liabilities = 0.67 = 0.67
Efficiency ratio

Inventory turnover rate 23500 23000

cos (17500+5500 /2)=11500 (16000+2500 /2)=9250
Average Stock = =
2.04 2.49
Inventory turnover period (17500+5500 /2) (16000+2500 /2)
Average stock 365 x 365 x
365 x 23500 23000
cos = 178.6 = 146.8
days days
Receivables turnover ratio= 4750 3585
Accounts receivable 365 x 365 x
365 x 85000 70000
Sales = 20.4 days = 18.7
days
Days payable outstanding 12050 10030
Accounts Payable 365 x 365 x
365 x 23500 23000
cos = 187.2 days =
159.2
Leverage ratio

Debts to equity ratio 39000 50000

Long−term debt x100 x100
X 100 29000 35000
Equity = 134% =
142%
Gearing ratio 39000 50000
Long−term debt x 100 x 100
X 100 (29000+39000) (35000+50000)
( Equity + Long−term debt) = =
57.4% 58.8%

Answer 1b
Profitability Ratio
Gross Margin
In 2020, Elixir Healthcare Ltd earned a gross profit of 72.3% from every £1 of sales made. In
2021, Elixir Healthcare Ltd earned a gross profit of 67.1% from every £1 of sales made.
Gross profit decreased by 5.2% in 2021 leading to a weaker year-on-year performance. The
decrease in gross profit is due to a decrease in cost of sales.
Operating Margin
In 2020, Elixir Healthcare Ltd earned operating profit of 60.2% from every £1 of sales made.
In 2021, the operating profit decreased by 7.1% to 53.1%. This shows that Elixir Healthcare
Ltd performed better in 2020. The decrease in operating profit was mostly due to the
increase in cost of sales.
Liquidity Ratio
Current Ratio
In 2020, Elixir Healthcare Ltd had £1.12 of current assets for every £1 of current liabilities. In
2021, the current assets increased to £0.92 for every £1 of current liabilities. This means that
performance in terms of liquidity was better in 2020. The decrease in liquidity could be the
fact that current assets declined more in 2021 than the decrease in current liabilities.
Quick Ratio
In 2020, Elixir Healthcare Ltd had £0.67 of very liquid current assets for every £1 of current
liabilities. In 2021, the very liquid current assets remained the same at £0.67 for every £1 of
current liabilities. This means that Elixir Healthcare Ltd performed remained relatively the
same in 2021. The steadiness of liquid current assets is due to the increase in inventory and
the decrease in accounts payable (inventory does not change into cash quickly).

Efficiency Ratio
Inventory Turnover Rate
In 2020, Elixir Healthcare Ltd sold its inventory for an average of 2.04 times. Inventory was
sold 2.49 times in 2021. This means that Elixir Healthcare Ltd became more efficient in
selling its inventory in 2021, which shows a better performance in 2021. More inventory was
sold efficiently in 2021 because Elixir Healthcare Ltd may have opened a new branch as can
be seen in the increase in non-current assets.
Inventory Turnover Period
In 2020, it took an average of 178.6 days for Elixir Healthcare Ltd to sell its inventory. In
2021, it took an average of 146.8 days. This means that Elixir Healthcare Ltd became
significantly more efficient in selling its inventory in 2021, which is a good performance. More
inventory was sold efficiently in 2021 because Elixir Healthcare Ltd may have opened a new
branch as can be seen in the increase in non-current assets.
Receivables turnover ratio
In 2020, it took an average of 20.4 days for Elixir Healthcare Ltd to collect its account
receivables. In 2021, it took an average of 18.7 days. This means that Elixir Healthcare Ltd
became slightly less efficient in collecting its receivables in 2021, which means that
performance was better in 2020. Taking longer days to collect receivables could have been
due to less productive receivable management practices
Days Payable Outstanding
In 2020, Elixir Healthcare Ltd took an average of 187.2 days to pay its accounts payables.
However, Elixir Healthcare Ltd took an average of 159.2 days to pay in 2021. This means
that Elixir Healthcare Ltd became more efficient in paying its suppliers in 2021. However,
paying its accounts payable quicker may be a good thing for Elixir Healthcare Ltd because
its relationship with suppliers could improve.
Leverage Ratio
Gearing ratio
In 2020, Elixir Healthcare Ltd had long term debt of 57.4% for every £1 of financing. This
increased to 58.8% in 2021. This means that Elixir Healthcare Ltd became a riskier business
in 2021. However, Elixir Healthcare Ltd could also take advantage of tax interests due to a
high level of gearing.
Debt-to-Equity ratio
In 2020, Elixir Healthcare Ltd had a debt-to-equity ratio of £1.34 for every £1 of equity. Debt-
to-equity ratio increased to £1.42 for every £1 of equity in 2021.This means that the
company’s growth has been financed by more debt versus equity. This puts the business at
more risk of becoming insolvent if they are unable to pay back creditors.
Answer 2
Answer 2a

Income Statement for Dr Twinings Inc.

For the Year ended 31/12/2021
£ £ £
Sales Revenue 1,350,000

Cost of goods sold

opening inventory 147,000
Purchases 460,000
closing inventory (89,000)
Cost of goods sold (518,000)
Gross profit 832,000
Less Expenses
Wages and Salaries 260,000
Insurance expenses 52,000
Less Prepaid (7,370) 44,630
Rent 45,000
Utility expenses 11,000
Add Outstanding 500 11,500
Equipment depreciation expense 45,000
Motor vehicle depreciation expense 5,500 (411,630)
Earnings Before Interest and Taxes (EBIT) 420,370
8% debenture interest (8,000)
Profit before tax 412,370
Tax (75,000)
Profit for the year 337,370
Answer 2b

Dr Twinings Inc.’s
Balance Sheet as at 31.12.2021
£ £
Current Assets
Closing Inventory 89,000
Accounts Receivable 87,000
Prepaid Insurance 7,370
Bank 200,000
383,370

Non-current Assets 55,000

Property, Plant and Equipment
Land 185,000
Initial Cost (Equipment) 300,000
Accumulated Depreciation (Equip) (155,000)
Net Book Value 145,000
Initial Cost (Motor Vehicle) 115,000
Accumulated Depreciation (MV) (65,500)
Net Book Value 49,500
Total Assets 817,870