Topic list Syllabus reference

BPPF?
IIARV. \~J

4. 
   Set out the headings for the main parts of your answer. Leave space to insert points within the headings.
   
5. 
   Jot down points to make within the main sections, underlining points on which you wish to expand.
   
6. 
   Write your full answer.
   

Exam focus point
If you run out of time, a clear answer plan with points in note form will earn you more marks than an introductory paragraph written out in full.
ACCA Examiner's Reports repeatedly comment on the answers given by candidates, for example, the June 2018 Examiner Report. Remember these key points:

• 
  Depth of answer - explain the ratio and the underlying reasons for the movement
  
• 
  Use the scenario - apply relevant ratios applicable to the question being asked

• 
  Calculations - marks are awarded for showing where the numbers have come from.
  

Ratios
Question
The following information has been extracted from the recently published accounts of Doolittle Co
EXTRACTS FROM THE STATEMENTS OF PROFIT OR LOSS TO 30 APRIL

	20X9 $000				20X8 $000
Revenue			11,200	9,750
Cost of sales			8,460	6,825
Net profit before tax			465	320
This is after charging:
Depreciation			360	280
Loan note interest			80	60
Interest on bank overdraft			15	9
Audit fees			12	10
STATEMENTS OF FINANCIAL POSITION AS AT 30 APRIL
	20X9		20X8
	$'000	$000	$000	$'000
Assets
Non-current assets		1,850		1,430
Current assets
Inventories	640		490
Trade receivables	1,230		1,080
Cash and cash equivalents	80		120
		1,950		1,690
Total assets		3,800		3,120
Equity and liabilities
Equity
Ordinary share capital	800		800
Retained earnings	1,310		930
		2,110		1,730
Non-current liabilities
10% loan stock		800		600
Current liabilities
Bank overdraft	110		80
Trade and other payables	750		690
Taxation	30		20
		890		790
Total equity and liabilities		3,800		3,120

The following ratios are those calculated for Doolittle Co, based on its published accounts for the previous year, and also the latest industry average ratios:

	Doolittle Co	Industry
	30 April 20X8	average
ROCE (capital employed = equity and debentures)	16.30%	18.50%
Profit/sales	3.90%	4.73%
Asset turnover	4.19	3.91
Current ratio	2.14	1.90
Quick ratio	1.52	1.27
Gross profit margin	30.00%	35.23%
Accounts receivable collection period	40 days	52 days
Accounts payable payment period	37 days	49 days
Inventory turnover (times)	13.90	18.30
Gearing	26.75%	32.71%

Required

1. 
   Calculate comparable ratios (to two decimal places where appropriate) for Doolittle Co for the year ended 30 April 20X9. All calculations must be clearly shown.
   
2. 
   Write a report to your board of directors analysing the performance of Doolittle Co, comparing the results against the previous year and against the industry average.
   

20X8		20X9	Industry average
ROCE	320 + 60 ц „ „ „0, 2,330 - ^16'^30/o	465 + 80 2,910 "^1872/0	18.50%
Profit/sales	320 + 60 g gno/ 9,750 "^3'^90/o	465 + 80 _ . , 11,200 " ^4 87/0	4.73%
Asset turnover	^9'^750-4 18x 2,330 "^418X	w—-	3.91x
Current ratio	W=2io 790		1.90
Quick ratio	1,080 + 120 790 ^=1'^52	1,230 + 80 890 =^1 47	1.27
Gross profit margin	^9’^75а°-в’^825 = 30.00% 0,750	11,200-8,460 _ 11,200 '^■^4b/°	35.23%
Accounts receivable collection period		230 200^X365=^40days	52 days
Accounts payable payment period	e»-^365*^37^	8^7460^x3®^5=32dayS	49 days
Inventory turnover (times)	^-139x 490 “^13-^9X	M60_132x 640 ^-1^^Х	18.30x
Gearing	тЖ = 25.75%	Ж-27.5%	32.71%

(a)

(b) (i) REPORT

To: Board of Directors


Date: xx/xx/xx
From: Accountant
Subject: Analysis of performance of Doolittle Co
This report should be read in conjunction with the appendix attached which shows the relevant ratios (from part (a)).
Trading and profitability
Return on capital employed has improved considerably between 20X8 and 20X9 and is now higher than the industry average.
Net income as a proportion of sales has also improved noticeably between the years and is also now marginally ahead of the industry average. Gross margin, however, is considerably lower than in the previous year and is only some 70% of the industry average. This suggests either that there has been a change in the cost structure of Doolittle Co or that there has been a change in the method of cost allocation between the periods. Either way, this is a marked change that requires investigation. The company may be in a period of transition as sales have increased by nearly 15% over the year and it would appear that new non-current assets have been purchased.
Asset turnover has declined between the periods although the 20X9 figure is in line with the industry average. This reduction might indicate that the efficiency with which assets are used has deteriorated or it might indicate that the assets acquired in 20X9 have not yet fully contributed to the business. A longer term trend would clarify the picture.

2. 
   Liquidity and working capital management
   

The current ratio has improved slightly over the year and is marginally higher than the industry average. It is also in line with what is generally regarded as satisfactory (2:1).
The quick ratio has declined marginally but is still better than the industry average. This suggests that Doolittle Co has no short term liquidity problems and should have no difficulty in paying its debts as they become due.
Trade receivables as a proportion of revenue is unchanged from 20X8 and are considerably lower than the industry average. Consequently, there is probably little opportunity to reduce this further and there may be pressure in the future from customers to increase the period of credit given. The period of credit taken from suppliers has fallen from 37 days' purchases to 32 days' and is much lower than the industry average; thus, it may be possible to finance any additional receivables by negotiating better credit terms from suppliers.
Inventory turnover has fallen slightly and is much slower than the industry average and this may partly reflect stocking up ahead of a significant increase in sales. Alternatively, there is some danger that the inventory could contain certain obsolete items that may require writing off. The relative increase in the level of inventory has been financed by an increased overdraft which may reduce if the inventory levels can be brought down.
The high levels of inventory, overdraft and receivables compared to that of payables suggests a labour intensive company or one where considerable value is added to bought-in products.

2. 
   Gearing
   

The level of gearing has increased only slightly over the year and is below the industry average. Since the return on capital employed is nearly twice the rate of interest on the loan stock, profitability is likely to be increased by a modest increase in the level of gearing.
Signed: Accountant