Level 2 Accounting, 2006

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9 0 2 2 5

Level 2 Accounting, 2006

90225 Analyse and interpret information and make

recommendation(s) for a sole proprietor

For Supervisor’s use only

2

For Assessor’s

use only

Achievement Criteria

Achievement

_{with Merit}

_{with Excellence}

Achievement

Analyse financial information. Analyse a range of financial

information. Analyse a wide range of financial information.

Credits: Four

9.30 am Thursday 23 November 2006

Check that the National Student Number (NSN) on your admission slip is the same as the number at the top of this page.

Pull out Resource Booklet 90225R from the centre of this booklet to answer all questions. You should answer ALL the questions in this booklet.

If you need more space for any answer, use the page(s) provided at the back of this booklet and clearly number the question.

Check that this booklet has pages 2–11 in the correct order and that none of these pages is blank.

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You are advised to spend 45 minutes answering the questions in this booklet.

QUESTION ONE: PROFITABILITY AND DECISION MAKING

Max Kirby has recently inherited $50 000 and wants to purchase a business with his money. Max will invest all the $50 000 in the business he chooses, and he will borrow any extra money required. The information in Resource One of your RESOURCE BOOKLET 90225R details the two

businesses he is considering purchasing. Use this information to answer the questions which follow.

Part A

Use the information in Resource One and the Analysis Formulae in RESOURCE BOOKLET 90225Rto calculate the following analysis measures for Home Entertainment Specialists in 2006.

Roundyour calculations to 2 decimal places.

Kirk’s Computers Home Entertainment _Specialists

Equity Ratio (after purchase) 0.77 : 1 : 1

Gross Profit percentage 75 % %

Mark-up percentage 300 % %

Advertising Expenses percentage 14.10 % %

Net Profit percentage 20.51 % %

Part B

(a) Explain what the advertising expenses percentage of 14.10% tells Max about Kirk’s Computers in 2006.

(b) (i) Explain the meaning of Kirk’s Computersmark-up percentage of 300% in 2006.

Assessor’s use only

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(ii) Explain ONE reason why Kirk’s Computers would have a mark-up percentage as

high as 300%.

(c) If Max was to buy Kirk’s Computers, state ONE strategy he could use to improve its sales.

Justify your answer by explaining how your strategy would improve sales. Strategy:

Explain how your strategy would improve sales:

(d) Explainfully what the equity ratio you calculated for Home Entertainment Specialists

tells Max, assuming he purchased this business.

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(e) The information in Resource One for Home Entertainment Specialists shows that from 2003 to 2006 sales revenue is increasing while Net Profit ($) is falling.

Explain ONE possible reason that would cause both of these trends.

(f) Recommend to Max which business he should purchase. Write a paragraph to justify your recommendation by explaining ONE financial reason and ONE non-financial reason.

Recommendation:

Justifications for the recommendation:

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QUESTION TwO: LIQUIDITY

Meli Jones has owned her dental practice for the past twelve years. Each year her business makes a good Net Profit, however she often struggles to have enough money to pay her Accounts Payable as they fall due. She has provided you with the following information.

2005

$ $

Bank 3 814 Accounts Payable 9 000

Accounts Receivable 13 500 GST Payable 1 100

Petty Cash 100

Prepayments 160

2006

$ $

Bank 4 175 Accounts Payable 10 400

Accounts Receivable 19 300 GST Payable 850

Petty Cash 100

Prepayments 90

Fees Received (60% cash and 40% credit) excluding GST.

2005 = $240 000 2006 = $275 000 Space for Workings:

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Part A

Refer to the information on page 6 and the Analysis Measures Formulae in RESOURCE

BOOKLET 90225R to complete the table below. Round your ratio calculations to 2 decimal places, and the Age of Accounts Receivable calculation up to the nearest whole number.

2005 2006

Age of Accounts Receivable 46 days days

Liquid Ratio :1 2.10:1

Current Ratio 1.74 :1 :1

Part B

(a) Explainfully what the Current Ratio of 1.74:1 in 2005 tells Meli about her business.

(b) Answer the questions that follow to show the impact of the Age of Accounts Receivable on the Liquid Ratio.

(i) Explain how the increasing Age of Accounts Receivable helps improve the Liquid Ratio.

(ii) Explain, using the increasing Age of Accounts Receivable, why Meli struggles to repay her Accounts Payable as they fall due, despite the Liquid Ratio being 2.10:1.

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(c) As a result of the trend in the Age of Accounts Receivable, Meli’s business might have to take out a short-term bank loan to repay her Accounts Payable. One negative impact of this would be that she would have to pay interest, which would decrease her Net Profit.

Explain why Meli would choose to take out the short-term loan to repay her creditors, even though the loan would result in a decrease in Net Profit for her business.

(d) Recommend ONE way Meli can improve the Age of Accounts Receivable. Justify your recommendation by explaining how your strategy would improve the Age of Accounts Receivable.

Recommendation:

Explain how your strategy would improve the Age of Accounts Receivable:

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Question number

Extra paper for continuation of answers if required.

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Question number

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Question number