Question

1. Read the following and answer questions that follow.

The following information was taken from Masego Leero’s books.

01/01/2015 Started business with P20, 000 cash

03/01/2015 Deposited P15, 000 cash into the bank account

05/01/2015 Bought furniture on credit P3, 000 from Supreme

07/01/2015 Bought goods P7, 000 paying by cheque.

09/01/2015 Sold goods P6, 000 by cash

11/01/2015 Sold goods on credit to Lesego R P1, 000, Lorato L P2, 000 and Kago M P3, 000

13/01/2015 Kago M returned goods P300, Lorato L returned goods P200 to the business

15/01/2015 Bought goods from Sefalana worth P5, 000 and paid P3, 000 deposit by cheque

17/01/2015 Returned P500 goods to Sefalana

19/01/2015 Paid a cab for transporting goods in the business P300 by cash.

21/01/2015 Lesego R paid us P500 cash, Lorato L and Kago M paid us the amount owed by cheque

23/01/2015 Bought goods from the following on credit: Choppies P3, 000, Superspar P5,000

25/01/2015 Sold goods by cheque P10, 000

26/01/ 2015 Bought a second hand car paying by cheque P8, 000

29/01/2015 Paid electricity P500, telephone P500, rent P2, 000 by cheque

30/01/2015 Bought stationary by cash P300

31/01/2015 Paid Choppies P2, 000, Superspar P3, 000 by cheque

31/01/2015 Sold goods by cheque P3, 000

e. Using the new trial balance and additional notes given below:

Notes:

1. Closing inventory on 31 January 2015 was P2, 000

2. Assets are to be depreciated at 25% at cost on a reducing balance method

3. Interest payable P100 was owing

4. Electricity P100 was paid in advance

5. Provision should be made for bad debts at 10% of debtors

i. Draw up the income statement (11 marks)

ii. Statement of Financial Position (8 marks)

f. Use the following ratios to analyse and interpret the results of the financial statements. (10 marks)

i. Gross profit margin (2 marks)

ii. Gross profit mark up (2 marks)

iii. Stock turn over (2marks)

vi. Current ratio (2 marks)

vii. Acid test ratio (2 marks)

Answer 1

Income statement

To Purchase (goods)	7000	By sales (goods)	19000
To purchase		By sales (goods) Credit 6000
Seflana 5000		Less Returned 500	5500
less returned 500		Closing stock	2000
Choppies 3000
Superspar 5000	12500
To taxi charges	300
To electricity(500-100 prepaid)	400
To Telephone	500
To rent	2000
To stationery expense	300
To Depreciation	2750
To interest Expense	100
To Bad debts	50
To Net Profit	600
Total	26500	Total	26500

Financial Statement (Balance sheet)

Capital	20000	Cash	10900
Add Profit	600	Bank a/c	6500
Accounts Payable( less returned)		Furniture (3000 - 750 Depreciation @ 25% RBM)	2250
Supreme 3000		Accounts Receivable(less Returned goods)
Seflana 2000-500		Lesego R 500	500
Superspar 2000	7500
Choppies 1000		Second hand Car (8000- 2000 Depreciation @ 25% RBM)	6000
Accrued Interest	100	Closing Stock	2000
Provision for Bad debt	50	Prepaid Electricity	100
	28250		28250

Gross Profit Margin Ratio= Gross Profit/Sales *100

Gross Profit=Sales + Closing stock - Purchases

= 27500-19500

=7000

=7000/25500*100

=27.45%

Gross Profit markup= 27%

Stock turnover ratio = Closing Stock/sales*100

=2000/25500*100

=7.84%

Current ratio=Current assets/current liabilities

=All current assets except car and furniture=20000

Current liabilities= All current liabilities except Capital and profit=7650

=20000/7650

=2.61

Acid Test Ratio=Liquid assets/Liquid liabilities

= Cash and bank/Current liabilities

=17400/7650

=2.274

Looking at the ratios we can interpret that the company is enjoying a strong financial position as its assets are enough that is twice than its liabilities and liquidity is also sound and it has enough funds to repay its liabilities.