The information given is for the business of Trefor Johns.

Summarised balance sheet at 31 January 20*8

Additional information

Purchases all on credit £291,900; sales all on credit £450,500.

Required

Calculate:

a) Net current asset ratio

b) Liquid capital ratio

c) Debtors’ collection period

d) Creditors’ payment period.

Many students are good at calculating the ratios and so score good marks. However, they are less confident in analysing the results of their calculations.

Examiners and teachers alike expect students to reach earth-trembling conclusions from their calculations and analysis. Try not to be daunted by this prospect. We can only analyse at a very basic level. Even city fund managers are not very good at analysing the results of major businesses; otherwise the scores of pension funds and other investment portfolios would not be in such a mess at the moment!

Let us consider how to tackle the written sections of a question. The presenter of a popular quiz programme on television coined the saying ‘Say what you see’. Remember the saying when you are making observations and comments.

The pattern to follow is:

• State the formula
• Do the calculation
• State whether the ratio shows an improvement or a worsening of performance
• Quantify the change identified
• Suggest reasons for any changes.

These five headings should be considered when comparing different businesses and when trying to identify the trends that have occurred within a single business.

Transcribed Image Text:

Fixed assets Current assets Stock Trade debtors Current liabilities Trade creditors Bank overdraft Capital £ 19,460 11,540 £ 34,000 26,500 60,500 31,000 £ 450,000 29,500 479,500 479,500