12.9 Pereniv Ltd You work in the accounts department of Pereniv Ltd, a company which manufactures materials
Question:
12.9 Pereniv Ltd You work in the accounts department of Pereniv Ltd, a company which manufactures materials which it supplies to electrical goods manufacturers. Normal credit terms in the industry, for both suppliers and customers, require payment within 30 days from the end of the month in which the goods were invoiced.
Latlest Ltd and Nelumbo Ltd are both new customers of Pereniv Ltd, so neither has a sales ledger account with Pereniv Ltd. Latlest Ltd, has recently ordered materials worth £100,000 from Pereniv Ltd. Nelumbo Ltd wishes to purchase materials worth £300,000 from Pereniv Ltd.
You have obtained summaries of the final accounts of Latlest Ltd and Nelumbo Ltd for the year ended 31 March 1999. These are set out below.
Profit and loss accounts Latlest Ltd Nelumbo Ltd £000 £000 Sales 35,505 57,330 Cost of sales Materials 6,250 13,150 Labour and production overheads 14,320 24,565 Gross profit 14,935 19,615 Non-production overheads 11,738 15,432 Trading profit 3,197 4,183 Debenture interest 1,120 800 Profit before taxation 2,077 3,383 Tax on profit 765 834 Profit after taxation 1,312 2,549 Dividends 392 567 Retained profit for the year 920 1,982 Retained earnings at 1 April 1998 1,783 2,498 Retained earnings at 31 March 1999 2,703 4,480 Balance sheets at 31 March 1999 Fixed assets 24,903 32,413 Materials stock 1,047 645 Finished goods stock 1,732 5,269 Trade debtors 6,136 15,432 Other debtors 1,799 1,007 Bank and cash 68 97 35,685 54,863 Materials creditors 743 2,836 Other creditors 331 707 Bank overdraft 3,003 14,738 8% debentures 14,000 10,000 £0.50 ordinary shares, fully paid 5,600 6,300 Reserves 12,008 20,282 35,685 54,863
(a) Calculate the following liquidity ratios for Latlest Ltd and for Nelumbo Ltd:
(i) current ratio;
(ii) quick ratio (or acid test ratio);
(iii) days materials in stock;
(iv) days of finished goods in stock;
(v) debtors collection period;
(vi) creditors payment period;
(vii) operating or cash cycle.
Present your results in the form of a table. (14 marks)
(b) Comment on the liquidity of each company. Advise Pereniv Ltd whether it should extend credit to Latlest Ltd or to Nelumbo Ltd. (6 marks)
(20 marks)
(ICSA, Paper 6, Introduction to Accounting, June 1999)
Step by Step Answer:
Introduction To Accounting
ISBN: 9780761970378
3rd Edition
Authors: Pru Marriott, J R Edwards, Howard J Mellett