QUESTION ONE

The balance sheet of Grand Limited, a wholesaler, at 31 December 1995 and 1996 were as follows:

Tangible fixed assets Cost of valuation Aggregate depreciation Current assets Stock Debtors Cash Current liabilities Trade creditors Corporation tax Proposed dividend Net current assets Loans (due for repayment 1999) Called up share capital Share premium Revaluation reserve Profit and loss account	31 December
	1995	1996
	000 126,300 (50,000) 12,000 10,500 1,400 23,900 6,800 3,400 4,000 14,200	000 76,300 9,700 86,000 (60,000) 26,000 6,000 1,000 - 19,000 26,000	000 162,400 (64,000) 15,000 14,000 2,000 31,000 9,400 5,000 6,000 20,400	000 98,400 10,600 109,000 (60,000) 49,000 10,000 3,000 8,000 28,000 49,000

The stock at 31 December 1994 was 10,000,000.

The summarized profit and loss accounts for the company for the years ended 31 December 1995 and 1996 were:

Sales Cost of sales Gross profit Expenses Net profit before tax	Year ended 31 December
	1995 000 64,000 40,000 24,000 10,000 14,000	1996 000 108,000 75,600 32,400 12,400 20,000

Required:

1. Calculate the following accounting ratios for both years:

• The gross profit percentage
• The current ratio and the quick ratio (or acid test)
• Debtors collection period in days
• Trade creditors payment period in days (based on purchases figures which are to be calculated)
• Gearing ratio.

2. Show you full workings. (10 marks)
3. Explain what you can deduce from the ratios as at 31 December 1996 and from comparing them with those for 1995. (5 marks)
4. State two points which could cause the movement in the gross profit percentages between the two years and explain how they could bring the change about. (2 marks)
5. State the extent to which you agree or disagree with the following and give brief reasons for your answers.
6. The current ratio and the quick ratio help to assess whether a company is able to meet its debts as they fall due. Therefore the higher these ratios are the better placed the company is.
7. A high gearing ratio is advantageous to shareholders, because they benefit from the income produced by investing the money borrowed. (3 marks)

(20 marks)