QUESTION THREE [25]

3.1 Mighty Ltd had monthly cash sales of R5 000, credit sales of R 6 000 and outstanding accounts receivable was R 1175.

3.1.1 Calculate average collection period. (5)

3.1.2 If the payment terms were 30 days net, is the average collection calculated above a favourable or unfavourable one and Why? (5)

3.2 Suppose an enterprise purchased the following stock for the year:

January 15 units @ R 4 000 each

March 17 units @ R 4 500 each

July 16 units @ R 4 600 each

September 12 units @ R 4 800 each

November 10 units @ R 5 000 each

On 31 December there are 15 units in stock. What would be the value of stock using the First-in-first-out method? (7)

3.3 The following information belongs to the ABC Company and XYZ Company.

ABC Ltd XYZ Ltd

Cash 25000 50000

Accounts receivable 30000 45000

Accounts payable 21000 55000

Inventory 23000 60000

Non-current assets 125000 200000

Pre-paid Expenses 10000 12000

Calculate the current ratio and acid test ratio for the two Companies and comment on the relative liquidity positions of the two. (8)