A-AS Level (CIE) Accounting Paper-2: Specimen Questions with Answers 33 - 34 of 53

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Following are the financial statements of Kyoor ltd.

Following Are the Financial Statements of Kyoor Ltd
1992
Net Sales1,82, 500
Less: cost of sales1,42, 500
Gross Profit40,000
Less: Operating Expenses25,000
Net profit15,000
Cash and Bank Balance5,000
Debtors30,000
Stock50,000
Prepaid Expenses5,000
Fixed Assets2,10, 000
3,00, 000
Creditors40,000
Bills payable10,000
Mortgage loan70,000
Equity share capital1,50, 000
Reserve and surplus30,000

Calculate the following ratios:

Question 33 (2 of 5 Based on Passage)

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Short Answer▾

State the significance of debtors՚ turnover ratio

Explanation

Debtors turnover ratio indicates the relationship between credit sales and average debtors during the year. Debtor turnover ratio indicates the time in which the amount is collected from debtors. The higher the ratio, the better it is, since it indicates that amount from debtors is being collected more quickly. The more quickly the debtors pay, the less the risk from bad debts and so lower the expenses of collection and increase in the liquidity of the firm. A lower debtor turnover ratio indicates the management՚s inefficient credit sales policy. It means that credit sales have been made up to customers who do not deserve much credit. It is difficult to set up a standard for this ratio. It depends upon the policy of the management and the nature of the industry. By comparing the debtor՚s turnover ratio company of the current year with the previous year, it may be assessed whether sales policy of the management is efficient or not.

Question 34 (3 of 5 Based on Passage)

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What are the objectives of ratio analysis?

Explanation

Relationship between two figures, expressed in arithmetical items is called a ratio. A ratio is simply one number expressed in terms of another. It is found by dividing one number into the other.

  • To locate the weak spots of business which need more attention.
  • To provide deeper analysis of the liquidity, solvency, activity, and profitability.
  • To provide information for making cross-sectional analysis i.e.. for making comparison with that of some selected firms in the same industry.
  • To provide information for making time series analysis i.e.. for making comparison of a firm՚s present ratios with its past ratios.
  • To provide information that is useful for making estimates and preparing the plans for future.

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