The records of R. Graham showed the following purchases and sales of stock for the months of May and June 2006.
May 2 Purchased 12 boxes of wine at $40 per box
May 17 Purchased 20 boxes of sodas at $20 per box
June 8 Purchased 10 boxes of vinegar at $60 per box
June 25 Purchased 5 boxes of vinegar at $10 per box
June 30 Sold 32 boxes at $65 each.
Use the LIFO, FIFO and AVCO methods of stock valuation to calculate the value of closing stock. Please show all workings clearly.
The Following balances were extracted from the Trial balance of T. Brooks Wholesale at the end of 2005.
Returns Outwards 3,600
Opening Stock 4,800
Closing Stock 3,200
Rent owing 600
Cash in hand 2,800
1. Calculate the following Ratios:
(b)Acid Test Ratio
(c)Rate of Stock Turnover
2. What is the purpose of each ratio?
3. Identify one limitation associated with the use of accounting ratios.
(a) Current Ratio provides indication of the business to meet its short term financial commitments. The comparison is made with (current) assets which will become liquid within a year and (current) liabilities which should be paid within the same period of one year. This will indicate if the business has enough short term assets to meet its short term payments.
(b) Acid test ratio indicates the ability of the business to meet it short term payments given the situation where all debtors settle and all creditors are paid at the same time.
(c) Stock turn provides an indication as to how fast or slow stock is been sold. It also indicates the efficiency of the business in terms of its control of stock levels. Assuming that gross profit percentage remains constant, a faster sale of stock will mean increases in profits from sales, likewise a slower sale of stock could mean decreases in profits.
3. Ratios may become misleading if they are not used in proper context. The same ratios need to be used as a means of comparison for different time periods of a business, or in comparison with similar business entities.