Quiz

Question 1

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.

Required:

Use the LIFO, FIFO and AVCO methods of stock valuation to calculate the value of closing stock. Please show all workings clearly.

Solution

Question 2

The Following balances were extracted from the Trial balance of T. Brooks Wholesale at the end of 2005.

Creditors                                 1400

Purchases                             32,000

Returns Outwards                   3,600

Opening Stock                        4,800

Closing Stock                         3,200

Rent owing                               600

Debtors                                  2,000

Cash in hand                           2,800

Required:

1. Calculate the following Ratios:

(a)Current Ratio

(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.

Solution

1.

2.
(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.

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