VCAA Accounting Preparing and interpreting accounting reports
15 sample questions with marking guides and sample answers · Avg. score: 26.1%
Which of the following processes will happen when closing entries are prepared?
Drawings will be closed to the Profit or Loss Summary Account.
Asset accounts will be closed to the Profit or Loss Summary Account.
The Profit or Loss Summary Account will be closed to the Cash Account.
All relevant expense accounts will be closed to the Profit or Loss Summary Account.
Reveal Answer
Drawings will be closed to the Profit or Loss Summary Account.
Drawings represent a withdrawal of equity and are closed directly to the Capital account (or Retained Earnings), not the Profit or Loss Summary.
Asset accounts will be closed to the Profit or Loss Summary Account.
Asset accounts are permanent (real) accounts; their balances carry forward to the next accounting period and are not closed.
The Profit or Loss Summary Account will be closed to the Cash Account.
The Profit or Loss Summary account represents net income or loss and is closed to the Capital account (or Retained Earnings) to update equity, not to the Cash account.
All relevant expense accounts will be closed to the Profit or Loss Summary Account.
Closing entries transfer temporary account balances to permanent accounts; specifically, expense accounts are credited and the Profit or Loss Summary is debited to reset expenses to zero.
James's Business
| List of accounts | $ |
|---|---|
| Accumulated depreciation — delivery van | 6 800 |
| Capital contributions | 0 |
| Cost of goods sold | 25 000 |
| Depreciation | 3 400 |
| Drawings | 4 500 |
| GST payable | 10 000 |
| Interest received | 1 000 |
| Sales | 100 000 |
| Sales returns | 10 000 |
| Wages | 20 000 |
Following the completion of all closing entries, the owner’s equity would increase by
$31 300.
$38 100.
$39 200.
$42 600.
Reveal Answer
$31 300.
This answer incorrectly treats 'Accumulated depreciation' ($6,800) as an expense. Accumulated depreciation is a contra-asset account on the balance sheet, whereas only the current period's 'Depreciation' ($3,400) should be deducted as an expense.
$38 100.
The increase in equity is Net Profit minus Drawings. Net Profit is calculated as Net Sales ($100,000 - $10,000) plus Interest ($1,000) minus Expenses (COGS $25,000 + Wages $20,000 + Depreciation $3,400), which equals $42,600. Subtracting Drawings ($4,500) gives $38,100.
$39 200.
This result likely stems from calculating profit without the depreciation expense ($46,000) and then incorrectly subtracting the accumulated depreciation balance ($6,800) instead of drawings.
$42 600.
This figure represents the Net Profit ($42,600) but fails to account for Drawings. Drawings ($4,500) represent a withdrawal of capital by the owner and must be subtracted from Net Profit to find the final increase in owner's equity.
The following information has been provided by Business A as at 31 March 2022.
| Sales | 146 000 |
| Cost of goods sold | 102 000 |
| Gross profit | 31 000 |
The missing $13 000 can be attributed to the
GST payable account
cartage on sales account
commission revenue account
sales returns and allowances account
Reveal Answer
GST payable account
GST payable is a liability account reported on the Balance Sheet and is not included in the calculation of Gross Profit in the Income Statement.
cartage on sales account
Cartage on sales (freight outwards) is an operating expense deducted from Gross Profit to arrive at Net Profit, rather than a component used to calculate Gross Profit.
commission revenue account
Commission revenue is considered 'other revenue' and is added to Gross Profit to determine Net Profit; it does not reduce the Sales figure used to calculate Gross Profit.
sales returns and allowances account
Gross Profit is calculated using Net Sales (). Since but the reported Gross Profit is only $31,000, the $13,000 difference represents Sales Returns and Allowances deducted from Gross Sales.
The following financial data has been provided for [Box] Ltd.
| Extract of accounts | $ |
|---|---|
| Cash sales | 220 000 |
| Credit sales | 270 000 |
| Cost of goods sold | 170 000 |
| Repairs and maintenance | 5 000 |
| Sales salaries | 125 000 |
| Rent expense | 6 000 |
| Depreciation on delivery vehicles | 8 000 |
| Rates | 1 200 |
| Depreciation on building | 6 000 |
| Office expenses | 2 000 |
| Amortisation of goodwill | 4 000 |
| Interest paid | 23 000 |
| Net profit before tax | 139 800 |
| Income tax | 41 940 |
| Net profit after tax | 97 860 |
Ltd’s EBITDA margin ratio, rounded to two decimal places, is
45.46%
43.82%
36.90%
36.08%
Reveal Answer
45.46%
This calculation incorrectly adds Income Tax ($41,940) to Net Profit Before Tax ($139,800). Since the starting profit figure is already before tax, adding the tax expense again is a double-counting error.
43.82%
This result is obtained by incorrectly adding Income Tax to Net Profit Before Tax and failing to add back the depreciation on delivery vehicles ($8,000) to the earnings figure.
36.90%
To calculate the EBITDA margin, first determine Total Revenue ($220,000 + $270,000 = $490,000) and EBITDA (Net Profit Before Tax + Interest + Depreciation + Amortisation = $139,800 + $23,000 + $14,000 + $4,000 = $180,800). The ratio is .
36.08%
This option incorrectly excludes the Amortisation of goodwill ($4,000) from the EBITDA calculation. EBITDA requires adding back Interest, Tax, Depreciation, and Amortisation to the Net Profit.
Read Case study 2 (Stimulus 9–10) in the stimulus book.
Analyse and evaluate the performance of the company to propose two recommendations to improve the profitability of the company.
Reveal Answer
Gross profit ($50.86 m to $36.59 m) and net profit ($78.13 m to $25.11 m) decreased from 2021. The gross margin dropped from 56.79 in 2021 above the industry benchmark of 48.43 to 40.07 in 2022, below the industry benchmark of 47.28. Net profit ratios for both years are consistently above the industry benchmarks of 22.85 and 21.65.
Cost of sales as a percentage of sales has increased by 19.45 percentage points, therefore gross profit has decreased by $14.27 m or 16.72 percentage points. Changing suppliers should be considered to reduce these costs or reduce the amount of stock kept on hand.
Sales have increased by 1% in 2022 yet the cost of these sales has increased by 46% since 2021. Considering increasing sales prices could recoup some costs. Other revenue has increased since 2021 and it may be profitable to increase these items.
Effective management of most expenses resulted in consistent or decreasing costs. The revaluation of investment properties with gains of $63.49 m in 2021 and $13.46 m in 2022 overinflated the net profit figures, particularly in 2021. This explains the positive comparison with industry benchmarks. Without the revaluation, the net profit ratios would be 16.34% (2021) and 12.76% (2022), both below the industry benchmarks.
Employee expenses decreased by $3.77 m, indicating a reduction in staff or movement from casual to permanent positions.
Marketing and administrative expenses have halved, indicating a reduction in spending or change of suppliers.
The profitability of the Motel Company could improve by changing purchasing policies (suppliers and quantities) and increasing selling prices.
Analysis
Marking Bands| Descriptor | Marks |
|---|---|
Provides a detailed analysis of the scenario; supports this analysis with relevant financial data and information from the stimuli | 5 |
Provides an analysis of the scenario; refers to relevant financial data and information from the stimuli | 4 |
Explains the scenario; refers to financial data or information from the stimuli | 3 |
Makes a statement about the scenario; refers to financial data or information from the stimuli | 2 |
Makes a statement about the scenario | 1 |
Does not satisfy any of the descriptors above. | 0 |
Recommendations
Marking Bands| Descriptor | Marks |
|---|---|
Provides valid and justified decisions, assessing strengths and limitations; proposes two valid recommendations; supports these two recommendations with relevant financial data and information | 5 |
Provides valid decisions; proposes two valid recommendations; supports these recommendations with financial data and information | 4 |
Proposes a valid recommendation; supports this recommendation with financial data or information | 3 |
States a recommendation | 2 |
Infers a recommendation | 1 |
Does not satisfy any of the descriptors above. | 0 |
Gross profit and net profit ratios are above industry benchmarks for Company A, and credit sales have increased by 20% on the previous year. However, the net cash flows from operating activities have decreased. This is because
cost of goods sold has increased.
payment of dividends has increased.
inflows have increased proportionally more than outflows.
customers buying on credit are not paying their accounts on time.
Reveal Answer
cost of goods sold has increased.
An increase in the cost of goods sold would typically lower the gross profit ratio, which contradicts the scenario stating that profit ratios are above industry benchmarks.
payment of dividends has increased.
Dividend payments are generally classified as financing activities, not operating activities, so they would not cause a decrease in net cash flows from operating activities.
inflows have increased proportionally more than outflows.
If cash inflows increased proportionally more than outflows, the net cash flow would increase, which contradicts the statement that net cash flows have decreased.
customers buying on credit are not paying their accounts on time.
Credit sales are recorded as revenue (increasing profit) immediately, but cash is only received when customers pay; if collections are slow, accounts receivable rise and operating cash flow decreases despite high profitability.
Business A is a suburban hairdressing salon that receives 25% commission, paid at the end of each quarter, for sales of a shampoo. To 31 March, commission of $560 has been recorded by Business A.
| Sales A/C (extract) for quarter ended 30 June 2023 | ||
|---|---|---|
| April | May | June |
| $40.00 | $45.00 | $52.00 |
Determine the entry for the Commission account to close off to the Profit or Loss Summary Account.
Commission revenue Dr $594.25; Profit or Loss Summary Cr $594.25
Profit or Loss Summary Dr $594.25; Commission revenue Cr $594.25
Commission revenue Dr $590.00; Profit or Loss Summary Cr $590.00
Profit or Loss Summary Dr $697.00; Commission revenue Cr $697.00
Reveal Answer
Commission revenue Dr $594.25; Profit or Loss Summary Cr $594.25
The total commission revenue is the recorded balance of $560 plus the commission earned in the final quarter (), totaling $594.25. To close a revenue account, you debit the revenue account and credit the Profit or Loss Summary.
Profit or Loss Summary Dr $594.25; Commission revenue Cr $594.25
While the calculated amount ($594.25) is correct, the journal entry is reversed. Revenue accounts have a credit balance, so they must be debited to close them, not credited.
Commission revenue Dr $590.00; Profit or Loss Summary Cr $590.00
This option presents an incorrect total amount. The correct figure is $594.25, calculated by adding the $34.25 commission earned in the current quarter to the existing $560 balance.
Profit or Loss Summary Dr $697.00; Commission revenue Cr $697.00
This option incorrectly adds the full sales value ($137) to the balance instead of the 25% commission portion, and the journal entry direction is reversed.
The following company data has been collected.
| $ | |
|---|---|
| Bad debt expense | 4 000 |
| Cost of goods sold | 85 000 |
| Depreciation on delivery van | 8 000 |
| Electricity | 12 000 |
| Interest expense | 5 000 |
| Inventory adjustment (for lower NRV) | 4 500 |
| Rent expense | 20 000 |
| Sales | 280 000 |
| Sales returns | 10 000 |
| Telephone expense — sales staff | 2 500 |
| Wages — sales staff | 75 000 |
The gross profit figure is
$180 500
$185 000
$189 500
$195 000
Reveal Answer
$180 500
Gross profit is calculated as Net Sales minus the total Cost of Goods Sold (COGS). Net Sales is . Total COGS includes the base cost and the inventory adjustment: . Thus, .
$185 000
This calculation ignores the inventory adjustment for lower Net Realizable Value (NRV). It subtracts only the standard COGS from Net Sales (), failing to account for the write-down expense.
$189 500
This option incorrectly adds the inventory adjustment to the profit instead of deducting it as a cost. The calculation performed was likely Net Sales minus COGS plus the adjustment ().
$195 000
This figure uses Gross Sales instead of Net Sales and excludes the inventory adjustment. It fails to deduct Sales Returns () and the inventory write-down () from the calculation.
| Return on owner’s equity | ||
|---|---|---|
| 2022 | 2021 | |
| Business B | 9.5% | 8.5% |
The Return on owner’s equity for Business B indicates that
the owner’s investment into the business is yielding increased returns
the business is undercapitalised and the owner should invest further funds
the owner has been effective in maximising net profit and managing equity
the business is overcapitalised and the owner should investigate other investments
Reveal Answer
the owner’s investment into the business is yielding increased returns
Return on Owner's Equity (ROE) measures the profitability relative to the owner's equity. An increase from 8.5% to 9.5% directly indicates that the return generated on the funds invested by the owner has improved.
the business is undercapitalised and the owner should invest further funds
Undercapitalisation refers to having insufficient funds to support operations. An increasing ROE indicates improved efficiency or profitability, not necessarily a capital shortage that requires further investment.
the owner has been effective in maximising net profit and managing equity
While the trend is positive, claiming the owner has "maximised" profit is a definitive conclusion that cannot be drawn from a single year's increase. The metric simply shows improvement, not necessarily that the maximum potential has been reached.
the business is overcapitalised and the owner should investigate other investments
Overcapitalisation typically results in a lower or decreasing ROE because excess capital is not being used efficiently to generate profit. An increasing ROE suggests the opposite: that capital is being utilized more effectively.
To review its performance, a sole trader clothing retail business in Queensland should compare its
net profit ratio with clothing retailers listed on the ASX.
gross profit ratio with clothing retailers with a similar turnover.
cost of goods sold with clothing retailers considered to have world’s best practice.
commission revenue with sales revenue for all other Queensland clothing retailers.
Reveal Answer
net profit ratio with clothing retailers listed on the ASX.
Comparing a small sole trader to large public companies listed on the ASX is not useful because of the vast differences in scale, capital structure, and operational complexity.
gross profit ratio with clothing retailers with a similar turnover.
Benchmarking against businesses in the same industry with similar turnover provides the most realistic comparison of trading efficiency and performance.
cost of goods sold with clothing retailers considered to have world’s best practice.
Comparing a local sole trader to global entities with "world's best practice" is unrealistic, as the sole trader lacks the purchasing power and economies of scale to match those costs.
commission revenue with sales revenue for all other Queensland clothing retailers.
Clothing retailers primarily earn income through sales revenue rather than commission revenue, making this comparison irrelevant to the business model.
Companies A and B operate within the same industry.
Comparative Statement of Profit or Loss for the year ending 30 June 2020 (extract)
| Company A | Company B | |||
|---|---|---|---|---|
| Sales | 95 000 | 95 000 | ||
| Sales returns | (10 000) | (2 500) | ||
| Cost of goods sold | 59 500 | 70% | 64 750 | 70% |
| Gross profit ratio | 30% | 30% |
By comparing the results of the two businesses, management of Company A can conclude that
Company A’s selling prices are competitive.
both companies have the same gross profit result.
the quality of Company A’s inventory should be reviewed.
Company A’s purchasing policy is better than Company B’s purchasing policy.
Reveal Answer
Company A’s selling prices are competitive.
While the gross profit ratios are identical, the high level of sales returns suggests customers are dissatisfied with the product itself rather than the price.
both companies have the same gross profit result.
Although both companies have the same 30% gross profit ratio, the absolute gross profit amounts differ ($25,500 for A vs. $27,750 for B) because Company A has lower net sales.
the quality of Company A’s inventory should be reviewed.
Company A has significantly higher sales returns ($10,000) compared to Company B ($2,500), which often indicates issues with product quality or defects that require investigation.
Company A’s purchasing policy is better than Company B’s purchasing policy.
Both companies have the same Cost of Goods Sold percentage (70%), indicating that Company A's purchasing costs relative to sales are comparable, not superior, to Company B's.
An analysis of Company C’s financial reports shows a decrease in the shareholder equity ratio over the past two years. This could indicate that the company
has a falling net profit.
has a high level of debt.
needs to issue more shares.
has reduced its final dividend.
Reveal Answer
has a falling net profit.
Net profit is the primary source of Retained Earnings, which is a key component of Shareholder Equity. If net profit falls (or turns into a loss), Shareholder Equity grows more slowly or decreases relative to Total Assets, causing the ratio to decline.
has a high level of debt.
While a decreasing shareholder equity ratio implies the company is becoming more leveraged (relying more on debt), the statement 'has a high level of debt' is a static observation. The decrease in the ratio is a trend best explained by performance factors like falling profitability.
needs to issue more shares.
Issuing more shares increases the company's equity capital. This would increase the numerator in the shareholder equity ratio (), causing the ratio to rise, not fall.
has reduced its final dividend.
Reducing the final dividend means the company pays out less cash to shareholders and keeps more as Retained Earnings. This increases Shareholder Equity, which would cause the ratio to increase.
The Debt ratio of a business indicates the
extent of the business’s borrowing and risk implications
debt that needs to be repaid in the next financial period
percentage of debt to be covered by the owner/s
investment made by the owner/s of the business
Reveal Answer
extent of the business’s borrowing and risk implications
The debt ratio is calculated as and measures the proportion of assets financed by debt, directly indicating the level of leverage and financial risk.
debt that needs to be repaid in the next financial period
This describes current liabilities; the debt ratio considers total debt (both short-term and long-term) relative to total assets, not just what is due immediately.
percentage of debt to be covered by the owner/s
The debt ratio measures the percentage of assets funded by creditors, not the specific portion of debt that owners are personally liable to cover.
investment made by the owner/s of the business
This refers to owner's equity or capital; the debt ratio focuses on external financing (liabilities) rather than the investment made by the owners.
The following financial data has been provided for Company D as at 30 June 2024.
| Financial data | $ |
|---|---|
| Cash flows from operating activities | 810 000 |
| Cash flows from financing activities | 45 000 |
| Loan from bank (due 30/6/2030) | 250 000 |
| Dividends paid | 25 000 |
| Mortgage on land and buildings (due 30/6/2026) | 400 000 |
| Taxation payable | 61 000 |
| Trade creditors | 48 000 |
Company D’s long-term debt coverage ratio, rounded to two decimal places, is
0.98
1.03
1.21
1.96
Reveal Answer
0.98
This option is incorrect. It does not match the result derived from the standard long-term debt coverage ratio formula, which focuses on operating cash flows available after dividends relative to long-term obligations.
1.03
This result is obtained by dividing the adjusted cash flow ($785,000) by Total Liabilities ($759,000). This is incorrect because the ratio should only consider non-current (long-term) liabilities, excluding current liabilities like taxation and trade creditors.
1.21
The long-term debt coverage ratio is calculated as . Using the data: .
1.96
This value incorrectly excludes the bank loan from the denominator, using only the mortgage balance (). Both the bank loan (due 2030) and the mortgage (due 2026) are long-term debts.
Read Case study 2 (Stimulus 2, 3 and 4) in the stimulus book.
Use Stimulus 2 and 3 to prepare a fully classified Statement of Profit or Loss for the years ended 30 June 2024 and (projected) 30 June 2025.
Health Foods
Statement of Profit or Loss for year ended 30 June
| Particulars | 2025 | 2024 | ||||
|---|---|---|---|---|---|---|
| $ | $ | $ | $ | $ | $ | |
Reveal Answer
Health Foods
Statement of Profit or Loss for year ended 30 June
| 2025 | 2024 | |||||
|---|---|---|---|---|---|---|
| $ | $ | $ | $ | $ | $ | |
| Sales | 78 000 | 60 000 | ||||
| Less Cost of sales | ||||||
| Cost of goods sold | 19 550 | 17 000 | ||||
| Gross profit | 58 450 | 43 000 | ||||
| Add Other Revenue | ||||||
| Interest revenue | 790 | 790 | 790 | 790 | ||
| 59 240 | 43 790 | |||||
| Less Other Expenses | ||||||
| Selling Expenses | ||||||
| Advertising | 2 331 | 2 331 | ||||
| Delivery vehicle expenses | 3 663 | 3 663 | ||||
| Depreciation on delivery vehicles | 1 021 | 1 021 | ||||
| Website maintenance | 666 | 7 681 | 666 | 7 681 | ||
| Administrative Expenses | ||||||
| Bookkeeping expenses | 1 665 | 1 665 | ||||
| Depreciation on computer equipment | 1 000 | 1 000 | ||||
| Electricity | 4 650 | 4 650 | ||||
| Insurance | 555 | 555 | ||||
| Wages — office staff | 20 000 | 27 870 | 20 000 | 27 870 | ||
| Finance Expenses | ||||||
| Interest on loan | 821 | 821 | 821 | 821 | ||
| Total Expenses | 36 372 | 36 372 | ||||
| Net profit | 22 868 | 7 418 |
Classification Headings
Marking Bands| Descriptor | Marks |
|---|---|
Correctly presents 4 classification headings | 3 |
Correctly presents 2–3 classification headings | 2 |
Correctly presents 1 classification heading | 1 |
None of the above | 0 |
Account Classification & Amounts
Marking Bands| Descriptor | Marks |
|---|---|
Correctly classifies accounts and accurately records amounts for all 13 accounts for both years | 5 |
Correctly classifies accounts and accurately records amounts for 9–12 accounts for both years | 4 |
Correctly classifies accounts and accurately records amounts for 6–8 accounts for both years | 3 |
Correctly classifies accounts and accurately records amounts for 3–5 accounts for both years | 2 |
Correctly classifies accounts and accurately records amounts for 1–2 accounts for both years | 1 |
None of the above | 0 |
Sub-totals
Marking Bands| Descriptor | Marks |
|---|---|
Correctly calculates 4 sub-totals for both years | 2 |
Correctly calculates 1–3 sub-totals for both years | 1 |
None of the above | 0 |
Profit
| Descriptor | Marks |
|---|---|
Correctly determines gross profit figures for both years | 1 |
Determines net profit figures for both years | 1 |
Use Stimulus 2 and 3 to prepare a fully classified Statement of Financial Position for the years ended 30 June 2024 and (projected) 30 June 2025.
Health Foods
Statement of Financial Position as at 30 June
| Particulars | 2025 | 2024 | ||||||
|---|---|---|---|---|---|---|---|---|
| $ | $ | $ | $ | $ | $ | $ | $ | |
Reveal Answer
Health Foods
Statement of Financial Position as at 30 June
| 2025 | 2024 | |||||||
|---|---|---|---|---|---|---|---|---|
| $ | $ | $ | $ | $ | $ | $ | $ | |
| Assets | ||||||||
| Current assets | ||||||||
| Cash at bank | 36 889 | 14 000 | ||||||
| Inventories | 5 800 | 42 689 | 5 800 | 19 800 | ||||
| Non-current assets | ||||||||
| Property, plant and equipment | ||||||||
| Computer equipment | 2 500 | 2 500 | ||||||
| Less accumulated depreciation on computer equipment | 2 200 | 300 | 1 200 | 1 300 | ||||
| Delivery vehicles | 45 000 | 45 000 | ||||||
| Less Accumulated depreciation on delivery vehicles | 9 521 | 35 479 | 35 779 | 78 468 | 8 500 | 36 500 | 37 800 | 57 600 |
| Liabilities | ||||||||
| Current liabilities | ||||||||
| A/c payable | 5 290 | 5 290 | 5 290 | 5 290 | ||||
| Non-current liabilities | ||||||||
| Loan due 30 June 2030 | 7 000 | 7 000 | 12 290 | 7 000 | 7 000 | 12 290 | ||
| Net assets | 66 178 | 45 310 | ||||||
| Owner’s equity | ||||||||
| Capital | 45 310 | 39 892 | ||||||
| Add Net profit | 22 868 | 7 418 | ||||||
| 68 178 | 47 310 | |||||||
| Less drawings | 2 000 | 66 178 | 2 000 | 45 310 |
Classifications
Marking Bands| Descriptor | Marks |
|---|---|
Correctly presents 5 classifications | 4 |
Correctly presents 4 classifications | 3 |
Correctly presents 2–3 classifications | 2 |
Correctly presents 1 classification | 1 |
None of the above | 0 |
Account Classification & Amounts
Marking Bands| Descriptor | Marks |
|---|---|
Correctly classifies accounts and accurately records amounts for all 10 accounts for both years | 5 |
Correctly classifies accounts and accurately records amounts for 8–9 accounts for both years | 4 |
Correctly classifies accounts and accurately records amounts for 5–7 accounts for both years | 3 |
Correctly classifies accounts and accurately records amounts for 3–4 accounts for both years | 2 |
Correctly classifies accounts and accurately records amounts for 1–2 accounts for both years | 1 |
None of the above | 0 |
Balancing
| Descriptor | Marks |
|---|---|
Correctly balances the Statement of Financial Position for both years | 1 |
Using Stimulus 2 and 3 and your responses to Questions 12a) and 12b), calculate the following ratios for 30 June 2024 and projected ratios for 30 June 2025.
Calculations should be rounded to two decimal places.
| 2025 | 2024 | |
|---|---|---|
| Gross profit ratio | ||
| Net profit ratio | ||
| Return on owner’s equity | ||
| Current ratio |
Reveal Answer
| 2025 | 2024 | |
|---|---|---|
| Gross profit ratio | ||
| 74.94% | 71.67% | |
| Net profit ratio | ||
| 29.32% | 12.36% | |
| Return on owner’s equity | ||
| 41.02% | 17.41% | |
| Current ratio | ||
| 8.07:1 | 3.74:1 |
| Descriptor | Marks |
|---|---|
Correctly calculates 4 ratios for both years | 4 |
Correctly calculates 3 ratios for both years | 3 |
Correctly calculates 2 ratios for both years | 2 |
Correctly calculates 1 ratio for both years | 1 |
None of the above | 0 |
Using Stimulus 2, 3 and 4 and your responses to Questions 12a), 12b) and 12c), advise Tamara on how to convince Health in Your Kitchen to buy her business.
Reveal Answer
Owing to the projected increases in sales of 30% and cost of goods sold of 15%, Tamara’s gross profit is estimated to increase from 71.67% to 74.94% or by $15 450 in 2025. This reaches the benchmark of 75%. There is also a very pleasing increase in net profit from $7 418 to a projected $22 868 or from 12.36% in 2024 to 29.32% in 2025. Once again, these compare favourably with the current benchmark of 30%.
With the ROE of 17.41% increasing to 41.02% and the current ratio increasing from 3.74:1 to 8.07:1, the benchmark results of 40% and 2:1 respectively have been easily met. The ROE shows a healthy return and the level of the current ratio suggests the business is well able to meet its debts in the short term. With the cash balance of $36 889, Tamara could consider repaying the loan of $7 000 before the due date.
The expenses are projected to remain constant at 2024 levels. Tamara’s results are excellent overall and represent an outstanding opportunity for a ‘bricks and mortar’ business to acquire a profitable and growing ‘online’ business in order to diversify and expand.
Discussion of Ratios
Marking Bands| Descriptor | Marks |
|---|---|
Discusses 4 ratios | 4 |
Discusses 3 ratios | 3 |
Discusses 2 ratios | 2 |
Discusses 1 ratio | 1 |
None of the above | 0 |
Advice
| Descriptor | Marks |
|---|---|
Provides justified advice regarding the sale of her business | 1 |