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Sparkrite Ltd - Income statements for years ended 30 September

The managing director of Sparkrite Ltd , a trading business, has just received summary sets of financial statements for last year and this year.

Sparkrite Ltd
Income statements for years ended 30 September last year and this year
Last Year This Year
£000 £000 £000 £000
Sales revenue 1,800 1,920
Less Cost of sales
Opening inventories 160 200
Purchases 1,120 1,175
1,280 1,375
Less Closing inventories 200 250
1,080 1,125
Gross profit 720 795
Less Expenses 680 750
Net profit 40 45

Balance sheets as at 30 September last year and this year
Last Year This Year
£000 £000 £000 £000
Non-current assets 950 930
Current Assets
Inventories 200 250
Receivables 375 480
Bank 4 2
579 732
Less current liabilities 195 225
384 507
1,334 1,437
Equity
Fully paid £1 ordinary shares 825 883
Reserves 509 554
1,334 1,437

The finance director has expressed concern at the increase in inventories and receivables levels.

Required:
a. Show, by using the data given, how you would calculate ratios that could be used to
measure inventories and receivables levels during last year and this year.

b. Discuss the ways in which the management of Sparkrite Ltd could exercise control over:
1. inventories levels;
2. receivables levels.

Check figures: Inventories turnover period for this year - 73 days
Average settlement period for this year - 91 days

Solution Preview

Average Collection Period

365/ Debtor Turnover Ratio
Debtor Turnover Ratio= Sales/Net Receivable
=1920/480 4

Average Collection Period =91.25
or 91 days

Inventory Turnover = Cost of Goods Sold/ Average Inventory
=1125/((200+250)/2)= 5 times
Inventory levels= 365/5=73 days

b. Discuss the ways in which the management of Sparkrite Ltd could exercise control over:
1. inventories levels;
Inventory Turnover = Cost of goods sold/ Average Inventory. Thus the inventory turnover will be higher if average inventory is lower. Hence higher inventory turnover leads to reduction in operating cycle and less investment in working capital. Thus it results in improvement in profitability.
Inventory is necessary for any organization because it comprises the ...

Solution Summary

Three paragraphs, computations and two references assist you.

$2.19