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    Sparkrite Ltd - Income statements for years ended 30 September

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    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

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    https://brainmass.com/business/income-statement/sparkrite-ltd-income-statements-for-years-ended-30-september-128296

    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

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