Week 12 Voluntary Tutorial Solutions

Week 12 Voluntary tutorial- Solutions
QUESTION ONE
(a)
Days’ inventory on hand measures the average time inventory remains on hand before being sold. Days’ inventory on hand has deteriorated over the 12-month period, with it taking an extra 24 days to sell inventory in 2007 relative to 2006.
Days in debtors shows on average how long it takes to collect money from a customer following credit sales. Days in debtors has improved, with debtors paying 4 days quicker in
2007 relative to 2007.
Current ratio shows whether there are sufficient current assets to meet current liabilities, with a ratio of 1 or above indicating such sufficiency. The analysis shows an improvement in the current ratio, indicating a greater ability to meet current liabilities. There was $1.50 in current assets for every $1 in current liabilities in 2006. In 2007, this has increased to $1.80 in current assets for every $1 in current liabilities.
Quick ratio shows how many dollars of quick assets are available to meet immediate obligations. The quick ratio resembles the current ratio, except inventory is excluded as it is not considered easily convertible into cash. The quick ratio has deteriorated, with 30 cents less in quick assets (per $1 of current liabilities) in 2007 relative to 2006.
Profit margin shows the percentage of sales that generates profit. There has been a significant improvement in profit margin for the analysis period. In 2006, one dollar of sales generated profit of 6 cents (6%). In 2007, this increased to 8 cents (8%).
(1½ marks for each ratio = 7.5 marks)
(½ mark for ‘superior’ answers)

(b)
Sales have increased by over 23% to $6.4 million. Profit margin has also increased, suggesting an improvement in the overall profitability of Monash Leisure Ltd. However, there has been a build up in inventory reflected in the deterioration in the days’ inventory on hand ratio. This would indicate that Monash Leisure Ltd has increased sales price, which may have caused a drop in sales volume (while there may alternative explanations such as a deliberate policy to increase inventory levels, it is more likely that volumes have dropped following the increase in selling price).
Whilst profitability appears to be sound, there is evidence of deterioration in the short term financial position of Monash Leisure Ltd. The increased inventory held is reflected in the improved current ratio, with inventory the major current asset. As such, the improvement in the current ratio does not reflect an improvement in liquidity, as the increase is purely due to inventory. To support this, the quick ratio has deteriorated, which suggests solvency problems. In particular, if inventory is not saleable, Monash Leisure Ltd may face solvency problems. The improvement in days in debtors, however, does suggest improved credit control and debtor management.

Question 2

(a)
a.

Weighted average method: Periodic
Average cost

b.

=

$350 + $320 + $600 + $240 + 770
= $87.69
26 units

Ending inventory

=

12 x average cost $87.69 = $1050.28 (2)

Cost of sales

=

14 units x $87.69 = $1227.66 (1)

FIFO: Periodic
Ending inventory:
7 units @ $110.00
2 units @ $120.00
3 units @ $100.00
12 units

Cost of sales = $3 690 - $1 890 = $1 800 or 7 units @ $50.00
4 units @ $80.00
3 unit @ $100.00
14 units

$770.00
$240.00
$300.00
$1310.00(1 1/2)

$350
$320
$300
$970(1 1/2)

(b)
Cost v NRV
Cost
Delivery
Import duty
NRV
Selling price
Marketing
Delivery costs

$300 (1/2 mark)
$ 30.00 (1/2 mark)
$ 40.00 (1/2 mark)
370

$400 (1/2 mark)
($ 50.00) (1/2 mark)
($60.00) (1/2 mark)
290.00
So applying the rule we need to value inventory at NRV.
So the adjusting entry required is:
Dr
Inventory writedown(1/2 mark)
8000 ( 1 mark)
8000
Cr
Inventory (1/2 mark)
100 x $80 = 4664

(c)
Stocktakes for perpetual inventory system is to determine if there is stock loss or stock gain, that is to verify the accounting records. (1 ½ marks) Stocktakes for periodic inventory system is to determine stock level and cost of

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