a)
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Year 2
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Year 1
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Stock turnover
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(350/500) * 365 =
255.5 days
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(250/450) * 365 =
202.7 days
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or
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500/350 =
1.43 times
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450/250 =
1.8 times
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Debtor days
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(150/1,000) * 365 =
55 days
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(200/850) * 365 =
86 days
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Creditor days
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(300/500) * 365 =
219 days
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(200/450)*365 =
162 days
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b) The term 'efficiency position' should be defined. The efficiency position of JKL Ltd. can be judged by assessing the firm's efficiency ratios, i.e. its Stock turnover, creditor days and debtor days:
- Stock turnover - Stock is taking longer to turnover (or turning over at a lower rate), i.e. there is less effectiveness
- Debtor days - Debtors are, on average, paying much earlier suggesting that there is enhanced credit control
- Creditor days - The firm is taking considerably longer to pay its creditors, which in the long run might dampen its relationship with suppliers
- Overall then, it appear that the firm's liquidity position has perhaps deteriorated; although more data and information is needed to make any firm conclusions
c) There are three efficiency ratios in this question and hence any development in these should help to get better the overall efficiency position of the firm. Some examples are given below.
- Stock turnover - Hold less stock, e.g. introduce a system of Just in Time (JIT) or introduce lean production to the production procedure.
- Debtor Days - enhanced credit control, e.g. if credit control is too tight, then this could lead to a fall in sales as customers switch to rival firms offering privileged credit terms.
- Creditor Days - Given the improved cash position of JKL Ltd. suppliers will perhaps query why the firm is taking so much longer to pay its debts. The ratio suggests that the credit period is rather generous particularly since the firm has sufficient working capital and liquidity to meet these amounts overdue. This could, therefore, dampen the relationship with its suppliers. Award up to 2 marks for each factor considered to progress the firm's efficiency position.