Inventories levels and receivables levels


Problem:

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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Accounting Basics: Inventories levels and receivables levels
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