April 2015 Q19

Discussion in 'CT2' started by salj67, Sep 21, 2016.

  1. salj67

    salj67 Member

    Part i)
    I am unable to understand calculations of the ratios..
    a) why have they deducted 200 in the denominator in feb?
    b)why have they added 29 and divided by 185(and not 556+400 o/d) for feb?
    c)if in gross profit the sales in denominator deducted 200 from 900 why havnt they done it here?
    d)again why deduct 200 from the denominator for feb? And add 200 in denominator for jan?
     
    Last edited by a moderator: Sep 21, 2016
    salj67, Sep 21, 2016
    #1
  2. Simon James

    Simon James ActEd Tutor Staff Member

    These adjustments are in respect of the one-off transactions mentioned in the questions. For example, the company may have artificially increased inventories in January in advance of the sale in February. Hence January’s inventory figure or February’s cost of goods sold could be adjusted by £200k. The effect of the new asset could be removed from the accounts by adding back £400k of cash, eliminating the overdraft and leaving a positive bank balance of £29k.
    A wide range of adjustments are possible - for a full discussion please see ActEd's ASET.
     
    Simon James, Sep 21, 2016
    #2
  3. Anu

    Anu Member

    Hi,
    In the first place, what is the need for these adjustments? The entry (purchase of equipment) is not a wrongly recorded entry so why is there a need for the adjustment? Also sales to charity is still a sale at cost price, they have not just donated it hence it still should be considered as sales. Even if they are one off but they are being done in the month of February and are not wrongly recorded. Then why the adjustments? Adjustments are usually there when the entry is not correctly recorded or something has been missed but according to me these entries are correctly recorded.

    If at all we do the adjustments, then according to me, for trade payable turnover, it is fine to deduct 200 from cost of goods sold in feb but what's the need for adding 200 in Jan? We haven't done that for any adjustment then why here? Also because sticking up is just a "may be" case, we cannot base our answer on that.

    Seeking for a reply soon.

    Thanks!
     
    Anu, Sep 21, 2016
    #3
  4. Simon James

    Simon James ActEd Tutor Staff Member

    The need for the adjustments is because that's what the examiners have asked you to do! In the real-world being able to make such adjustments is important. One-off or exceptional items may be correctly recorded from an accounting point of view, but they distort the accounts and hence make analysis using ratios misleading or meaningless. In the worst case potential investors or management may make poor decisions based on "dodgy" ratios.

    The examiners argument was that the company had artificially stocked up in January thus affecting the Jan figures.
     
    Simon James, Sep 21, 2016
    #4
  5. salj67

    salj67 Member

    Can u explain the (c) adjustment in my first doubt above? Pleaseeee
     
    salj67, Sep 22, 2016
    #5
  6. Simon James

    Simon James ActEd Tutor Staff Member

    Prudence? The money is owed to the company so perhaps it it is prudent to leave it in. You could deduct from the denominator (then would deduct from numerator for consistency) - this would give almost the same answer.
     
    Simon James, Sep 22, 2016
    #6

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