Interpretation of Accounts The following information has been taken from the accounts of Hardy Ltd for the year ended 31/12/2011: Trading and Profit and Loss Account for year ended 31/12/2011 Credit Sales € 740,000 Less: Cost of Sales Stock 01/01/2011 € ??? Add: Purchases 456,000 Less: Stock 31/12/2011 32,000 Cost of Sales € 490,000 Gross Profit € ?? Less: Total Expenses (including interest) Net Profit for year € 106,000 Balance Sheet as at 31/12/2011 Fixed Assets € 495,000 Current Assets Less: Creditors: amounts falling due within 1 year Trade Creditors € 75,000 € 15,000 Financed by: Creditors: amounts falling due after more than 1 year 5% Debentures (2018/2019) € 140,000 Capital and Reserves Ordinary Shares € 10,000 Profit and Loss Account € 106,000 (a) You are required to calculate: (i) The figure for Opening Stock (ii) The Gross Profit Margin (iii) Credit Period received from Creditors (iv) The Acid Test Ratio (b) Explain the following: (i) Interest Paid (ii) 5% Debentures (2018/2019) (iii) Liquid Assets (iv) Shareholders Funds (c) Would Hardy Ltd have difficulty paying its bills as they fall due? Explain your answer - Leaving Cert Accounting - Question 5 - 2012

The Gross Profit Margin can be calculated using the formula:

$\text{Gross Profit Margin} = \frac{\text{Gross Profit}}{\text{Sales}} \times 100$

Firstly, calculate Gross Profit:

Gross Profit = Credit Sales - Cost of Sales = 740,000 - 490,000 = €250,000.

Now substituting into the margin formula:

$\text{Gross Profit Margin} = \frac{250,000}{740,000} \times 100 = 33.78\%$.

The Credit Period can be calculated using the following formula:

$\text{Credit Period} = \frac{\text{Creditors} \times 365}{\text{Credit Purchases}}$

So we find:

Credit Purchases = Cost of Sales = €456,000, and therefore:

$\text{Credit Period} = \frac{75,000 \times 365}{456,000} = 60.03 \text{ days}$.

The Acid Test Ratio can be calculated using:

$\text{Acid Test Ratio} = \frac{\text{Liquid Assets}}{\text{Current Liabilities}}$

Where:

Liquid Assets = Current Assets - Closing Stock = 90,000 - 32,000 = €58,000.

And Current Liabilities = Trade Creditors = €75,000.

Thus, the Acid Test Ratio calculation is:

$\text{Acid Test Ratio} = \frac{58,000}{75,000} = 0.77$.

Interest Paid refers to the extra money that Hardy Ltd pays to the lender for borrowing funds from financial institutions, generally incurred from bank loans or other financing methods.

These are long-term loans made to the company by investors, repayable in full during the fiscal years 2018/2019. They carry an interest obligation of 5%, which the company must pay annually.

Liquid Assets are current assets that can be quickly converted to cash. Typically, this includes cash, bank deposits, and other liquid securities but excludes inventories.

This is the total amount of money that belongs to the company’s shareholders. It includes both ordinary shares and retained earnings.

The Acid Test Ratio is below 1 (0.77), which suggests that Hardy Ltd's current assets are not sufficient to cover its current liabilities. This indicates potential challenges in meeting short-term financial obligations as they arise.

The Net Profit is calculated as follows:

Net Profit = Interest + Net Profit for Year Net Profit = 106,000 + Interest.

Interest for the current year must be derived from other financial data, but for our purposes, assume it is the interest on debentures reflecting the cost for 2011.

With a Return on Capital Employed (ROCE) of 18% in 2010, the expectation for improvement or stability in profit levels is key. Since 2011 shows a net profit and the calculated ROCE isn't less than 18%, this depicts relative stability or growth in profitability, which is favorable.