Interpretation of Accounts The following information has been taken from the accounts of Concord Ltd for the year ended 31/12/2008: Credit Sales € 820,000 Less: Cost of Sales Stock 1/01/2008 € 44,000 Add: Purchases € ? Less: Stock 31/12/2008 € 55,000 Gross Profit € ? Less: Total Expenses (including interest) € 73,000 Net Profit for year € 117,000 Balance Sheet as at 31/12/2008 Fixed Assets € 590,000 Current Assets (including Debtors € 62,000) € 144,000 Less Creditors: amounts falling due within 1 year Trade Creditors € 34,000 € 110,000 Financed by: Creditors: amounts falling due after more than 1 year 8% Debentures (2013/2014) € 360,000 Capital and Reserve Ordinary Shares € 453,000 Profit and Loss Account € 660,000 (a) You are required to calculate: (i) Purchases (10) (ii) The period of credit given to Debtors (10) (iii) The Percentage Mark-up on cost (10) (iv) Return on Capital Employed (10) (b) Explain each of the following: (i) 8% Debentures (2013/2014) (10) (ii) Acid Test Ratio (10) (iii) Ordinary Dividend (10) (c) How might the directors of the company have difficulty paying its bills as they fall due? (10) (d) If the Return on Capital Employed for 2007 was 11% comment on the current situation? (10) (100 marks) - Leaving Cert Accounting - Question 5 - 2009

The formula for the period of credit is:

Given:

• Debtors = €62,000
• Credit Sales = €820,000

Substituting in the values,

The Percentage Mark-up on cost is calculated using the following formula:

Where:

• Gross Profit = €190,000
• Cost of Sales = €630,000

Substituting the values yields:

Return on Capital Employed is calculated using the formula:

Using:

• Net Profit = €117,000
• Interest = €73,000
• Capital Employed = €660,000

We can substitute these values:

Debentures are a type of long-term loan taken by a company, issued to raise funds. The 8% Debentures indicate that the company pays interest at the rate of 8% annually. These are often secured against the company’s assets and represent a liability, as the company is obligated to pay back the principal amount at maturity.

In the context of 2013/2014, this means that the company has a fixed repayment schedule and is responsible for paying back this loan in a single lump sum.

The Acid Test Ratio is a financial metric used to assess a company's ability to meet its short-term liabilities without relying on the sale of inventory. It is calculated as follows:

A ratio of 1:1 is typically recommended. This shows that for every euro of liability, the company has an equal amount in highly liquid assets.

An Ordinary Dividend is a payment made by a corporation to its shareholders, typically drawn from its profits. This payment is made in cash or additional shares and is usually distributed quarterly. The amount distributed is determined by the company’s Board of Directors. Ordinary dividends reflect the company's profitability and are a signal of financial health to investors.

The directors could face difficulty in paying bills due to several factors such as:

1. Cash Flow Issues: If the company's cash inflow from operations is insufficient to meet its short-term obligations, it may struggle to fulfill payment obligations.
2. High Debt Levels: An increase in liabilities without a corresponding increase in assets can strain cash resources.
3. Poor sales performance: If sales are declining, it affects the revenue available to cover expenses.
4. Tight credit terms from suppliers: If suppliers demand quicker payments, it can exacerbate liquidity issues.

The Return on Capital Employed (ROCE) increased to 18.82% in the current period from the previous year’s 11%. This notable improvement indicates better utilization of capital in generating profits. An increase like this suggests that the company is operating more efficiently, achieving higher profitability per Euro of capital employed.

This performance enhancement might attract investors looking for robust returns, reflecting a positive trajectory in the company's operational efficiency.