Question

This is BBM206/05 Business Accounting II subject

Question 1 a. Both current ratio and quick ratio are designed to estimate the ability of a business to pay for its current liabilities. Explain the difference between these two measurements, by giving examples. [6 marks] b. Below is the Statement of Profit or Loss for the Year Ended 31 December 2018 for Kopi Sdn Bhd. (300) STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 2018 RM'000 Revenue 720 Cost of Sales Gross Profit 420 Administration expenses (180) Distribution expenses (120) Profit before tax 120 Taxation (10) Profit for the year 110 Required: İ. Calculate gross profit percentage and net profit percentage for Kopi Sdn Bhd. [2 marks] Mr Lim, accountant of Kopi Sdn Bhd noticed there was understatement of the closing inventory at 31 December 2017. Explain the impact that this error will cause to gross profit percentage / net profit percentage. [2 marks]

Answer 1

1 Salestion & Explanation or realised erdue (a) Difference Setween Cesend fatio eo deve de Rotlio, Before differentiating the troms Cusseent Ratio se quick sected, let's understaut what these all å . Current Ratio ao Current Assete Current liabilities - Current Asset all those wrich can be connected, into cash within 12 mouths, such as-Cash, inventories, martectable securities ftartet tio Accounts Receivables, prepaid enpeuses etc. E =) Current liabilities are those colich can be alpaids willin one year or say 12 months, such as a short-term debt, Account bageble; Accred liabilities and tur debts. Cluick Ratio : liquid direto Current licesilities liquid cassete are those which are mest liquid in thems of cash réalisation. We can socy that all current assets are locuiel. assets except - Inventories and prepoeid Expenses. Liquid losset - Current Assets - Inocutory - Belpeviol expenses. Difeseuces i frow Above, it is clear thelt Her difference is ouly o current assets and quiche asset, Cluicle Ratio is the propertion of only the most lipuid cursent Asset to currec diasilities. However, Current Ratio is the proportion of cussent assete to current liabilities. for more conserative analysis of company's liquidity position we can an sette refll que quiclo cratio, beet seul lunes, when a coupe and manufachat curreed asset of mainte total then the cassent Ratio will be very list, as colupered to quiche Ratio for Exauaple: Current Assets are of 8 noen levew l'asilities Current then Current Ratio would be a WESTERN w e of movinly enhory,' $ 200 evo $fweco

NA If there is inventory & $ 60,000 & prepand expenses are $20,000, then the quicle Assets will be $120006 (coelona 60000 2600) Auice Rochio would se = $120000 So the the Ratios stal se most then p Sload b) & G.P & N. p Ratus i GP Ratio - Gb x 10 AdP Ratio = NP after tex x 100 - sales GP = RM420 (inlooo) sales - Rm 720 (in '000) Nip aftes teves = Rmllo (in ooo) Crren in Chuestion Cip. Ratió = RM 420 xico Rm 720 = 58.33% Nip. Ratio - RM 110 . = 15:28% Rm 720 x 10 ANNADA N Understatement cloning inventory will cause decrease in profits - Gross and wet both, as the inventory is the part of Cost of goods sold. Thellfore, the Cipke N. P should se increased seg til camount which has been understated, support In vion of above, it can be inferreal that the cp & op faction would tableas have been ligher than now, if the ressor heis not been accussed. Suppose, the closing incensory has been understated Rm 2o, the neu Gel se NP Raties would be a GP. Ratio = RM420720 x RM 720 N.P. Ratio - Rm 110720 x 10 = 18.06). - Rm4zot 20 x 10 = 61.11% RM 720