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Testing your understanding - 6
Romantic Ltd trades in musical instruments, Hifi equipment and cassette tapes. Good profits have been made over the recent years and income statements [as per extracts below] for years ending 31 March 19x7 and 19x8 disclosed gross profits of £159,300 and £166,200 respectively.

The Managing Director is not particularly happy about the results for 19x8 and has asked for a short report.

Required:
(a)Calculate an accounting ratio for each year which will reveal the extent of the problem and:
(b)Write a report to the Managing Director stating five possible reasons for the differences in the ratios observed between those two years.
                                                          Romantic Ltd
                                      £           £
                                   19x7     19x8
Opening Stock     25,000     38,000
Purchases          278,700   318,300

Available Stock 303,700 356,300
Closing Stock (38,000) (22,500)

Cost of Sales 265,700 333,800
Sales 425,000 500,000

Gross Profit 159,300 166,200

answers to testing your understanding - 6
Gross P rofit ratio:
19x7 19x8

gross profit 159,300   166,200
sales             425,000   500,000
                        37.5%   33.2%

points for the report:

comments on the ratios just calculated

cost of sales has increased more than the sales figure.
sales of one type of product may have been unusual in one of the years.
two years is insufficient to reveal whether this is a 'trend'.
changes in closing stocks at the end of the years need explaining
two years data is insufficient to draw definitive conclusions.
external economic factors may have influenced the results.
the results themselves maybe distorted due to different accounting treatments having been adopted for instance.

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