Skill Exercise: Analysis (Level 1)

[AN] Worksheet 1: How to answer the question answers

Example:

Question 1: Calculate to the nearest whole day the trade receivables turnover.

What are you analysing?

Selecting the correct figures to enable the calculation of trade receivables turnover enables decisions to be made regarding the credit control policy of the business.

• Calculate the current ratio.

• What are you analysing?

  The relationship between the sales price and cost price enabling decisions to be made regarding increasing or reducing selling price to increase gross profit or looking for alternate suppliers to increase gross profit.

• Calculate the inventory turnover.

• What are you analysing?

  The reasons for the difference between the balances in the cash book and on the bank statement.

• Calculate the gross margin.

• What are you analysing?

  This allows analysis of the relationship the business has with its credit suppliers and the opportunity cost.

• Prepare bank reconciliation statement.

• What are you analysing?

  This looks at the current assets the business has in relation to the liabilities it needs to meet in the short term. Alternate strategies may need to be introduced if there will be insufficient funds to meet debts when they fall due.

• Calculate the trade payables turnover.

• What are you analysing?

  The number of times a business replaces it inventory in a specific period. Trends may be analysed, and decisions taken regarding stockholding.

Analysis or not?

For each of the following pairs of sentences, decide which one is analytical. Remember that analysis is about effects, consequences or reactions.

• [Sentence 1]

  The gross profit increased due to higher selling prices.

• [Sentence 2]

  Revenue is calculated by multiplying the number of units sold by the selling price.

Answer explanation

Sentence 1 – increasing selling prices is just one strategy to increase gross profit.

Analysis or not?

For each of the following pairs of sentences, decide which one is analytical. Remember that analysis is about effects, consequences or reactions.

• [Sentence 1]
  Profit is lower than last year.

• [Sentence 2]

  The expenses were not controlled so profit reduced.

Answer explanation

Sentence 2 – This gives a more detailed reason why profit is lower than last year.

Analysis or not?

For each of the following pairs of sentences, decide which one is analytical. Remember that analysis is about effects, consequences or reactions.

• [Sentence 1]

  Working capital increased this year.

• [Sentence 2]

  Inventory was sold at a higher mark up.

Answer explanation

Sentence 2 – The effect of increasing mark up resulted in higher working capital.

Analysis or not?

For each of the following pairs of sentences, decide which one is analytical. Remember that analysis is about effects, consequences or reactions.

• [Sentence 1]

  The average inventory value reduced and cost of sales remained the same.

• [Sentence 2]

  Inventory turnover increased this year.

Answer explanation

Sentence 1 – This shows understanding of the components used to calculate inventory turnover.

Analysis or not?

For each of the following pairs of sentences, decide which one is analytical. Remember that analysis is about effects, consequences or reactions.

• [Sentence 1]

  Trade payables were $12 000 for the years ended 2021 and 2022 but cost of sales reduced.

• [Sentence 2]

  The trade payables turnover increased in the year ended 2022.

Answer explanation

Sentence 2 – This shows detailed knowledge and application of the formulae for trade payables turnover.

Analysis or not?

For each of the following pairs of sentences, decide which one is analytical. Remember that analysis is about effects, consequences or reactions.

• [Sentence 1]

  Trade receivables turnover reduced this year end.

• [Sentence 2]

  The business was more successful at collecting debts.

Answer explanation

Sentence 2 – A possible strategy to improving trade receivables turnover.

Analysis or not?

For each of the following pairs of sentences, decide which one is analytical. Remember that analysis is about effects, consequences or reactions.

• [Sentence 1]

  Unpaid rent was included in the income statement.

• [Sentence 2]

  The matching principle was applied.

Answer explanation

Sentence 1 – This is the detail of applying the matching principle.

Analysis or not?

For each of the following pairs of sentences, decide which one is analytical. Remember that analysis is about effects, consequences or reactions.

• [Sentence 1]

  A lower quality of raw material was used to make the finished product.

• [Sentence 2]

  The lower quality of raw materials led to lower quality of finished goods.

Answer explanation

Sentence 2 – The lower quality of raw materials was a cause for lower quality of finished good. Sentence 1 is just descriptive.