| Date | May 2017 | Marks available | 2 | Reference code | 17M.2.HL.TZ0.1 |
| Level | Higher level | Paper | Paper 2 | Time zone | Time zone 0 |
| Command term | Explain | Question number | 1 | Adapted from | N/A |
Question
Bart Furniture (BF)
Bart Furniture (BF) is a wholesaler that stocks furniture. In 2015, BF purchased more stock than usual in order to take advantage of discounts that several furniture manufacturers were offering. However, much of this new stock did not sell.
Table 1: Financial information, for BF, for 2015 and 2016
Describe one feature of a wholesaler.
Using information in Table 1, calculate for BF stock turnover in days for 2015 (X) (show all your working).
Using information in Table 1, calculate for BF current ratio for 2015 (A) (show all your working).
Using information in Table 1, calculate for BF debtor days for 2016 (Y) (show all your working).
Referring to information in Table 1 and your calculations, explain the change in BF’s liquidity between 2015 and 2016.
Markscheme
Common features of wholesalers include:
• An intermediary along a distribution channel that breaks large quantities of product into small stock quantities for retail businesses.
• generally offering stock for predominantly one industry (furniture, fruit, electronic parts, auto parts, etc) and building up product knowledge to help retail businesses increase the opportunities for retail success.
• allow retail businesses to purchase on credit or even allowing retail business to purchase stock on a sale or return basis.
• given the large quantities of stock purchases, being able to experience significant purchasing and marketing economies of scale.
Accept any other relevant feature.
Award [1] for a relevant feature with appropriate description up to a maximum of [2].
It is not expected that candidates explain the benefits to any stakeholder
Application to the organisation is not required.
Do not credit an example of BF or any other organisation.
stock turnover in days
120.006 days (assuming 4000 is average stock)
Accept 121 days
Accept 120 days
Do not credit for the use of a correct formula as it is given.
Award [1] for some minimal understanding like at least two figures used are correctly.
Award [1] for a final correct answer without working
Award [2] for correct use of formula with clear working with no mathematical errors and the correct answer is given in days from working shown.
For [2], “days” must be present, as this is the standard unit used.
Do not accept a response that calculates the times it takes the stock to be turned over.
= current ratio
= 4.43
Accept 4.4
Award [1] for some minimal understanding like all the figures/total for CA or CL are correct
Award [2] for correct use of formula with no mathematical errors/the calculations are clear and correct.
[2] cannot be awarded if the candidates expresses the figures in times/ units etc.
Debtor days
days
If a leap year figure is used, please accept 86.34 days.
Accept 87 days.
Accept 86 days.
Do not credit for the use of a correct formula as it is given.
Award [1] for some minimal understanding like at least two figures used are correct.
Award [1] for a final correct answer without working
Award [2] for correct use of formula with no mathematical errors. Units (days) are required for full marks.
Given the changes in the current ratio from 4.4 to 5.47, one can say that BF’s liquidity has increased. Candidates may term this increase as an improvement or deterioration as BF’S ratios are high. The important issue is the increase in liquidity.
The application should refer to the possible reasons/contributors for the changes like:
An increase in stock from $4000 to $6164
An increase in debtors from $1973$ to $6134. Possibly due to some difficulties of shifting the stock as evident in 2016 of an increased stock turnover and the level of stock despite a fall in cash from $2000 to $500.
Award [1] if the candidate comments that the liquidity of the company has increased.
Award [2] for a clear explanation of one possible reason for the changes with a use of actual figures.
It is expected that the candidates refer to some actual changes like debtors/stock for full marks.
Candidates need to explain the changes- why/ the possible contributors to rather than just ‘what’.
It is expected that the candidates comment on the direction of the change not just say it has changes.
Allow for OFR.
Examiners report
Many candidates confused the role of a wholesaler with that of bulk retailers e.g. Costco in the US, and hence believe it is the role of a wholesaler to sell in bulk. Even if this is true, such a wholesaler cannot do this profitably unless it first buys in bulk, to enjoy purchasing economies of scale, and then breaks bulk to the next level of buyers.
Many candidates found this question a straightforward calculation. However, a few candidates tried to apply a strict interpretation of the formula and tried to calculate the ‘average stock’. Without the opening balance for 2015 this is not possible. Therefore, from a teaching perspective students should assume that if such an opening balance is not given then they should assume that all stock values are an average. Had the question asked for the 2016 stock turnover then the average stock could have been calculated, and would have been expected.
The question specifically asked for the stock turnover in days and a large number of candidates lost a mark for not stating ‘days’ [days only needed to be in some part of the calculation, not necessarily at the end – so candidates who reproduced the formula (including ‘days’) still got full marks.
Candidates had problems with this question. Whereas parts i) and iii) simply required candidates to pick the required numbers and apply to the formula, in this question, candidates had to arrive at the inputs by adding together several numbers. This required a basic understanding of what items make up ‘current assets’ and ‘current liabilities’, and clearly many (the vast majority) did not know this. This is somewhat disappointing given that it is a fundamental part of ‘final accounts 3.4 and ‘profitability and liquidity ratio analysis’, 3.5. This lack of understanding became further apparent in part c) (see later)
As in part i) application to the formula was quite straight forward – once again omission of ‘days’ prevented full marks from being achieved.
This was a straightforward question asking candidates to comment on the change in liquidity. As alluded to above, the vast majority of candidates could not understand this, and many proceeded to write long explanations about changes in profitability, stock turnover etc. As the syllabus makes quite clear, ratios fall into three distinct groups, profitability, liquidity and efficiency. Only 2 liquidity ratios are present therefore there should have been no reason to refer to any other ratios or figures. It was simply necessary to state the liquidity had increased – nothing more. For application, candidates were required to refer to any of the underlying figures supporting the increase in liquidity, namely the increase in debtors or the increase in stock. It was apparent that many candidates wrongly interpreted a reduction in cash as a reduction in liquidity, which in this case was not correct. Also many candidates seemed to think that if ratios were not in the ‘ideal’ range, then somehow this was very bad. Teachers should note that ‘ideal ranges’ for ratios are essentially ‘relative’ and what is good for one industry may not be good for another. Students therefore should not be encouraged to view these ratio ranges in ‘absolute’ terms.
