Define the term debtors.

Using information from Table 1 construct a fully labelled balance sheet for Papel for the end of October 2018.

Using information from Table 1 calculate the current ratio for Papel for the end of October 2018.

Explain one possible strategy, other than elimination of credit sales, for Papel to improve its liquidity position.

A debtor is a customer or a firm that has purchased a good or service from a business and has not yet paid. A debtor may be allowed up to one month or more to settle.

N.B.: no application required. Do not credit examples.

Award [1] for a basic definition that conveys partial knowledge and understanding.

Award [2] for a full definition that conveys knowledge and understanding similar to the answer above. – reference to repayment period is not necessary for full marks.

Papel balance sheet as at 31 October 2018

N.B.: if the candidate does not follow the IB prescribed format, award a maximum of [3].

N.B.: candidates should not be penalized for writing “retained profit” omitting the word accumulated.

Allow OFR.

[0]
The B/S does not reach a standard described below.

[1–2]
The B/S is not accurately constructed, and/or the calculations within and between the various components are not presented or largely incorrect. However, there is limited evidence of a general understanding of the format

[3–4]
The principal elements of the B/S are constructed, but may not be entirely accurate. The calculations under each heading/component/part are largely correct.
Allow up to two mistakes in calculations and/or presentation for [3].
Allow for either one error in calculation or one error in presentation [4].
For an accurately constructed B/S with incorrect calculations, award up to a maximum of [3].
Allow OFR.
For example, if one irrelevant figure that belongs to the P/L account is added, obviously the rest will not match.

[5]
The B/S is accurately constructed in the expected IBO format. All the relevant headings of each component/ parts are used and correctly classified. Do not penalise for internal order of classification. All and only the relevant figures are presented. No extra irrelevant figures that belong to the P/L are included. The calculations under each part/ component of the B/S are correct and well presented [5].

Deduct [1] for one omission including the overall heading provided the B/S is accurately balanced.

N.B.: If the candidate did not follow the IBO format award up to [2] marks

Current ratio = $\left(\frac{\text{current assets}}{\text{current liabilities}}\right)\frac{20}{20}$ = 1

Award [1] for the correct answer. Award no marks merely for writing the formulae. Award [1] mark with OFR but working must be shown.

Liquidity is the ability to pay short-term debts. Papel’s liquidity position is delicate. Working capital is zero and Papel´s acid test is 0.75, which means that Papel has less than $1 of liquid assets with which to repay every $1 of its short-term debts.

Papel could improve its liquidity position by keeping a tight credit control with debtors. Many are not paying on time, which means that Papel does not keep a check of customers’ accounts.

Papel could use a debt factoring service to recoup some of the debt as a way to boost its liquidity.

Papel should monitor debtors and chase them to pay on time and to respect the credit periods established and agreed.

Creditors are increasing even though 80 % of accounts are settled in cash. To improve the liquidity position, Papel could try to negotiate improved credit terms with its suppliers.

Reward candidates who highlight ‘surplus’ or ‘unused’ assets to sell but not a generic response of ‘sell assets’. Award maximum [1] as no application is possible.

Accept any other relevant strategy.

Award [1] for a relevant generic strategy identified or described and [1] for any additional explanation in context to DD.

[2] cannot be awarded for the strategy if the response lacks either explanation and/or application. 

For example: For an identification or a description of the strategy either debtors or creditors with or without application [1].

For explanation of the strategy with no application [1].

For explanation of the strategy and application [2].