Question

Diamond Company
Statement of Comprehensive Income for the year ended December 31, 2019
Sales revenue Cost of goods sold Gross profit		$1,294,000 737,000 $557,000
Operating Expenses Advertising expense	$ 7,900
Depreciation expense Salaries expense	64,000 169,000	240,900
Profit		$316,100
Diamond Company
Statement of Financial Position December 31, 2019
Assets
Current Assets Cash		$ 37,000
Accounts receivable Inventory Total current assets		115,000 106,500 $258,500
Non-current Assets
Property, Plant, & Equipment	$565,000
Less: Accumulated depreciation	115,000	450,000
Total Assets		$708,500
Liabilities
Current Liabilities
Accounts payable		$177,000
Total current liabilities		$177,000
Non-current Liabilities
Bank loan (payable in 3 years)		254,000
Total liabilities		$431,000
Shareholders’ Equity
Common shares		$245,000
Retained earnings		32,500
Total equity		277,500
Total Liabilities and Shareholders’ Equity		$708,500

Using Diamond Company’s financial statements, calculate the following ratios to one (1) decimal place, and answer the questions that follow:

1a)

i) working capital

ii) current ratio

iii) quick ratio or acid test

iv) Explain what the current and acid test ratios you calculated above communicate with respect to the company’s ability to repay its short-term debts. (1 mark)

(b) Days’ sales outstanding

2a) Calculate gross profit (or gross margin) ratio.

b) If the acceptable industry average for gross profit is 40%, explain how the company is doing relative to the industry standard. (1 mark)

c) Identify and explain two (2) ways in which the company could improve its gross profit (or gross margin) ratio.

d) Calculate inventory turnover.

e) Calculate the number of days it takes Diamond Company to sell its inventory.

3) Assume Diamond Company’s credit policy for its customers is 35 days. Using the ratios calculated above and any other ratios you deem necessary, comment on Diamond Company’s liquidity at December 31, 2019.

4. a) Identify and provide an example for each of the four (4) elements of a management control system present in the following example: (4 marks – ½ mark per element; ½ mark per explanation)

The Chocolate Dream Company makes chocolate bars in its factory every day. To pass quality control, each chocolate bar must weigh between 200 and 210 grams. A scale is used to weigh each chocolate bar that the company produces. Any chocolate bars that are over or under this standard are taken off the production line. Management receives a report of the number of chocolate bars rejected on a weekly basis. Line managers are notified if rejects are greater than 5% of total weekly production and make the necessary changes to the production process.

b) Chocolate Dream Company is looking to improve its gross profit. Using a balanced scorecard, identify and provide a specific example of two (2) perspectives that the company could examine.

Answer 1

working capital	current assets – current liabilities
	2019 ($)
current assets	258500
current liabilities	177000
working capital	81500
current ratio	current assets / current liabilities
	2019 ($)
current assets	258500
current liabilities	177000
current ratio	1.5
quick ratio	(Cash + accounts receivable) / current liabilities
	2019 ($)
cash	37000
accounts receivable	115000
acid assets	152000
current liabilities	177000
quick ratio	0.9

the current ratio and quick ratio indicates that the company if financially sound and can repay their debt.

days sales outstanding	accounts receivable / sales * 365 days
	2019 ($)
accounts receivable	115000
sales	1294000
days sales outstanding	32.4