DFS Section 2.1 - Ratios

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Sparkz1988
Sparkz1988 Registered Posts: 16 New contributor 🐸
in AAT Level 4 (Level 8 in Scotland)
I got the ratios and i think i worked them out right but what did everyone put to improve each ratio used? i just guessed :001_unsure:

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  • Richard
    Richard Registered Posts: 373 Dedicated contributor 🦉
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    Current ratio - I advised to try and get the bank account back into credit, and to avoid using the overdraft, as this would increase the assets and reduce the liabilities and therefore improve current ratio;

    Acid Test - reduce stock levels;

    Trade Receivables - improve credit control;

    Trade Payables - pay the suppliers quicker, which would be easier to do if all of the above improvements were implemented.
  • Sparkz1988
    Sparkz1988 Registered Posts: 16 New contributor 🐸
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    thats exactly what i put apart from current ratio and acid test the other way round coz the acid test i thought was excluding stock figure??
  • sleepysophie
    sleepysophie Registered Posts: 17 New contributor 🐸
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    would it not be an improvement to increase the trade payables rather to decrease them (in days ?). I looked at it from the other way and said we should agree longer payment terms to increase the payment days to say 60 or 90 and this would be an improvement. Not, reduce the days. Did anyone else agree to this angle ? This would impove liquidity ?
  • Richard
    Richard Registered Posts: 373 Dedicated contributor 🦉
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    Sparkz1988 wrote: »
    thats exactly what i put apart from current ratio and acid test the other way round coz the acid test i thought was excluding stock figure??

    Acid Test is Current Assets - Stock / Current Liabilities, so by reducing your stock figure, your Acid Test Ratio will improve.
  • acky2106
    acky2106 Registered Posts: 52 Regular contributor ⭐
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    think my answer was the same as Richards.
  • Chris023
    Chris023 Registered Posts: 93 Regular contributor ⭐
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    I was not sure whether to recommend an increase or decrease in the Trade Payable days

    I thought about it and in the end said to increase the trade payable days by delaying payments so that we can use the cash elsewhere (as the company was in their overdraft) but I said not too increase the number of days by to much otherwise we could harm relations with our creditors.
  • Richard
    Richard Registered Posts: 373 Dedicated contributor 🦉
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    sleepysophie wrote: »
    would it not be an improvement to increase the trade payables rather to decrease them (in days ?). I looked at it from the other way and said we should agree longer payment terms to increase the payment days to say 60 or 90 and this would be an improvement. Not, reduce the days. Did anyone else agree to this angle ? This would impove liquidity ?

    Thats a valid point. I think I mentioned that they would need to check their credit terms, and said that if it turned out the terms were 30 days, then improvements would need to me made to reduce the days.

    With these written questions you can have a variety of answers, which as long as you back up your reasoning with a valid argument you should receive some credit for.
  • Sarah
    Sarah Registered Posts: 5 New contributor 🐸
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    I suggested to reduce the overdraft to improve acid test and reduce stock levels to improve current ratio - but i'm sure they will accept a number of different suggestions.
  • Sparkz1988
    Sparkz1988 Registered Posts: 16 New contributor 🐸
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    Richard wrote: »
    Acid Test is Current Assets - Stock / Current Liabilities, so by reducing your stock figure, your Acid Test Ratio will improve.


    Yeah i agree now i think about it... owel i dont think i lose too many marks from that!! Cheers richard
  • sleepysophie
    sleepysophie Registered Posts: 17 New contributor 🐸
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    Phew !
    Thanks.
  • LondonMatt
    LondonMatt Registered Posts: 1,110 Beyond epic contributor 🧙‍♂️
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    Richard wrote: »
    Current ratio - I advised to try and get the bank account back into credit, and to avoid using the overdraft, as this would increase the assets and reduce the liabilities and therefore improve current ratio;
    I don't know, if the examiner is being harsh, he might not give that to you as you haven't suggested how to get the bank account into credit - which would be an important point. A loan, for example wouldn't have an impact on the current ratio but decreasing your expenses would
    Trade Payables - pay the suppliers quicker, which would be easier to do if all of the above improvements were implemented.
    You don't want to pay people quicker, you want to try and pay them as late as possible, to keep a hold of your cash for as long as poss. - but obviously only as long as the credit terms allow. I think I suggested a link between the increase in sales and CoS, to purchasing more goods, perhaps from different/new suppliers who have different credit terms than your old suppliers. Contacting them to change the credit terms could be beneficial

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