Rukmini Iyengar holds the canteen concession at a large secondary school in Iloilo in the Philippines. She buys the food, employs two cooks and keeps whatev...
Question 1 Report
Rukmini Iyengar holds the canteen concession at a large secondary school in Iloilo in the Philippines. She buys the food, employs two cooks and keeps whatever surplus the canteen makes. Staff and the sixth form may run monthly accounts; everybody else pays at the counter. The chart sets out her trading results for the two years just gone.
Her other figures were these. Inventory of food and packaging stood at $4 100 on 31 July 2024 and $5 200 a year later. Amounts owed to her by account holders were $2 900 and then $3 600. She held $3 300 in the bank at the end of the first year, but by the end of the second the account was $1 900 overdrawn. Suppliers were owed $5 600 and then $7 400, and accrued expenses were $700 and then $800. Capital employed, which here is simply her closing capital, was $28 000 and then $26 700.
For the earlier year the current ratio worked out at 1.63 : 1 and the liquid ratio at 0.98 : 1.
- Work out five measures for the year ended 31 July 2025: gross profit percentage, profit percentage, return on capital employed, current ratio and liquid ratio. Work to two decimal places. (10)
- Rukmini cut her prices in September and food costs rose in January. Explain how each of those events shows up in your first answer. (4)
- Compare the two liquidity measures with the earlier year's and explain what has brought about the change. (7)
- Recommend two things Rukmini should do before the next school year starts. (4)
Answer Details
Read the trading figures off the chart first. The darker bars are the year ended 31 July 2025 and the lighter bars the year ended 31 July 2024.
| Year ended 31 July 2025 $ | Year ended 31 July 2024 $ | |
|---|---|---|
| Revenue | 96 000 | 84 000 |
| Gross profit | 33 600 | 31 920 |
| Profit for the year | 9 120 | 10 920 |
Revenue rose by $12 000 while profit fell by $1 800, which is the pattern the ratios are there to explain.
(a) Five measures for the year ended 31 July 2025 [10]
- Gross profit percentage: \( \frac{33\,600}{96\,000} \times 100 = 35.00\% \)
- Profit percentage: \( \frac{9\,120}{96\,000} \times 100 = 9.50\% \)
- Return on capital employed: \( \frac{9\,120}{26\,700} \times 100 = 34.16\% \)
- Current ratio. Current assets are inventory $5 200 + trade receivables $3 600 = $8 800. Current liabilities are trade payables $7 400 + accrued expenses $800 + the $1 900 overdraft = $10 100. \[ \frac{8\,800}{10\,100} = 0.87:1 \]
- Liquid ratio: \( \frac{8\,800 - 5\,200}{10\,100} = \frac{3\,600}{10\,100} = 0.36:1 \)
The overdraft is the item most often misplaced. It is repayable on demand, so it is a current liability; treating it as a negative asset would give a current ratio of 0.71:1 and is wrong.
(b) How the price cut and the higher food costs show up [4]
Both events attack the same figure, the gross profit percentage, but from opposite ends of it.
- The price cut in September reduces revenue per meal. More meals were sold, which is why revenue still rose from $84 000 to $96 000, but each one brought in less, so gross profit grew by only $1 680 on $12 000 of extra takings. Selling more at a thinner margin is why the volume growth did not reach the bottom line.
- Dearer food from January raises cost of sales for the same meals. The cost side of every dollar taken is larger, so less is left as gross profit.
Together they pull the gross profit percentage from 38.00% in the earlier year ($31 920 / $84 000) down to 35.00%. Three percentage points on $96 000 of revenue is $2 880 of gross profit lost, which is more than the whole fall in profit.
(c) The two liquidity measures compared [7]
| Ratio | Year ended 31 July 2024 | Year ended 31 July 2025 |
|---|---|---|
| Current ratio | 1.63:1 | 0.87:1 |
| Liquid ratio | 0.98:1 | 0.36:1 |
- The canteen no longer has a dollar of current assets for every dollar due within the year. At 0.87:1 it is short by about $1 300 even counting the food in the store; at 0.36:1 it holds only 36 cents of quickly realisable assets for every dollar owed. Last year both measures were at least borderline; this year the current ratio has fallen below 1:1, which is a serious position.
- The bank has switched sides. A $3 300 balance that counted as a current asset is now a $1 900 overdraft counted as a current liability, a swing of $5 200 across the ratio. That single change explains most of the deterioration.
- Suppliers are owed $1 800 more, up from $5 600 to $7 400, and accrued expenses are $100 higher. The canteen is financing itself by paying its suppliers more slowly, which is exactly what a lender or a supplier would notice.
- A further $1 100 is locked into food and packaging, up from $4 100 to $5 200. That increase looks like an asset but cannot pay a bill until the food is sold, which is why it improves the current ratio slightly while doing nothing at all for the liquid ratio.
(d) Two things Rukmini should do before the next school year [4]
- Restore part of the price cut, or buy differently. Recovering even two of the three percentage points of gross margin lost would add about $1 920 to gross profit at the current level of sales, which is more than the whole fall in profit. If prices cannot rise, she should buy the dearest items in smaller quantities or substitute cheaper lines, so that cost of sales falls instead.
- Tighten the monthly accounts. Staff and the sixth form owe $3 600, up from $2 900. Billing promptly and refusing further credit to late payers would bring in cash to clear the $1 900 overdraft, which is the fastest route back to a liquid ratio above 1:1 and costs nothing in trade.
The distinction worth carrying away is that the canteen's problem is not that it is unprofitable, since it still earns 34.16% on capital employed, but that it is illiquid. A business can be profitable and still fail if it cannot pay a supplier on the day the bill falls due.
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