Answer to Question #224428 in Economics for Khwisti

Question

You are the auditor of motorway Ltd, a company trading in the motor industry. On examining the company’s latest annual financial statements, you make the following observations

• The gross profit margin which had consistently been 30% over the past five years

has dropped to 25%

• The current ratio, which in the past has always been at the same level as the

industry average of 2:1 has increased to 4;1

Required

1. List 3 possible factors which could have caused the reduction of the gross profit

margin. (3 marks) 2. List 3 possible factors which could have caused the increase in the current ratio.

(3 marks) 3. Briefly discuss whether an increase in the current ratio always represents an

improvement for a business. (4 marks)

Answer 1

Profits could be affected by higher prices for materials with already concluded contracts, changes in wages, increased requirements for quality control and safety in the field of road construction.

Liquidity could be affected by changes in profitability, changes in competition in the industry, international agreements signed by the government regarding the construction of highways.

Increased liquidity is not always an improvement for business, as there is additional interest in the industry from companies and corporations. who have not previously participated in this business.