a) Distinction between Capital Expenditure and Revenue Expenditure:

Capital Expenditure:

• It is expenditure which results in the acquisition of non-current assets or an improvement in their earning capacity.
• Capital expenditure is not charged as an expense in the statement of profit or loss at one go but rather a depreciation or amortization charge will usually be made to write off the capital expenditure gradually over time.
• Capital expenditure on non-current assets is the recognition of a non-current asset (e.g., vehicles, land, and buildings) in the statement of financial position of the business.

Revenue Expenditure:

• It is expenditure which is incurred for either:
  • The purpose of the trade/service of the business. This includes selling & distribution expenses, administration expenses, and finance charges.
  • To maintain the existing earning capacity of non-current assets (such as repair expenses).
  • To ensure the smooth running of the day-to-day activities of the company/business.

(5 marks)

b)
i) Computed ratios
Net Profit As A Percentage Of Sales (14,880/324,000) = 4.65%
Return On Capital Employed (24,000/158,880) = 15.11%
Current Ratio (53,680/6,800) = 7.89:1
Liquid (Acid Test) Ratio (12,080/6,800) = 1.78:1
Rate Of Inventory Turnover (240,000/41,600) = 6 times
(2 marks each = 10 marks)

ii) Assessment of Banky’s Business Performance:

• Net Profit Margin: The net profit margin of 4.65% is lower than the competitor’s 6%. This may indicate that Banky’s costs are higher or that he is not marking up his purchases as much as the competitor.
• Return on Capital Employed (ROCE): Banky’s ROCE of 15.11% is better than the competitor’s 10.50%, meaning that Banky is making more profit per cedi of investment in the company.
• Current Ratio: Banky’s current ratio of 7.89:1 is extremely high, indicating excessive liquidity, which might suggest inefficient use of resources. The competitor’s ratio is also high, but closer to the accepted standard.
• Acid Test Ratio: Banky’s acid test ratio of 1.78:1 is within acceptable limits, indicating good liquidity management, whereas the competitor’s ratio of 0.3:1 suggests potential liquidity issues.
• Inventory Turnover: Banky’s inventory turnover rate of 6 times is better than the competitor’s, indicating that Banky is selling inventory more frequently, which contributes positively to profitability.

(5 marks)