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HC1010 Accounting For Business, Holmes Institute, Australia

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Learning Outcomes: 1. Familiar with and readily able to access (refer to) and integrate across:

• The social role and purpose of accounting

• The accounting equation and how it shapes the financial statements

• General Purpose Financial Statements (GPFS)

• Special Purpose Financial Statements (SPFS)

2. Understand how to prepare, analyse, and interpret financial ratios from GPFS

4. Demonstrate the ability to apply, analyse, synthesise and evaluate information from multiple sources to make decisions about the financial performance of entities including assets, liabilities, owner's equity, revenue and expenses

5. Apply concepts and theories discussed on a weekly basis

6. Use transaction data and financial statement analysis for data-driven decision making

7. Demonstrate the ability to communicate accounting information writing to a professional standard.

Question 1: You are required to explain and calculate the following ratios for the years ended 30 June Year 2019 and 30 June Year 2018:

a. Current ratio

Answer: The first factor to be identified is current ratio which is the number of times that the present assets can settle off current liabilities (Wallstreetmojo, 2018). A good ratio is 2:1.

The ratio is calculated by dividing current assets with current liabilities. For the year 2019 and 2018, the ratios are 218000/105000 and 222000/81000 respectively. Current ratio for 2019 is 2.1 and for 2018, it is 2.7. This means that Big Bang Pty Ltd has a good financial health to settle its liabilities.

b. Quick ratio;

Answer: The second ratio to be identified is quick ratio and this is the number of times liquidable assets of Big Bang Pty Ltd can settle off current liabilities (Wallstreetmojo, 2018). We do not take inventory values into consideration during this calculation due to lack of liquidity condition and the need for historical approach to assess inventory.

The ratio is calculated by the formula -

(Current asset - inventory)/current liabilities

For 2018, it is (222000-150000)/81000 = 0.8 times.

For 2019 it is (218000-130000)/105000 = 0.8 times.

Once again, the company is safe in its financial asset performance.

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c. Accounts receivable turnover (times and in days); and

Answer: The third factor is accounts receivable turnover and it is the number of times a customer pays goods based on credit vs the settling off dues. Good turnover means high ratio that implies a better chance for the liquidation of company. This also means that customers tend to pay debts in a shorter span.

Formula:

Accounts receivable turnover = credit sales/average debtors

On an average, the collection period is total number of days divided by accounts receivable turnover.

For 2018,

Average accounts receivable = (78000+60000)/2 = 69000

Accounts receivable turnover = 490000/69000 = 7.10 times

Collection period = 365/7.10 = 51 days

For 2019,

Average accounts receivable = (60000+70000)/2 = 65000

Accounts receivable turnover = 630000/65000 = 9.69 times

Collection period = 365/9.69 = 37.6 ~ 38 days

This implies that the customers purchase from inventory on credit and take a really shorter time to pay off the debt and this is a good sign for the firm to maximize sales rate annually (Frank, 2006).

d. Inventory turnover (times and in days).

Answer: The next factor is inventory turnover which is the number of times inventory gets converted to sale on a yearly basis (Bade and Parkin, 2001).

Formula:

Inventory turnover = cost of sales/average inventory

For 2018,

Average inventory = (78000+60000)/2 = 140000

Inventory turnover = 250000/69000 = 1.78 times

Holding period = 365/1.78 = 205 days

For 2019,

Average inventory = (130000+150000)/2 = 140000

Inventory turnover = 290000/140000 = 2.07 times

Holding period = 365/2.07 = 176 days

Question 2: (i) Discuss whether the foregoing five financial items would meet the definition of income to the company during the year? Give reasons for your answer.

Answer: The major incomes to the company include:

• Interest received upon a small investment of \$50000

• Early settlement of the sought out liability fetched about \$2000

In general, income is calculated when a company exchanges products for cash or credit and this variable is used to carry on with the daily operations to maximize the overall profits.

(ii) Which, if any, of the items would meet the definition of revenue to the company for the year? Give reasons for your answer.

Answer: Revenue is actually the profit earned upon sales of goods and it is calculated for every product (Houston and Brigham, 2009). This also includes the profit received as a result of selling a product that will receive money at a later time.

The case mentioned here has made revenue of \$25000000 from the inventory sales. Apart from that, the company has made a capital investment of \$500000. There is still a high profit rate.

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Question 3: a. Assuming that you are a banker and that the owner of each business has applied for a short- term loan of \$6000 (repayable in six months), which application would you select as being the more favourable? Explain.

Answer: Before making a decision, current ratios of both the companies will be calculated. For XYZ, it is 26000/12000 = 2.17 times. For ABC, it is 7200/52800 = 0.14 times. The ratio is extremely low for ABC and it shall not be the right investment. However, XYZ has the ability to pay the invested amount of \$60000 in less than 6 months. Hence, my decision would be XYZ.

b. Assuming that you are a businessperson interested in buying one or both companies, and both owners have indicated their intentions to sell, for which business would you be willing to pay the higher price, assuming you will be taking over the existing liabilities of the company? Explain.

Answer: If I may have to choose one of the firms for purchase, I would look for the net value of the firm and the ability to settle off the present liabilities (Groppelli and Ehsan, 2000). In this case, the net value of XYZ is comparatively cheaper than ABC and I would go with XYZ.

c. If the existing owners agreed to be accountable for all existing liabilities, how would this change your decision in (b), if at all?

Answer: I would first compare the net worth of both the firms. Analyzing the liabilities, ABC has a better net worth when compared to XYZ and can assure a better ROI.

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