Reference no: EM132846190

ACT212 Principles of Accounting - Canadian University Dubai

Learning Outcome 1: Illustrate accounting for liabilities and equity of corporations.
Learning Outcome 2 Employ tools and methods to analyze the financial statement data to guide investment and lending decisions.
Learning Outcome 3 Explainthe major cost and managerial accounting concepts.
Learning Outcome 4 Apply the cost-volume-profit analysis to determine break-even- point and plan profit.
Learning Outcome 5 Prepare operating budgets and discuss their processes for the purposes of planning and doing differential analysis and product pricing.

Question 1

You have been hired as an analyst for Emirates Bank and your team is working on the assessment of DDF Inc., DDF Inc. is a firm that specializes in the production of imported organic food imported from North Africa. Your assistant has provided you with the following data for DDF Inc. and their industry.

Ratio	2020	2019	2018	2020- Industry Average
Long-term debt	0.45	0.40	0.35	0.35
Inventory Turnover	62.65	42.42	32.25	53.25
Depreciation/Total Assets	0.25	0.014	0.018	0.015
Days' sales in receivables	113	98	94	130.25
Debt to Equity	0.75	0.85	0.90	0.88
Profit Margin	0.082	0.07	0.06	0.075
Total Asset Turnover	0.54	0.65	0.70	0.40
Quick Ratio	1.028	1.03	1.029	1.031
Current Ratio	1.33	1.21	1.15	1.25
Times Interest Earned	0.9	4.375	4.45	4.65
Equity Multiplier	1.75	1.85	1.90	1.88

Answer the following questions.

Giventhe information above, your answershould be as complete as possible, but do not use any irrelevant information.

Requirement:

a. In the annual report to the shareholders, the CEO of Flipper Inc wrote, "2018 was a good year for the firm with respect to our ability to meet our short-term obligations. We had higher liquidity largely due to an increase in highly liquid current assets (cash, account receivables and short-term marketable securities)." Was the CEO correct?

b. What can you say about the firm's asset management?

c. You are asked to provide the shareholders with an assessment of the firm's solvency and leverage. Be as complete as possible given the above information, but do not use any irrelevant information.

Question 2

ABC completed the following transactions during a given year:

Transaction

Ratio

1.   Sold obsolete inventory at cost 2    Redeemed debentures by issuing ordinary shares 3.   Issued a share dividend on ordinary shares 4.   Declared a cash dividend on ordinary shares 5.   Paid the GST owing to the tax office 6.   Purchased inventory on credit 7.   Sold inventory for cash 8.   Wrote off a bad debt against Allowance for Doubtful Debts 9.   Collected an account receivable 10. Sold inventory on credit 11. Issued additional ordinary shares for cash 12. Paid trade accounts payable

1.      Profit margin 2.      Return on ordinary equity 3.      Earnings per share 4.      Dividend pay-out 5.      Dividend yield 6.      Quick ratio 7.      Current ratio 8.      Current ratio 9.      Receivable's turnover 10.  Inventory turnover 11.  Debt ratio 12.  Return on assets

Required
State whether each transaction would cause the ratio listed with the transaction to increase, decrease or remain unchanged. Explain your answer.

1. Decrease - will increase sales and cost of sales by the same amount, resulting in a zero change in operating profit.

2. Decrease - issuing additional shares will increase shareholders' equity (denominator), while profit is assumed to remain the same.

3. Decrease - issuing a share dividend will increase the number of ordinary shares on issue (denominator), while profit is assumed to remain the same.

4. Increase - declaring more cash dividend will increase the proportion of profit distributed to shareholders as dividends.

5. Remain unchanged - paying GST owing will affect total assets and total liabilities, not dividend paid or market price per share.

6. Decrease - purchasing inventory on credit will increase current liabilities (denominator), whilst the numerator remains constants as inventory is excluded from the calculation of quick ratio.

7. • Remain unchanged if selling price equals to cost - because the amount received as cash will be the same as the reduction in inventory balance, resulting in zero change in total current assets whilst current liabilities remain constant.
• Increase if selling price is greater than cost of sales - because cash received is greater than the reduction in inventory balance, resulting in the increase in current assets (numerator) whilst current liabilities (denominator) remain constant.

8. Remain unchanged - writing-off (estimated) bad debt against allowance for doubtful debts account does not decrease gross accounts receivable (current assets), until the actual bad debt is write-off.

9. Increase - collecting an account receivable will reduce accounts receivable balance (denominator), while net sales revenue is assumed to remain constant.

10. Increase - selling inventory will reduce inventory balance (denominator), while cost of sales (numerator) will increase.

11. Decrease - issuing additional ordinary shares for cash will increase total assets (denominator), whilst total liabilities (numerator) remain the same.

12. Increase - paying accounts payable will decrease total assets (denominator) through reduction in cash, while profit is assumed to remain the same.

Question 3
Financial statements of XYZ Ltd are presented below.

Additional information

• Payables includes $5620 (2019) and $5730 (2018) trade accounts payable; the remainder is accrued expenses.
• Market prices of issued shares at year-end (2019):
Ordinary, $12.00 Preference, $6.70

XYZ LTD Comparative Statements of Financial Position as at 31 December ($000)
		2019			2018
	Current assets Cash and cash equivalents Receivables (all trade) Inventories	$	3 290 8 200   14 000		$	4 220 7 350   13 860
	Total current assets		25 490			25 430
	Non-current assets Property, plant and equipment		34 380			30 660
	Total non-current assets		34 380			30 660
	Total assets	$	59 870		$	56 090
	Current liabilities Payables	$	11 560		$	11 980
	Total current liabilities		11 560			11 980
	Non-current liabilities Interest-bearing liabilities		19 880			18 900
	Total non-current liabilities		19 880			18 900
	Total liabilities	$	31 440		$	30 880
	Equity Share capital Retained earnings	$	15 400 13 030		$	15 400   9 810
	Total equity	$	28 430			25 210

XYZ LTD Statement of Profit or Loss for the year ended 31 December 2019 ($000)
	Revenue (net sales) Less: Cost of sales				$	110 000 70 200
	Gross profit					39 800
	Less: Expenses Selling and distribution expenses Administrative expenses Finance costs					14 200 9 940 3 120
	Total expenses					27 260
	Profit before income tax Income tax expense					12 540 3 816
	Profit				$	8 724

XYZ LTD Statement of Changes in Equity for the year ended 31 December 2019 ($000)
	Share capital Ordinary (14 400 000 shares): Balance at start of period				$	14 400
	Balance at end of period					14 400
	Preference (500 000 shares): Balance at start of period					1 000
	Balance at end of period					1 000
	Total share capital				$	15 400
	Retained earnings Balance at start of period Total recognised profit for the period Dividend paid - ordinary Dividend paid - preference				$	9 810 8 724 5 404    100
	Balance at end of period				$	13 030

Required

A. Calculate the following ratios for 2019. The industry average for similar businesses is also provided.

Industry average

1.   return on assets                             22.0%

2.   return on ordinary equity              20.0%

3.   profit margin                                  4.0%

4.   earnings per share                         45c

5.   price-earnings ratio                      12.0

6.   dividends yield                               5.0%

7.   dividend pay-out                            70%

8.   current ratio                                  2.5:1

9.   quick ratio                                     1.3:1

10. receivables turnover                      13.0

11. inventory turnover                         6.0

12. debt ratio                                       40.0%

13. times interest earned                      6.0

14. asset turnover                                1.8

B. Given the above industry averages, comment on the company's profitability, liquidity and use of financial gearing.

C. Discuss the limitations of ratios analysis.

Attachment:- Principles of Accounting.rar