Reference no: EM13736069

 

Tom and Jerry commenced operations on 1 July 2015. Assume that the companies are identical in all respects except their accounting policies. Tom revalues its property, plant and equipment; whereas Jerry values its property, plant and equipment at historical cost. Furthermore, Tom uses straight-line depreciation compared to Jerry, which uses the reducing balance method of depreciation. The statements of financial position and statements of financial performance for the entities are presented below:

 

Statement of financial performance for the year ended 30 June 2015
	Tom	Jerry
Revenue	$300 000	$300 000
Less Cost of sales	$160 000	$160 000
Gross profit	$140 000	$140 000
Depreciation expense	$  30 000	$  20 000
Interest expense	$  10 000	$  10 000
Other expenses	$  45 000	$  45 000
Profit	$  55 000	$  65 000

Statement of financial position As at 30 June 2015
	Tom	Jerry
Cash	$  20 000	$  20 000
Account receivables	$  50 000	$  50 000
Inventories	$ 40 000	$ 40 000
Current assets	$110 000	$110 000
Property, plant and equipment	$300 000	$200 000
Non-current assets	$300 000	$200 000
Total assets	$410 000	$310 000
Current liabilities	$  30 000	$  30 000
Non-current liabilities	$  50 000	$  50 000
Total liabilities	$  80 000	$  80 000
Equity	$330 000	$230 000
Total liabilities and equity	$410 000	$310 000

Required:

a) Calculate the following ratios for Tom and Jerry ensuring you show your formula:

i. Return on assets

ii. Return on equity

iii. Profit margin

iv. Current ratio

v. Asset turnover

vi. Debt ratio

b) Write a report commenting of the performance and position of Tom and Jerry. Include a summary table of the results you have used in your discussion.

c) With reference to your ratio calculations, comment on the importance of identifying accounting policy choices when comparing ratios for entities, or when comparing ratios for a single entity over time.