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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
Less Cost of sales
$160 000
Gross profit
$140 000
Depreciation expense
$ 30 000
$ 20 000
Interest expense
$ 10 000
Other expenses
$ 45 000
Profit
$ 55 000
$ 65 000
Statement of financial position
As at 30 June 2015
Cash
Account receivables
$ 50 000
Inventories
$ 40 000
Current assets
$110 000
Property, plant and equipment
$200 000
Non-current assets
Total assets
$410 000
$310 000
Current liabilities
Non-current liabilities
Total liabilities
$ 80 000
Equity
$330 000
$230 000
Total liabilities and equity
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.
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