Reference no: EM13847337

ASSIGNMENT QUESTIONS

QUESTION 1

a) The balance sheet for Capital Ltd reveals total assets of $440 000, total liabilities of $240000 and equity of $200 000 as at the end of the reporting period. Using this data, the debt ratio is 54.55 per cent, the equity ratio is 45.45 per cent and the debt/ equity ratio is 120 per cent. Can you explain why inferences from these ratios are consistent, despite the ratio calculations generating different numbers?

b) When calculating days inventory, the average inventory level is compared with the cost of sales. When calculating days debtors, the average debtors level is compare with the sales revenue. Explain why the former ratio uses cost of sales whereas the latter uses sales revenue.

c) Discuss the ratio(s) that will help a user to form an assessment about:

i. the short-term survival of an entity

ii. an entity's profit-generating capacity from its investment in assets

iii. an entity's financing policy      

QUESTION 2

Roshan operates a small book store in France. For the year ended 31 December 2014, his business has the following unadjusted trial balance:

	Dr($)		Cr ($)
Revenue			250,000
Cost of goods sold	45,000
Transportation expenses	5,000
Repair expenses	2,500
Rental	12,000
Electricity	2,000
Wages	24,000
Insurance	1,000
Bonus	500
Office supplies	3,500
Interest income			15,000
Furniture		65,000
Office Equipment		20,000
Accumulated Depreciation
- Furniture			8,000
- Office equipment			4,000
Capital			100,000
Drawing	25,000
Cash at Bank	152,000
Cash in hand	3,000
Accounts payable			31,000
Accounts receivable	40,000
Inventory	7,500
	408,000		408,000

Additional information:

a. Physical stock take as at 31 December 2014 showed an inventory value of $7,000.

b. Credit sales of $500 were omitted while preparing the unadjusted trial balance.

c. Electricity accrued is $500.

d. Office supplies prepaid at 31 December 2014 amounting $1,000.

e. Motor repairs expenses owing at 31 December 2014 amounting $1,000.

f.  Depreciation is yet to be provided for the year. All fixed assets are to be depreciated by 10% on cost.

g. Roshan withdrew cash $1,000 for his own personal use.

Required:

Prepare

(a) an Income Statement

(b) Your friend makes the following statement. How would you react to it? What advise will you give your friend? "It is not possible to earn profits unless we decide to cut-short on our costs".

(c) What do you understand by the terms 'relevance' and 'faithful representation' in accounting? Consider the following situation where your father has purchased an apartment and renovated and he now intends to rent out the apartment to recover his investment. What information would you consider as 'relevant'?

QUESTION 3

The following are excerpts from the Statements of Financial Position for Sun Dry Ltd:

	2014	2013	2012
Current Assets	$'000	$'000	$'000
Bank Balance	305	280	245
Short-term Investments	185	185	190
Accounts Receivable	640	505	395
Inventory	1,350	920	660
Prepaid Allowances	65	70	55
Total Current Assets	2,545	1,960	1,545
Current Liabilities
Notes Payable	255	225	200
Account Payable	955	740	520
Total Current Liabilities	1,210	965	720

Other information:

Item	2014	2013
	$'000	$'000
Net Credit Sales	5,775	5,250
Cost Of Goods Sold	4,620	4,200
Net Credit Purchases	5,050	4,460

Required:

a) The recent growth by Sun Dry Ltd has been fuelled by a relaxing of the credit criteria applied to potential customers wishing to purchase on credit.  Using all the necessary ratios, compare and contrast the liquidity position of Sun Dry Ltd from 2013 to 2014.  Ensure you discuss all relevant ratios affecting the stated issue.

QUESTION 4

Answer the following parts

a) You have just completed the income statement for the reporting period. The CEO, who has no accounting background, is reviewing the statement you have prepared and asks you to explain why the profit is relatively low compared to the increase in the cash at bank during the reporting period. Offer some suggestions that would explain this.

b) The balance sheet for Au Yong Pty Ltd reveals cash on hand of $2000, accounts receivable of $12 000, inventory measured at $15 000 and plant and equipment measured at $30 000. The liabilities of the entity are: accounts payable $8000, a bank overdraft of $10 000 and a loan of $60 000. Comment on the liquidity of the entity.

Knowing that you have some accounting experience, a friend has sought your advice regarding a business that he intends purchasing. The balance sheet for the business shows total assets of $200 000 and liabilities of $75 000. The selling business has provided no notes to accompany the balance sheet. On the basis of the information provided, your friend believes the business is worth $125 000. Advise your friend as to the accuracy of his assessment and what questions regarding the balance sheet he should ask the seller.