Acc00724 Accounting For Managers- Owners Assessment Answer

Answers 

1. (a) Current ratio is the company’s ability to repay its debt. In Other words, current ratio is the liquidity ratio that measures the company’s ability to repay its debt in short term generally 12 month. Current ratio is also called working capital ratio.

Current ratio for the year ended 2007 is 1.720 which has decreased from the previous year which was 2.07. This current ratio of the company states that company is in better position to pay off its liabilities. But if we see at the industry’s current ratio i.e. 1.760, which is higher than our company’s current ratio, it indicates that company is not in good condition to repay its liabilities.

Quick ratio is also called acid test ratio, or liquid ratio. It indicates how the company is able to pay off its short term liabilities. Quick ratio is the indicator of company’s short term liability.

Lower the quick ratio means that company’s liquidity position is not satisfactory, where as higher the quick ratio better the company's liquidity position. Quick ratio for the year 2007 is 0.198 which has decreased from the previous year from 2.07. This quick ratio states that company is not in good condition to pay off its short term liabilities as compare to industry capabilities to pay off its debts as the quick ratio of industry is 0.78. (Baridwan, 2013)

b) The Super Cheap Auto Group Limited has a combination of both forms of finances that is long term and short term. From the cash flow statement, it can be noticed that company is regular in payment of its liabilities. Along with principal amount the company has also paid interest amount on time. The company has earned sufficient profits, which indicates that company is also regular in paying the dividends to its shareholders. But at the same time company is not in condition to pay off its short term debts on time. From the cash flow from operating activity it can be identified that there is increase in the borrowing cost during the year 2007 which indicates that the company has made extra borrowings during the year.

c) Inventory turnover ratio is the ratio that shows how many times the company's inventory is sold and replaced for a period of time. Inventory turnover ratio is calculated as follows-

Inventory turnover ratio = sales/average inventory

Hence, the inventory turnover ratio of Super Cheap Auto Group Limited during the year 2007 is 1.659 which has decreased from the previous year which was 1.66.

Working Capital Management enables to determine that the company is able to continue its operations and has sufficient cash inflow and outflow to satisfy companies’ requirements. The Companies receipt has increased in year 2007 as compared to previous year from 581,016 to 689,172. The net working capital of the company is positive, which indicates that company is able to continue its operations, it represents that short term to current assets are not secured by long term assets.

d) No, the Super cheap Auto should not borrowed extra fund as the current debt of the company is high and borrowing the extra fund will create impact over the solvency position of the company. Also there is increase in interest cost of the company from the previous year and borrowing extra fund will create impact over the profitability of the company. The company have enough of retained earning so can make the use of the same for the purpose of expansion.

e) The Price earnings ratio of Super Cheap Auto Group Limited for the year 2007 was 4.66 which has increased from the previous year which was 3.44. Although the company has increased its P/E ratio but is still very much low from the market expectation which is 16.7. The average dividend yield is 3.7% on the other hand company is paying dividend at the higher rate which is 10.7% in the year 2007 which is better from the industrial standard.

2. (a) The mainUsers of financial statements are stated below-

1) Owners and investors

2) Government

3) Management

4) Creditors

(b). The two different groups who are the users of financial information-  

1) Owners and investors-

Stakeholders or owners of corporations need necessary information about the financial position of the company, in order to make decisions on what to do or what not to do in respect of the investments. The limitation which the owner may face with the financial statement is that it can be manipulated by the management of the company.

Benefits gained by the owners-

1. Investors rely on the financial information in order to gain necessary information like profits of the business, risks faced by the business, about the financial health, comparison with the previous year's profits etc. It helps the owners to take necessary decisions.
2. It helps to observe about the value of the business and about the profit margins. (Bebbington, 2014)

2) Creditors-

Creditors are interested in accounting information because it enables them to assess the credit worthiness of the company. Lenders lend money only to being satisfied with the credit worthiness of the company. They are basically interested in the company's liquidity i.e. company's ability to pay off its short term liabilities. The creditor also faces the issue that the information in the financial statement is based on the data of the past year which may have changed over the time.

Benefits gained by the Creditors

1. Creditors also rely on the financial information in order to gain necessary information about company's liquidity position, company's policy to pay off its liabilities on time.
2. Creditors review the financial information to assess the cash flow position.  (Christensen, 2013)

c. Following items to be classified as-

1) A loan to another company      - Asset

2) Shares issued to the public     - Equity

3) Inventory purchased last week - asset

4) Depreciation of equipment - expense

5) Provision for long service leave - liability

6) Excess payment to the tax department - asset

7) Shares owned in another company - asset

8) Accounts payable - liability

9) Prepaid insurance premium - asset

10) Deposit paid by a customer for work yet to be done - liability

11) Credit sales - asset

12) Cash sales - revenue

13) Retained profit – liability

14) Advertising - expense

15) Bad debts - expense

16) Dividend declared, not yet paid.  - Liability

References

Baridwan, Z. (2013). Accounting Fundamentals And Variations of Stock Price: Methodological Refinement with Recursive Simultaneous Model. Journal of Indonesian Economy and Business: JIEB.,28(1), 84.

Bebbington, J., Unerman, J., &O'Dwyer, B. (Eds.). (2014). Sustainability accounting and accountability. Routledge.

Christensen, T., Cottrell, D., & Baker, R. (2013). Advanced Financial Accounting. McGraw-Hill.

Jack, L. (2015). Book Review: Fair value accounting in historical perspective. Accounting Review, 90(2), 825-828.