Question

A) Interpret the Question 3 marks) Part A (8 marks) You are provided with the following information for Precedent Ltd Service revenue Profit Total assets Total liabilities Current ratio 2017 S620 000 52 500 540 000 300 000 0.60 : 1 2016 $575 000 56 100 555 000 330 000 0.71:1 Required: 1) A loan agreement entered into by the entity in 2017 requires the entity to maintain a minimum return on assets ratio of 10.50%. 1) Calculate the return on assets ratio for 2017. (2 marks) ii) Comment on whether the ratio for 2017 meets the requirement (1 mark) iii) Suggest a way to improve the ratio. Explain your answer. (1 mark)

Answer 1

1) i) return on assets ratio = profit / average total assets

Return on assets ratio (2017) = $52,500 / (($540,000 + $555,000) / 2)

Return on assets ratio (2017) = $52,500 / $547,500

Return on assets ratio (2017) = 9.50%

1) ii) decision - the return on assets ratio dosen't meet the requirement

Reason - because it is less than the required ratio of 10.50%

1) iii) the company can improve the ratio by paying off its liabilities which shall decrease company's total assets and hence increase company's return on assets ratio.

2) The ideal current ratio is 2 : 1 and higher the current ratio, better it is. But the company's current ratio is way less than that. Hence, the company's current ratio is not good.

3) The company's ratio has gone down from 0.71:1 in 2016 to 0.60:1 on 2017. Hence, it is a bad indicator. It means that the company's ability to pay off its current liabilities has reduced in the current year as compared to the previous year.