Question

Presented below is the condensed financial statements of Raleigh Airlines Ltd. for the year ended December 31, 2018. Consolidated Statement of Financial Position At December 31 (Stated in thousands of Canadian dollars)

Assets	2018	2017
Current assets:
Cash and cash equivalent	1185806	1147076
Marketable securities	93771	226090
Total cash, cash equivalents and marketable securities	1279577	1373166
Restricted cash	115615	109700
Accounts receivable	145544	152492
Prepaid expenses, deposits and other	190242	138676
Inventory	39742	43045
	1770,720	1817079
Non-current assets:
Property and equipment	4814200	4567504
Intangible assets	54851	59517
Other assets	118284	78584
Total assets	6758055	6522684
Liabilities and shareholder’s equity
Current liabilities:
Accounts payable and accrued liabilities	654422	546505
Unearned revenue	695367	659953
Deferred rewards program	224608	185991
Non-refundable guests credits	62914	58575
Current portion of maintenance provisions	101852	82129
Current portion of longterm debt	536044	153149
	2275207	1686302
Non current liabilities:
Maintenance provisions	278898	270347
Long-term debt	1442913	1895898
Other liabilities	33512	19171
Deferred income tax	424958	392111
Total liabilities	4455488	4263829
Shareholder’s equity:
Share capital	548979	548977
Equity reserves	106655	97514
Hedge reserves	6856	(1902)
Retained earnings	1640077	1614266
Total shareholder’s equity	2302567	2258855
Total liabilities and shareholder’s equity	6758055	6522684

The net income for 2018 and 2017 were $91,465 and $279,058 respectively.

1. Why is the liabilities section of the statement of financial position of primary significance to bankers, creditors and other users of the financial statements? (3 marks)

2. The accountant, in analysing the Statement of Financial Position, observed that the unearned revenue has increased in the current year when compared to the prior year. Is this a positive or negative indicator about the company’s liquidity? Explain. (3 marks)

3. Evaluate the company’s liquidity and financial flexibility by calculating and analysing the following ratios for the two year period. (i) Current ratio

(ii) Acid Test Ratio

(iii) Deb-to-total Assets

(iv) Rate of return on Assets (8 marks)

Answer 1

1. Liablity section is of much more importance to the fiancial analysts OR to the Bankers or to the users of Financial Statements. Liabilities tell a deep story of how a company finances, plans and accounts for money it will need to pay at a future date.

In the world of accounting, a liability is an obligation but is more defined by previous business transactions, events, sales, exchange of assets or services, or anything that would provide economic benefit at a later date.

Liablities section tells us about the future economic conditon of the company. It tells about the shareholders equity and also the future position of the company. Most of the ratios are calculated based on the liablities of the company. Also the liablities tells us that how much would be the outflow of funds of the company in the coming future.

2. Increase in the unearned revenue, whether Good OR Bad? It depends, upon various factors.

If the unearned revenue is increasing, and the company is delivering its services at some point of time in future without any fault, then it can be considered as good. However, if the company lacs in delivering the same at some future point of time, then it will become a matter of concern and it will not be a good sign for the company growth.

As, the unearned revenue, is a part of current liablities, that company need to incur. So to decide about the worthiness of the same, it can be said that. the Unearned Revenue is good, if the company is meeting out its liablity without any fault, because it will anyhow increaes the liquidity of the company. Otherwise, if the company is not meeting its liablility on time, then it will be a matter of concern for the companys long term existence.

3. Current Ratio = Current Assets / Current Liablities

Acid Test Ratio = (Cash & Cash Eq.+Marketable Securities + Accounts Receivable) / Current Liablities

Debt-to-Total Assets = Total Debts / Total Assets

Rate of Return on Assets = Net Income / Total Assets. (Cannot be calculated as the information of Net Income is Not Avaliable) However the formula has been provided for the same.

2018|| Current Ratio e Acid Test Ratio Debt-to-Total Assets 2017 1.08 0.90 0.31! 0.63 0.29