Question

Styles P2-SA Instructions (a) Compute the following values and ratios for 2017. (We provide the results from 2016 for comparative purposes.) 0) Working capital. (2016: $160,500) Working capital- current assets- current liabilities -$458,900-$195,500 -$263,400 The working capital is $263,400 (i) Current ratio. (2016: 1.65:1) Current ratio Curr ssets Current liabilities 0158,900 5195,500 -2.34:1 The current ratio is 2.34:1 (ii) Free cash flow. (2016: $48,700) Free cash flow -net cash provided by operating activities -Capital expenditures Cash dividends 190,800-S92,000-S31,000 -$67,800 The free cash flow is $67 800 Debt to assets ratio. (2016: 31%) Debt to ratio-Total liabilities (iv) Total assets -$395,500 $1,034,200 -38.24% The debt assets ratio is 38.24%

Answer 1

Ans:

Available Information
Particulars		2017	2016
Working Capital		$263,400	$160,500
Current Ratio		2.34	1.65
Free Cash flow		$67,800	$48,700
Debt to Asset ratio		38.24%	31%
Earning per Share		3.06	3.15

a) Liquidity : Current Ratio and Working capital uses to measure the Liquidity of the entity. In given case current ratio in 2017 is 2.34 is more than 1.65 in 2016 and Working capital in 2017 is $263,400 as compare to $160,500. Both Current ratio and working capital shows entity's ability to pay off its current liabilities through current assets. In 2017 both current ratio and working capital is high as compare to 2016 which means entity's better Liquidity position in 2017.

b) Solvency: Both Free cash flow and Debt to asset ratio helps to understand the solvency of the entity. Higher the cash flow shows the entity's good solvency condition whereas poor cash flow is indicator of insolvency. Higher the debt to asset ratio shows poor solvency as more and more asset is assigned to debts at the time of liquidation. In given case free cash flow is higher in the year 2017 as compare to 2016 which is good for solvency whereas it also has higher Debt to asset ratio as compare to which indicates poor solvency.

c) Profitability : Earning per share is best measure to understand the profitability of an entity. in the given case the earning per share in 2017 is lower than as compare to 2016 this is may be due to increase in Debt which is indicated by Debt to equity ratio. The higher the Earning per share the better it is as in the given case the profitability in the 2017 decreases as compare to 2016.