Question

AP12-15A  

The following information comes from the accounting records of Hercep Ltd. for the first three years of its existence:

	2018	2019	2020
Statement of Financial Position
Assets :
Cash	$22,500	$20,000	$25,000
Accounts receivable	67,500	50,000	145,000
Inventory	110,000	130,000	220,000
Capital assets (net)	430,000	450,000	500,000
Other assets	232,000	210,000	266,400
Total :	$862,000	$860,000	$1,156,400
Liabilities and equity:
Accounts payable	$100,000	$50,000	$100,000
Long-term debt	200,000	250,000	500,000
Common shares	525,000	525,000	525,000
Retained earning	37,000	35,000	31,400
Total :	$862,000	$860,000	$1,156,400
Statement of earning:
Sales	$700,000	$800,000	$900,000
Cost of goods sold	(420,000)	(540,000)	(630,000)
Other expenses	(170,000)	(220,000)	(218,000)
Total :	110,000	40,000	52,000
Income tax	(33,000)	(12,000)	(15,600)
Net Income	$77,000	$28,000)	$36,400)

Required

a.  Based on above information, analyze and comment on the changes in the company's profitability and liquidity, in addition to the management of accounts receivable and inventory from 2018 to 2020.

b.  Based on the above information, analyze and comment on the company's use of leverage from 2018 to 2020

Answer 1

Answer:

(a)

• Organization's Profitability and liquidity :It can be seen that however the Sales has increased during the period 2018 to 2020 the cost o goods sold has additionally increased which in turn lead to a decrease in the net income of the organization.
• Further the liquidity of the organization can be surveyed based on the present proportion of all the three years. Since the present resources are adequately more than the present liabilities, it tends to be presumed that the organization has liquid assets for meet its budgetary commitments.
• Management of accounts receivable and inventory: The accounts receivable must be matured appropriately and fitting credit period ought to be alloted. It is seen that the percentage of accounts receivables when contrasted with sales has increased in the year 2020. Further, the organization is hold stock which could prompt acquiring of holding cost and carrying cost of stock. The organization must guarantee that ideal degree of stock is maintained.

(b)

• The organization has been raising long term debt consistently, The organization must guarantee that appropriate debt equity  ratio is maintained. Further, the organization can likewise raise funds by issue of shares.