The balance sheet of a sole trader revealed the following position.
Fixed Assets
Land and buildings
R
9 170
R
Equipment at cost less depreciation 15 570
Goodwill at cost less amounts written off 10 250 34 990
Investment in shares at cost 2 200
Current Assets
R
R
Trading stock
45 840
Sundry debtors less bad debts written off
19 350
Cash at bank
10 920
76 110
113 300
=
A
Less: Current Liabilities
R
Sundry creditors and accruals
77 600
=
L
35 700
Owner's Interest
R
R
Capital
28 400
Profit for the year
7 300
35 700
=
0
Required
Answer the following questions:
(a) Are the assets correctly classified? If not, re-arrange them and give your reasons for doing this.
(b) What is the current ratio? Is it satisfactory?
(c) What is the acid-test ratio? Is it satisfactory?
(d) Is the business solvent? Give your reasons.
(e) Is the business overtrading? Give your reasons.
(f) What is the profitability ratio of the business?
Homework Answers
| Sole Trader | |
| Answer a | |
| Classified Balance Sheet | |
| Assets | Amount $ |
| Current Assets | |
| Cash | 10,920.00 |
| Account Receivable Net | 19,350.00 |
| Trading Stock | 45,840.00 |
| Current Assets | 76,110.00 |
| Long Term Investments | |
| Investment in shares | 2,200.00 |
| Long Term Investments | 2,200.00 |
| Property, plant, and equipment | |
| Land and Building | 9,170.00 |
| Equipment (net) | 15,570.00 |
| Total Property, plant, and equipment | 24,740.00 |
| Intangible assets | |
| Goodwill | 10,250.00 |
| Intangible assets | 10,250.00 |
| Total Assets | 113,300.00 |
| Liabilities & Owners' Equity | |
| Current Liabilities | |
| Sundry creditors and accruals | 77,600.00 |
| Current Liabilities | 77,600.00 |
| Long Term Liabilities | |
| Total Long Term Liabilities | - |
| Total Liabilities | 77,600.00 |
| Owners' Equity | |
| Capital | 28,400.00 |
| Profit for the year | 7,300.00 |
| Total Owners' Equity | 35,700.00 |
| Total Liabilities & Owners' Equity | 113,300.00 |
| Quick Assets | 2019 |
| Current Assets | 76,110.00 |
| Less: | |
| Trading Stock | 45,840.00 |
| Quick Assets | 30,270.00 |
| Ans b | |
| Current Ratio | 0.98 |
| Current Assets/Current Liabilities | |
| Current ratio is less than 1 so it is not satisfactory. | |
| Ans c | |
| Quick Ratio | 0.39 |
| Quick Assets/Current Liabilities | |
| Quick ratio is less than 1 so it is not satisfactory. | |
| Ans d | |
| Working capital is used to determine if business is overtrading. | |
| Working Capital | (1,490.00) |
| Current Assets less Current Liabilities | |
| As Working capital is negative so the business is overtrading. | |
| Ans e | |
| Profitability ratio | |
| Profitability margin | 25.70% |
| Profit for the year/Capital | |
| So Profitability ratio is 25.70% |
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