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)

	2018	2017
Assets
Currents Assets:
Cash and Cash Equivalents	1185806	1147076
Marketable Securities	93771	226090
Total cash,cash equivalents and marketable securities	1279577	13732166
Restricted Cash	115615	109700
Accounts Receivable	145544	152492
Prepaid Expenses,Deposits and other	190242	138676
Inventory	39742	43045
	1770720	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 Guest Credits	62914	58575
Current Portion of Maintenance Provisions	101852	82129
Current Portion of Long Term 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
Shareholders' Equity
Share Capital	548979	548977
Equity Reserves	106655	97514
Hedge Reserves	6856	(1902)
Retained Earnings	1640077	1614266

Total Shareholders' equity                                                       2302567     2258855

Total Liabilities and Shareholders' Equity                                  6758055    6522684

The net income for 2018 and 2017 were $91,465 and $279,058 respectively.
a) Provide a definition for the term ‘current liability.’ (Refer to the relevant standard or authoritative literature)
b) Why is the liabilities section of the statement of financial position of primary significance to bankers, creditors and other users of the financial statements?

c) 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.

d) 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

e) On May 20, 2018 a passenger was injured while disembarking one of the company’s aeroplane. This was partially the result of his own negligence. The passenger sued Raleigh Airlines Ltd. for $1,000,000. Raleigh’s legal counsel believes it is possible but not probable that the outcome of the suit will be unfavourable and that the settlement would cost the company from $500,000 to $800,000. Discuss the proper accounting treatment, including any required disclosure for the situation. Give the rationale for your answer.

Answer 1

A) Current Liability:

Paragraph 69a–d of IAS 1 states that liabilities are to be classified as current if any one of four specified conditions is met. The conditions are:

a) It expects to settle the liability in its current operating cycle

b) It holds the liability primarily for trading

c) The liability is due to be settled within 12 months

d) It does not have an unconditional right to defer settlement of the liability for at least 12 months after the reporting period.

B) The liabilities section of the statement of financial position of primary significance to bankers, creditors and other users of the financial statements because:

a) it shows the financial soundness of the entity

b) it indicates the level of obligation of such entity.

c) it assists in calculating various financial ratios that are involved in decision making process.

d) the capital structure of the entity can be understood and the cash flows projections for future could be estimated.

C) Increase in unearned revenue in statement of financial position is a positive indicator in terms of liquidity due to funds being realized earlier than the actual sale, this would mean that the funds are available in excess increasing the liquidity level of the entity.

D)Answer in excel screenshot.

E) As per GAAP(Generally accepted accounting principles), this obligation has to be treated as a contingent liability as it is possible but not probable and the accounting treatment would be to disclose under foot notes of financial statements for amount of $8,00,000.

A Current ratio 2018 2019 Total Current Assets(CA) 1770720 1817079 Total Current Liabilities(CL) 2275207 1686302 Current Ratio(CA/CL) 0.778267648 1.077552538 Analysis Poor Good there is a increase in current ratio showing a positive indicator Acid Test Ratio 2018 2019 Current assets excluding inventories(QA) 1730978 1 774034 Total Current Liabilities(CL) 2275207 1686302 Acid test Ratio (QA/CL) 0.760800226 1.052026268 Analysis Poor Good there is a increase in acid test ratio showing a positive indicator Debt to total Asset Ratio 2018 2019 Debt(D) 4455488 4 263829 Total Assets(TA) 6758055 6522684 Debt to total asset ratio(D/TA) 0.659285549 0.653692406 Analysis there is a decrease in Debt ratio showing a positive indicator 12 13 14 Rate of return on assets 2018 2019 Net Income(NI) 91465 279058 Total Assets(TA) 6758055 6522684 Rate of return on assets(NI/TA) 0.01353422 0.042782695 Analysis Average Good there is a increase in Return on assets ratio showing a positive indicator 15 16 17