Question

Great Road Trips Ltd. Comparative Statements of Financial Position As at 30/06/2019 As at 30/06/2018 $ 90,000 30,000 3,900 200 1,320 85,000 40,000 2,400 300 1,200 117,620 124.100 60,000 40,000 4,000 10,000 50,000 167,620 36,000 160.100 Current Assets Cash Accounts Receivable Less: Allowance for Bad Debts Supplies Prepaid Insurance Total Current Assets Non-current Assets Vehicles Less: Accumulated Depreciation - Vehicles Total Non-current Assets TOTAL ASSETS Current Liabilities Accounts Payable Unearned Revenue Total Current Liabilities Non-current Liabilities Long Term Loan Total Non-current Liabilities TOTAL LIABILITIES Shareholders' Equity Contributed Capital Retained Earnings Total Shareholders' Equity Total Liabilities & Shareholders' Equity 15,000 9,000 20,000 7,000 24.000 27,000 25,000 5,000 25,000 49,000 5,000 32,000 50,000 68,620 40,000 88.100 118,620 128,100 167,620 160,100

A. Perform horizontal analysis and vertical analysis (for 2019 only) on the comparative

balance sheet. In your answer please remember to indicate if it is an INCREASE or

(DECREASE) and round your findings to ONE decimal place [e.g. -32.996% is -33.0%

or minus 33.0% or (33.0%).

B. Calculate the current ratio for 2019.

C. Assuming credit sales for 2019 were $300,000 calculate the receivables turnover ratio

for 2018.

D. Calculate the days in receivables ratio for 2019.

E. Calculate the allowance ratio for 2019.

F. Comment on the significant changes disclosed by the comparative balance sheet. In your

analysis include:

i) The main findings from the horizontal analysis and vertical analysis

ii) An interpretation of what each of the ratios mean for Great Road Trips

Answer 1

(A)Horizontal Analysis is the percentage change for individual items in the financial statement from year to year.Horizontal analysis compares the item on each line to determine the change in dollar amounts.A percentage change can be shown by using the earlier figure as base(base year is always the earlier year )

Balance Sheet(Horizontal Analysis) Current Assets Cash Accounts Receivable Less:Allowance for bad debts Supplies Prepaid Insurance Total Current Assets Non-current Assets Vehicles Less:Accumulated deprication Total Non-current Assets TOTAL ASSETS 2019 90,000 30,000 3,900 200 1,320 117,620 Increase or (Decrease] 2018 Amount percent 85,000 5,000 40,000 -10,000 2,400 1,500 300 -100 1,200 120 124,100 -6,480 5.996 -25.096 62.595 -33.396 10.0% -5.296 60,000 10,000 50,000 167,620 40,000 4,000 36,000 160,100 20,000 6,000 14,000 7,520 50.096 150.096 38.996 4.796 15,000 9,000 24,000 20,000 7,000 27,000 -5,000 2,000 -3,000 -25.096 28.696 -11.196 Current Liabilities Accounts Payable Unerned Revenue Total Current Liabilities Non-current Liabilities Long term loan Total Non-current Liabilities TOTAL LIABILITIES 25,000 25,000 49,000 5,000 5,000 32,000 20,000 20,000 17,000 400.096 400.096 53.196 Shareholder's Equity Contributed Capital Retained Earnings Total Shareholder's Equity 50,000 68,620 118,620 40,000 88,100 128,100 10,000 -19,480 -9,480 25.096 -22.196 -7.496 Total Liabilities & Shareholders' Equity 167,620 160,100 7,520 4.796

Since we are measuring the amount of change between 2018 and 2019,the dollar amounts for 2018 become the base figures for expressing these changes in percentage form.For example:Cash increased by $5,000 from 2018 to 2019 .This increase expressed in percentage form is computed as follows:$5,000/85,000 = 5.9%

Vertical analysis is the relationship of each item on a financial statement to some base amount on the statement.On the income statement ,each item is expressed as a percentage of net sales.In vertical analysis of balance sheet,each asset item is stated as a percentage of total assets and each liability and stockholder's equity item is expressed as a percentage of total liabilities and stockholder's equity.

For example:figure below for cash is computed as follows:$90,000/$167,620 = 53.7%

Balance Sheet(Vertical Analysis) 2019 Current Assets Cash Accounts Receivable Less:Allowance for bad debts Supplies Prepaid Insurance Total Current Assets Non-current Assets Vehicles Less:Accumulated deprication Total Non-current Assets TOTAL ASSETS 90,000 30,000 3,900 200 1,320 117,620 53.796 17.995 2.396 0.196 0.896 70.296 60,000 10,000 50,000 167,620 35.896 696 29.896 10096 15,000 9,000 24,000 8.996 5.496 14.396 Current Liabilities Accounts Payable Unerned Revenue Total Current Liabilities Non-current Liabilities Long term loan Total Non-current Liabilities TOTAL LIABILITIES 14.996 25,000 25,000 49,000 14.996 29.296 Shareholder's Equity Contributed Capital Retained Earnings Total Shareholder's Equity 50,000 68,620 118,620 29.896 40.996 70.896 Total Liabilities & Shareholders' Equity 167,620 100%

Current ratio,Accounts receivable turnover ratio ,days in receivable ratio(2019):

(B) Current Ratio:Current ratio is one of the measure of evaluate liquidity(Liquidity meaasures the ability of a business to pay its debts when due).Current ratio measures the ability of a business to pay its current debts using current assets.It i computed as follows:

Current Assets/Current liabilities

Current assets = $117,620

Current liabilities = $24,000

Current ratio = 117,620/24,000

= 4.90

(C)Accounts Receivable turnover ratio:The accounts receivable trunover ratio measures the efficiency with which sales on account are collected.This ratio is computed as follows:

Net credit sales/Average account receivables*

300,000 Computation: (a)Net credit sales Accounts receivable(net): Beginning of the year End of year Total (b)Average accounts receivable(Total/2) Accounts receivable trunover(a/b) 40,000 30,000 70,000 35,000 8.57times

(D)Days in receivable ratio:This ratio measures the average number of days it takes to collect an account receivable.This ratio is computed by dividing the average accounts receivable by average daily sales.Average daily sales is computed by dividing net sales by 365days.

Computation: (a) Average accounts receivable Net credit sales (b)Average daily sales(net credit sales/365days) No.of days in receivable(a/b) 35,000 300,000 822 42.58days