Question

The following financial data relate to Big Bang Pty Ltd for the years ended 30 June Year 2019 and 30 June Year 2018. Year 2018 $490 000 250 000 $630 000 Net credit sales Cost of goods sold Cash Accounts receivable 290 000 12 000 18 000 60000 70 000 150 000 81 000 130 000 Inventory Current liabilities 105 000 Additional information: The amount of Accounts receivables at 30 June Year 2017 was $78 000 (net). The inventory figure at 30 June Year 2017 was $130 000. The company provides its credit customers 30 days to pay. The average inventory turnover for the industry in which the company operates is 101 days You are required to explain and calculate the following ratios for the years ended 30 June Year 2019 and 30 June Year 2018: a. current ratio; n quick ratio accounts receivable turnover (times and in days); and -inventory turnover (times and in days). b. Comment on the short-term solvency, including the efficiency of the business, given the ratio results obtained in your answer in part a PART B. Income and Revenue (4 marks) The core business of Green Apple Ltd involves the sale of anti-virus software. The following took place during the financial year ended 30 June. The company earned $25 000 000 from the sale of software; $3 000 000 from update downloads; and $50 000 in interest from investing on the short-term money market. The company also received a $2000 discount arising out of the early settlement of a liability; and issued shares in exchange for $500 000 cash during the year. HC1010 Accounting for Business Page 3 of 7 Discuss whether the foregoing five financial items would meet the definition of income to the company during the year? Give reasons for your answer. Which, if any, of the items would meet the definition of revenue to the company for the year? Give reasons for your answer.

Answer 1

SOLUTION:-

1) Big Bang Pty Ltd

30th June 30th June 30th June 2019 2018 2017 Net credit sales 630000 490000 Cost of goods sold 290000 250000 Cash 18000 12000 Accounts receivable 70000 60000 78000 130000 150000 130000 Inventory Current assets 218000 222000 Current liabilities 105000 81000 Average receivables 65000 69000 Average inventory 140000 140000

Current ratio Current assets/Current liabilities 2.08 2.74 Times Quick ratio (Cash+Accounts receivable)/Current 0.89 Times 0.84 2 abilities Accounts receivable turnover (times) Net 7.10 Times 3) sales/Average accounts receivable 9.69 Accounts receivable turnover (Days)- 365/Accounts receivable turnover in times 38 51Days Inventory turnover (times) Cost of goods sold/Average inventory 4) 2.07 1.79 Times Inventory turnover (days) 365/Inventory turnover (times) 204 Days 176

b)	Short term solvency:
	The current ratio is above the generally accepted ratio of 2 and is hence satisfactory.
	But, the more stringent quick ratio is lower
	than the standard ratio of 1 and it indicates a
	less than satisfactory liquidity position. It means
	that the firm will not be able to meet its current
	liabilities at short notice.
	The overall situation is not satisfactory.
	Efficiency:
	The efficiency of asset management is indicated by the receivable turnover in days
	and the inventory turnover in days as
	compared with the norms of the firm or the
	industry standards.
	As regards the receivable turnover in days
	(also called days sales outstanding), the figure
	is more than the credit period allowed for the
	customers, which is 30 days. However, there has
	been significant improvement in 2019 when it has
	decreased to 38 days from 51 days.
	The inventory turnover of the firm (days) is very high when compared to the industry norm of 101 days.
	It means that the firm is overinvested in inventory
	which, will entail higher financing and costs
	associated with stocking excessive inventory.
	The inventory management is poor and calls for
	immediate attention.
	That the inventory turnover in days is high proves
	why the current ratio is satisfactory but the quick
	ratio is not.

2) The following are the five elements given in this case study:

1. Sales of software $25000000
2. Update of software $3000000
3. Interest on Investment $50000
4. Discount received on early settlement : $2000
5. Issue of share $500000

Now as per IAS /IFRS , following are the items which fulfills the definition of income to the company

Definition of Income :

Income has a broader scope than of revenue , according to IFRS 15, Income means economic benefits derived by the entity during a accounting period in the form of cash or enhancement of assets or decrement of liability , Income excludes direct contribution by the equity share holders

1. Sales of software $25000000 : Income as per definition above
2. Update of software $3000000 : Income as per definition above
3. Interest on Investment         $50000: Income as per definition above
4. Discount received on early settlement : $2000 : Income as per definition above
5. Issue of Share : Can’t be classified as Income

As per IFRS 15: revenue means Income derived in the normal course of business

1. Sales of software $25000000 : revenue as per definition above
2. Update of software $3000000 : revenue as per definition above

Interest and discount received from customer can be classified as other income but not revenue, , further issue of share is inflow from equity participants , hence cant be classified as revenue.

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