Question

Exam period 10 January, 2020 Exam Basic Accounting Exercise 1 (20 points) To assist the financial director of a medium sized enterprise, you have been asked to draft some financial ratios. It concerns the ratios accumulated in Table 1. shown below. Table 1. Ratios with corresponding standard values of the enterprise. Ratio for Standard value Realisation Liquidity Current ratio 1.1 Solvency Debt ratio 0,65 Profitability Return on Equity Return on Assets 20% 13% A On basis of last year's Balance sheet and Profit and Loss account, shown in Table 2 and 3, calculate the outcomes for the key figures liquidity, solvency and profitability. Show the calculations and the outcomes for these key figures on the answer sheet. (8 points) B For each key figure, compare the calculated outcome with the standard value and give a plausible explanation for the fact that the values realised for the key figures are the same, better or worse than the standard value. If possible, use the data from the Balance sheet and Profit and Loss account for your explanation (12 points) Table 2. Balance sheet as of December 31" 2017 and 2018 (amounts x € 1.000) 2017 2018 2017 2018 Machines Furniture Inventory Accounts receivable Cash Total Assets 260 200 90 400 50 1,000 400 Equity 400 Bank loan 110 Accounts payable 700 Current account credit 80 1,800 Total Liabilities 350 100 450 100 800 200 650 150 1,000 1,800 Table 3. Profit & loss account for the year 2018 (x € 1.000) Net Sales 8,000 Cost of goods sold Salaries Depreciation Other operating expenses 5,000 2,400 120 230 Operational profit terest fit before Tax (7.750) 250

Answer 1

* RATIOS REALISATION RATIO STANDARD VALUE 2017 2018 Liquidity * Current Ratio Refer Note 1 1.11 1.1 0.98 Solvency * Debt Ratio Profitability * Return on Equity Refer Note 2 0.65 0.65 0.55 Refer Note 3 20% 27.5% |Refer Note 4 * Return on Assets 13% 12.22% NOTE 1:- Current Ratio is calculated as follows:- Current Ratio = Current Assets / Current Liabilities Current Liabilities are ones which are to be paid within 12 months Here, current liabilities include Accounts Payable and Current Account Credit For 2017 = Current Liabilties = Accounts Payable + Current Account Credit For 2017 = Current Liabilties = 450 + 100 = 550 For 2018 = Current Liabilties = Accounts Payable + Current Account Credit For 2018 = Current Liabilties = 650 + 150 = 800 Current Assets are ones which are to be realised within 12 months Here, current assets include Inventory, Accounts Receivable and Cash For 2017 = Current Assets = Inventory + Accounts Receivable + Cash For 2017 = Current Assets = 90 + 400 + 50 = 540 For 2018 = Current Assets = Inventory + Accounts Receivable + Cash For 2017 = Current Assets = 110 + 700 + 80 = 890 Current ratio 2017 = 540 / 550 = 0.98 Current ratio 2018 = 890 / 800 = 1.11 Current ratio higher is better as it tells us more assets are available as compared to laibilties. Current ratio is less as compared to Standard for 2017 but increased in 2018 and is good. NOTE 2:- Debt ratio is total liabilties (long term) against total assets. It tell how many times asset are available as compared to liabilities. For 2017 = Total Liabilties = Bank Loan + Accounts Payable + Current Account Credit For 2017 = Total Liabilties = 100 + 450 + 100 = 650 For 2018 = Total Liabilties = Bank Loan + Accounts Payable + Current Account Credit For 2018 = Total Liabilties = 200 + 650 + 150 = 1000 For 2017 = Total Assets = 1000 For 2018 = Total Assets = 1800 Debt ratio 2017 = Total Liabilities / Total Assets = 650 / 1000 = 0.65 Debt ratio 2018 = Total Liabilities / Total Assets = 1000 / 1800 = 0.55 Debt Ratio lower is better as it signifies more asset available to pay off the liabilties. Debt ratio is same as compared to standard for 2017 and reduced for 2018 which is good. NOTE 3:- Return on Equity is total return to owners that is shareholders of the company. The profit figures for 2017 are not available and hence cannot be calculated Return on Equity 2018 = Net Profit / Shareholders Equity Return on Equity 2018 = 220 / 800 = 27.5% Profit after tax is taken for calculation but since tax figures are not available hence PBT is taken. Standard ROE is 20% and here it is 27.5% which implies company is earning more then industry average. NOTE 4:- Return on Assets is total return divided by the assets of the company. It tells income earned on assets The profit figures for 2017 are not available and hence cannot be calculated Return on Assets 2018 = Net Profit / Total Assets Return on Assets 2018 = 220 / 1800 = 12.22% Profit after tax is taken for calculation but since tax figures are not available hence PBT is taken. Standard ROE is 13% and here it is 12.22% which implies company is earning less then industry average. this means company has not employes its total assets to proper and effective use.