MAH161213_9114_17485

Answer:  1

(A) Income Statement

Income:    
Revenue 5325  
Closing stock 125  
Net income   5450
     
Expenses:    
Loan paid off 1500  
Supplies 450  
Salaries                                2150    
(+) O/S                                   350 2500  
Rent of equipment              900    
(-) Prepaid                          (300) 600  
Repairs 150  
Net expenses   (5200)
Net Profit   250

 

(B)  Balance Sheet

Liabilities Amount Asset Amount
Capital               3000   Cash in hand 655
(-) Loan paid    (1500)   Debtors 650
(-) Drawings     (520) 980 Stock in hand 125
Outstanding salaries 350 Prepaid rent on equipment 150
Profit 250    
       
  1580   1580

(C)  Yes Wally’s venture was successful. In a short span of time i.e. 4 months he is able to earn a profit of $250.

He successfully utilised all the resources and was able to generate good revenues.

He was able to pay off the major liability of loan from his father $1500.

Though some of the liabilities are still outstanding, this can be paid off through the current assets left. He has a good amount of cash left i.e. $655, also has debtors of $650 from which he’ll soon receive the money, leftover stock is also there of $125 which he can sell in future or use himself.

He was able to effectively employ all the capital. Though the revenues were much more and the compared profit is of fewer amounts. After gaining some experience and having some expertise in this field also with the existing customer base, he can run this venture more successfully.

So he should continue this business for long term.

Answer: 2

(A) The income statement reflects the company’s accounting base profitability. It shows the illustrations of company’s revenues, expenses and net income. It uses the concept of accrual accounting, which requires that business records expenses when incurred and revenues when earned. Under the accrual based accounting method revenues are recognized when earned not necessarily when cash is received. On the other hand expenses are matched with associated revenues, not necessarily cash is paid or went out of the firm. Under accrual method, net income is calculated as revenues earned minus the expenses incurred in order to earn those revenues.

(B)  If a company earns revenues in November but allows the customers a credit to pay in 30 days, the cash from the November revenues will be collected in December. In this situation the November revenues will increase the November net income, but will not increase the firm’s November net cash flow.

Accrual accounting expenses are matched to the accounting period when the related sales occur or when the costs have expired. For example, a firm may have bought and paid for the goods in August. However, the goods remained in inventory until it was sold in November. The firm’s net cash flow will decrease in November when the company pays for the goods. However, net income decreases in November when the cost of the goods sold is matched with the November sales.

There are many other instances of expenses occurring in one accounting period but the payments occur in a different accounting period. His is the reason the  profit does not match the cash collected.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Answer: 3 (A)

Date

Details

Debit

Credit

    Stock A/C 650  
    To Supply A/C   650
         
    Insurance A/C 1080  
    To Prepaid insurance A/C   1080
         
    Wages A/C 850  
    To O/S Wages   850
         
    A/C receivable 330  
    To Sundry expenses   330
         
    Loan A/C 840  
    To Accrued interest   840
         
    Drawings 60  
    To Stationary A/C   60
         
    Sales A/C 470  
    To Sales in advance   470
         
    Depreciation A/C 7350  
    To Building   650
    To office furniture   330

 

 

 

(B) Effects on Profit

Old Profit $19800
(-) Insurance (1080)
(-) Outstanding wages (850)
(-) Accrued interest on loan (840)
(-) Sales income in advance (470)
(-) Depreciation (7350)
(+) Stock 650
(+) A/C receivable 330
Profit Left Over           10190

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Answer: 4

(A)

Date

Details

Debit

Credit

    Commission A/C 2600  
    To Accrued commission   2600
    (being commission accrued)    
         
    Revenue A/C 1400  
    To Revenue received in advance   1400
    (Being the revenue amount received in advance for July)    
         
    Prepaid advertisement expense 900  
    To Advertisement expense A/C   900
    (Being advertisement expenses paid in advance for July)    
         
    Profit & Loss A/C 4500  
    To Depreciation A/C    
    (Being the depreciation expenses not recorded)   4500

 

 

 

 

 

 

 

 

 

(B)                                                    Income Statement

For the year ended 30 June 2013

 

INCOME    
Revenues:    
Fees revenue                                 $331,428    
(-) Revenue received in advance         1,400   $330,028
EXPENSES    
Salaries $226,536  
Depreciation expenses 4,500  
Commissions                                    46,252    
(-) Accrued commission                     2,600 48,852  
Council rates 2,080  
Insurance 5,600  
Advertising                                     10,000    
(-) Prepaid advertising expenses          900 9,100  
Rent 15,840  
 Sundry expenses 1,920 314,428
PROFIT  

 

15,600

 

 

(C)  No, he should not continue or retain the business as the expenses have increased after the provided adjustments. The earlier profit before the adjustment was $23,200, which has come down to $15,600 after all the adjustments were made.

Profit margin i.e. net profit/ revenue = 15600/330000 = 4.72%

Also the profit margin has come down from 7% to 4.72%. The basic condition of Ian Smith was to retain a profit margin of 7%, which is not happening as it has reduced to 4.72%. So, he should shut down his business.

 

 

 

 

 

 

 

 

Answer: 5

(A) Return on total asset=  Net profit after taxes and interest  * 100

Average total assets

Net profit= 47250 (2013)

Average total assets= 486000 (2013) + 499500 (2012)

2

= 492750

 

Return on total assets= 47250 * 100                          = 9.58%

492750

 

(B)  Return on equity=  Net income after taxes- Preference dividend  *100

Average shareholder’s fund

Net profit= 47250 (2013)

Average shareholder fund= Opening shareholder’s equity  + Closing shareholder’s equity

2

= 90000 + 99000        =94500

2

 

Return on total asset= 47250 *100                                 =47.33%

94500

 

(A) Profit margin ratio= Net income *100

Net revenue

2012                                      2013

Net income=                 50490                                    47250

Net revenue=               517500                                  522000

 

Profit margin ratio=    50490 *100                          47250 *100

517500                                   522000

= 9.75%                                      =9.5%

 

 

(B)  Debt ratio= Total liabilities

Total assets

2012                                          2013

Total liabilities=     297000                                      270000

Total assets=          499500                                      486000

 

Debt ratio=           297000                                       270000

499500                                       486000

=         0.59 times                                 0.55 times  

 

 

(C)  Times interest ratio= Earnings before interest and tax

Interest expenses

2012                              2013

Earnings before interest and tax=          122040                          108090

23850                             20700

=       5.22 times                   5.11 times

 

(A) Return on total asset: It measure the relationship between net profit and total assets. Ratio shows the ability of generating profits per hundred rupees. A higher ratio shows the efficiency of management in making effective use of the total assets.

(B)  Return on equity: the ratio shows or reflects the return on shareholder’s fund that the business enterprise is able to earn. The shareholders are interested in the profit earning capacity of the business in which their funds are invested. If profits earned are insufficient, firm will fail to attract funds for expanding operations since additional capital will not be available.

(C)  Profit margin ratio: It shows the relationship between net profits and net sales. A higher net profit ratio would enable the firm to pay higher dividend, to create adequate general reserves and to face bad economic conditions. .  A low net profit ratio has opposite results. But a firm with low profit margin can earn higher rate of return on investment if it has higher sales turnover. A fall in the net profit ratio would require a thorough investigation into the operating expenses if there has been unreasonable increase in such expenses.

(D) Debt ratio: It indicates the percentage of a firm’s assets that are provided via debt. The higher ratio indicates the greater risk which will be associated with the firm’s operation. It also reflects low borrowings capacity of the firm, which in turn will lower the firm’s financial flexibility.

(E)  Time’s interest ratio: It shows the relationship between earnings before interest and tax to interest expenses. A high ratio indicates that the company has an undesirable lack of debts or is paying down too much debt with earnings that could be used for other projects.

  1. Limitations of ratio analysis:

(A) Trends are not the actual ratios: the different rations calculated from the financial statements of a business enterprise for a single year are of limited value. It would be more useful to calculate the important figures in respect of income, working capital or dividends, etc. for a number of years. Such trends are more useful than absolute ratios.

(B)  Ratios ignore qualitative factors: the ratios are obtained from the figures expressed in money. So the qualitative factors, which may be important, are ignored. For example, if the financial position of a firm may be quite satisfactory in terms of money, yet it may not be desirable to extend credit because of inefficient management in the matter of payments on due dates.

(C)  Defective accounting information: the ratios are calculated from the accounting data in the financial statements. It means that defective information would give wrong information. Thus, the deliberate omission such as omitting purchases, would positively affects the ratios too.

(D) Ratios are sometimes misleading: ratios must not be studied separately from the absolute figures; otherwise the result may be misleading. For example, f the output of one firm goes up from 8000 units to 16000 units, the ratio would show 100% increase. On the other hand, if the second firm increases its output from 20000 units to 35000 units, the ratio would reflect an increase of only 50%. On the basis of ratios, we find that first firm is more active than second though in terms of absolute figures, the contribution of second firm is more than the first.