Accounting WEEK 5 PDF

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Accounting Week 5 Assignment...

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ASSIGNMENT: WEEK 5 EXERCISE

IBM 2010 Section 006 Accounting and Financial Concepts

Submitted to, Shaveda Bedi

Submitted by, Alvin Varghese Koonan 0754016

Question 1 When considering Liquidity, Current Ratio = Current Assets / Current Liabilities = 720,000 / 420,000 = 1.7 times Objective is 1.5 times (Therefore a higher performance). Solvency, Debt to total assets ratio = Total Liabilities / Total Assets = 720,000 / 1,520,000 = 47.36% Objective is 50% (Therefore a higher performance). Times interest earned ratio = Profit before taxes and finance costs / Finance Costs = 200,000 / 25,000 = 8 times Objective is 5 times (Therefore a higher performance). Productivity, Total assets turnover ratio = Revenue / Total Assets = 2,000,000 / 1,520,000 = 1.3 times Objective is 1.5 times (Therefore lower performance). Average collection period = Trade Receivables / Average daily sales = 300,000 / 5,479 = 54.8 days Recommended time-period should be 45 days. Therefore, lower performance. Inventory turnover ratio = Cost of sales / Inventories = 1,200,000 / 400,000 = 3 times Objective is 4 times (Therefore, lower performance).

Profitability, Return on revenue = Profit for the year / Revenue = 110,000 / 2,000,000 = 5.5% Objective is 4% (Therefore, higher performance). Return on total assets = Profit for the year / Total Assets = 110,000 / 1,520,000 = 7.2% Objective is 6% (Therefore, higher performance).

Inference: Ian Stoddart can be satisfied with the performance in liquidity ratio, solvency ratio and the profitability performance. But he should be more concerned about the performance on productivity.

Question 3 Time – Interest earned ratio = Profit before tax + Finance cost / Finance cost = 87,000 + 30,000 / 30,000 = 3.9 times Fixed Charge ratio = Profit before tax + Finance cost + Lease payments / Finance cost + Lease payments = (87,000 + 30,000 + 20,000) / (30,000 + 20,000) = 2.74 times Additional loan costs can be calculated as follows: Profit before taxes = 400,000 – 323,000 = 77,000 Time – Interest earned ratio = Profit before tax + finance cost / Finance cost = 77,000 + 40,000 / 40,000 = 2.925 times.

Fixed Charge ratio = Profit before tax + Finance cost + lease payments / Finance cost + lease payments = (77,000 + 40,000 + 20,000) / (40,000 + 20,000) = 2.283 times. Considering the above calculations, as a banker, I will not grant loan for the company as the company is not capable of paying back the debt in time. Therefore, the credit file will be rejected....