Week4 Homework - solution PDF

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Accounting homework week 4...

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HOMEWORK SOLUTION – WEEK4

1.13 a. Tia Kim believes that the analysis of financial statements is directed at two characteristics of an entity: liquidity and profitability. Is Tia correct? Explain. b. Are short-term creditors, long-term creditors, and shareholders mainly interested in the same characteristics of an entity? Explain.

(a)

Tia is not correct. There are three characteristics: • liquidity • profitability • solvency.

(b)

The three parties are not primarily interested in the same characteristics of a company. Short-term creditors are primarily interested in the liquidity of the business. In contrast, long-term creditors and shareholders are primarily interested in the profitability and solvency of the company. However, they may use the same financial statements as a source of information.

BE1.7 Calculate return on assets and profit margin.LO9 The following information is available for Ware Ltd for 2018: sales revenue $7 840 000; cost of sales $3 528 000; profit $1 176 000; total equity $2 233 300; average total assets $5 113 000. Calculate the return on assets and profit margin for Ware Ltd for 2018.

Return on assets ratio

=

$1,176,000 Profit = 23% = $5,113,000 Average total assets

Profit margin ratio

=

Profit Sales

=

$1,176,000 = 15% $7,840,000

HOMEWORK SOLUTION – WEEK4

E1.11 Calculate liquidity ratios and compare results.LO9 Retail Ltd operates stores in numerous states. Selected financial statement data (in thousands of dollars) for the year ended 30 June 2019 are as follows: End of year

Beginning of year

Cash

$8 995

$17 807

Receivables (net)

10 711

15 992

184 872

187 890

Other current assets

3 848

1 624

Total current assets

$208 426

$223 313

Total current liabilities

$129 941

$169 549

Merchandise inventory

For the year, net sales revenue was $1 109 934 and cost of sales was $628 197 (in thousands). Required a. Calculate the working capital and current ratio at the beginning of the year and at the end of the current year. b. Did Retail Ltd’s liquidity improve or worsen during the year?

Retail Ltd

(a)

Working capital = current assets – current liabilities

Beginning of year $53,764,000

= $223,313,000 – $169,549,000

End of year: $78,485,000

= $208,426,000 – $129,941,000

HOMEWORK SOLUTION – WEEK4

Current ratio

= current assets/current liabilities

Beginning of year: 1.32:1

= $223,313,000 / $169,549,000

End of year: 1.60:1

(b)

= $208,426,000 / $129,941,000

These measures indicate that Retail Ltd’s liquidity improved during the year....