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Current assets
Cash and cash equivalents $1,645 $2,110
Accounts receivables (all trades) 4,100 3,675
Inventories 7,000 6,930
Total current assets 12,745 12,715
Non-current assets
Property, plant and equipment 17,190 15,330
Total non-current assets 17,190 15,330
Total assets $29,935 $28,045
Current liabilities
Payables $5,780 $5,990
Total current liabilities 5,780 5,990
Non-current liabilities
Interest-bearing liabilities 9,940 9,450
Total non-current liabilities 9,940 9,450
Total liabilities $15,720 $15,440
Equity
Share capital $7,700 $7,700
Retained earnings 6,515 4,905
Total equity $14,215 $12,605
Nimbin P/L
Income Statement
As at 30 June 2014
($000)
Revenues (net sales) $55,000
Less: cost of sales 35,100
Gross profit 19,900
Less: Expenses
Selling and distribution expenses 7,100
Administrative expenses 4,970
Finance costs 1,560
Total expenses 13,630
Profit before income tax 6,270
Income tax expense 1,908
Profit $4,362
Nimbin P/L
Statement of changes in Equity
For the year ended 30 June 2014
($000)
Share capital
Ordinary (7,200.000 shares)
Balance at start of period $7,200
Balance at end of period 7,200
Preference (250,000 shares)
Balance at start of period 500
Balance at end of period 500
Total share capital $7,700
Retained Earnings
Balance at start of period $4,905
Total income for the period 4,362
Dividends paid – ordinary (2,702)
Dividends paid – preference (50)
Balance at end of period $6,515
Additional information:
Payables include $5,620 (2014) and $5,730 (2013) trade accounts payable; the remainder is accrued expenses. Market prices of issued shares at year-end (2014): Ordinary $12; Preference $6.70.
Required:
Industry average
Apart from indicating the financial statements (s) involved, use appropriate phrases such as ‘increase total asset’, ‘decrease equity’, ‘increase income’, ‘decrease cash flow’ to describe the transaction concerned.
ROA: Net Income/ Average total assets
$4,362 / $28,990 = 15%
Average total assets = Opening Assets + Closing Assets 2
($29935+$28045)/2 = $28,990
Industry Average = 22%
ROE: Net income for equity shareholders/ Shareholder’s equity
($4362-$50) / ($7200+$6515) = 31%
Net income available to equity shareholders = Net income – Preference share dividend
Shareholder’s equity= equity share capital + retained earnings
Industry Average = 20%
Profit Margin = Net income/ Net sales
$4,362 / $55,000 = 8%
Industry Average= 4%
EPS = Profit for equity shareholders/ No. of Equity Shareholders
$4,312 / $7,200 = 0.60
Industry Average= 45 cents
Price Earning: MPS / EPS
$12 / $0.60 = 20
Industry Average= 12
Dividend Yield Ratio: Cash dividend per share/Market price per share
$0.375 / $12 = 3%
Cash dividend per equity share = Equity dividend / No. of Equity Shareholders
$2702 / $7200 = $0.375
Industry Average= 5%
Dividend pay-out = Total Dividend / Net income
$2752 / $4362 = 63%
Total Dividends = Equity dividend + Preference dividend
$2702+$50 = $2752
Industry Average= 70%
Current Ratio: Current Assets/ Current Liabilities
$12,745 / $5,780 = 2.21:1
Industry Average= 2.5:
Quick Ratio: Quick assets/Current liabilities
$5,745 / $5,780 = 0.99:1
Quick Assets = Total Current Assets- Inventory
$12,745-$7,000 = $5745
Industry Average= 1.3:1
Receivables turnover: Net credit sales/Average Debtors
$55,000 / $3887.5 = 14.15%
Average Debtors = Opening Receivables + Closing Receivable / 2
($3,675+$4,100) / 2 = $3887.5
Industry Average= 13
Inventory turnover: COGS/Average inventory or stock
$35,100 / $6,965 = 5.04
Average Inventory= Opening Inventory + Closing Inventory / 2
($6,930+$7,000) / 2 = $6965
Industry Average= 6
Debt Ratio = Total Liabilities/Total Assets
$15,720 / $29,935 = 53%
Industry Average= 40%
Times Interest Earned: EBIT/Interest expense
$7,830 / $1,560 = 5.02
Industry Average= 9
Asset Turnover Ratio: Total Revenue/ Average total assets
$55000 / $28990 = 1.90
Average Total Assets= Opening Total Assets+ Closing Total Asset / 2
Industry Average= 1.8
Profitability can be determined by analysing ratios like profit margin, ROA and ROE. These ratios indicate the capability of company to make profits.
Looking at the profit margin maintained by the company which is 8% as compare to industry average which is 4%, it can be said that the company is a capable of making more profits than the expected ones. It is operating profitably.
The ratio of return on asset tells about the efficiency of a company in generating its revenue with the use of its total assets. Return on asset ratio is 15% which is less than the industry ratio of 22%. This means that the company is not able to produce more revenue from its assets as it is inefficient in managing its assets (Jenter and Lewellen, 2015). As far as, return on ordinary equity ratio is concerned, it is 31% which is more than the industry benchmark of 20%. ROE indicates the potential of a company to generate return from the investments. Maintaining a high ROE shows that company has a sound profitability position as it can produce high returns from its investment. Investor can find it profitable to invest in (Penman, Reggiani, Richardson and Tuna, 2017).
These ratios are used to show the liquidity position of a company. They are current ratio and quick ratio. The current ratio is 2.21:1, which is lower than the industry benchmark of 2.5:1. It shows that company is not efficient enough to meet the expectations of its creditors and investors and to deal with its liquidity problems. Moreover, the quick ratio 0.99:1 is also considerably lower than the industry’s ratio of 1.3:1, which indicates that the company cannot meet its short term liabilities using its liquid assets, which can easily and quickly be converted into cash, whenever required. Hence, the company does not maintain a good liquidity position (Saleem and Rehman, 2011).
Financial gearing means the proportion of debt and equity used by the company in its operations. It determines the capital structure of the company. Debt ratio means the amount of assets of the company which are provided through debt. It is 53% which is quite higher than the industry average of 40%. It indicates that the company has high financial risk because of its excessive use of debt in conducting its operations (Levi and Segal, 2015).
A chef is a human resource and is considered as an asset to the business because he contributes in the success of the business. However, accounting practices does not include any measurement or recognition method for human resource assets. Therefore, the valuation of this asset is not possible as it cannot be measured in terms of money. So as a result it cannot be recorded in the financial statements.
Statement of financial position: Increase in assets and decrease in cash.
Statement of Cash flow: Decreased cash (financing activities).
Statement of financial position: increase in asset and increase in equity.
Statement of financial performance: increase in income.
Statement of financial position: Decrease in cash and decrease in liabilities.
Statement of cash flow: Decrease in Cash (operating activities).
Statement of financial position: increase in equity and increase in cash
Statement of cash flow: increased cash (financing activities).
Statement of financial position: increase in assets (cash) and decrease in assets (debtors).
Statement of cash flow: increased cash (operating activities).
Statement of financial position: Decrease in asset (cash) and decrease in equity.
Statement of financial performance: Decrease in expenses (wages).
Statement of cash flows: decreased cash (operating activities).
Statement of financial position: increase in liability and decrease in equity.
Statement of financial performance: increase in expense.
Statement of financial position: Increase in cash and decrease in asset.
Statement of Cash flows: increased cash flow
Statement of financial position: Decrease in capital account and decrease in cash (current asset).
Statement of Cash flows: Decreased cash.
Statement of financial position: increase in asset (cash) and increase in liability (loan)
Statement of Cash flows: increased cash flow.
Jenter, D. and Lewellen, K., 2015. CEO preferences and acquisitions. The Journal of Finance, 70(6), pp.2813-2852.
Levi, S. and Segal, B., 2015. The Impact of Debt-Equity Reporting Classifications on the Firm's Decision to Issue Hybrid Securities. European Accounting Review, 24(4), pp.801-822.
Penman, S.H., Reggiani, F., Richardson, S.A. and Tuna, A., 2017. A Framework for Identifying Accounting Characteristics for Asset Pricing Models, with an Evaluation of Book-To-Price.
Saleem, Q. and Rehman, R.U., 2011. Impacts of liquidity ratios on profitability. Interdisciplinary Journal of Research in Business, 1(7), pp.95-98.
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