Accounting for Business

This document provides study material and solved assignments for Accounting for Business. It covers topics such as current ratio, quick ratio, accounts receivable turnover, and inventory turnover. It also analyzes the performance of a company in terms of short term liquidity and operational efficiency. Additionally, it explains the concept of income and revenue according to AASB 118 and compares companies for a loan based on current ratio and balance sheet analysis.

ACCOUNTING FOR BUSINESS
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PART A
a) 1) Current Ratio – This is a measure of the liquidity position over the short run,
For 2018
Current assets = Cash + Account receivable + Inventory = 12,000 + 60,000 + 150,000 = $
222,000
Current liabilities = $81000
Current Ratio= Current Assets
Current Liabilities = 222000
81000 =2.74
For 2019
Current assets = Cash + Account receivable + Inventory= 18,000 + 70,000 + 130,000 =
$228,000
Current liabilities = $105000
Current Ratio= Current Assets
Current Liabilities = 228000
105000 =2.17
2) Quick Ratio: This is a short term liquidity measure which taken into computation assets
that are cash or convertible to cash readily.
For 2018
Quick Ratio= Current Assets – Inventories
Current Liabilities = 222,000−150,000
81,000 =0.89
For 2019
Quick Ratio= Current Assets – Inventories
Current Liabilities = 228,000 – 130,000
105,000 =0.93
3) Accounts Receivable Turnover – This computes the time to recover cash from debtors
created on account of credit sales and hence represents operational efficiency.
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For 2018
Accounts Receivable Turnover ¿
Accounts Receivable Turnover ¿
Account Receivable Days= 365
7.10 =51.4 days
For 2019
Accounts Receivable Turnover ¿
Accounts Receivable Turnover ¿
Account Receivable Days= 365
9.69 =37.66 days
4) Inventory Turnover – This computes the time to generate sale or revenue from inventory
created and hence represents operational efficiency.
For 2018
Inventory Turnover ¿
Inventory Turnover ¿
Inventory Days ( 2018 ) = 365
1.79 =204.4 days
For 2019
Inventory Turnover ¿
Inventory Turnover ¿
Inventory Days ( 2018 ) = 365
2.07 =176.20 days
b) The performance of the company in the context of short term liquidity has been lacklustre
in 2019 when compared to the corresponding performance in 2018. This is because the
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current ratio has declined in 2019. Some respite is provided by the minor jump in quick
ratio in 2019. However, the current ratios do not provide any cause of concern as despite
some dip, the values do not indicate any short term crunch of cash or failure to meet the
current liabilities (Gitman, Juchaou and Flanagan, 2015).
The key problem area for the company is the operational performance where the company
lags behind the peers since its ratios in this regards are worse than the industry average.
Even though the company has managed to bring about significant lowering of the average
receivable collection period in 2019 but it still remains above the company policy value of
30 days. In terms of inventory turnover days, the company has managed to bring about
improvement in 2019 but the performance in this metric lags the industry average which is
a cause of concern. The poor operational efficiency of the company could render it
uncompetitive against peers on account of larger working capital requirements (Parrino
and Kidwell,2014).
PART B
In accordance with AASB 118, income refers to any economic benefit that may be realised
on account of cash inflows, asset increase, liability decrease but should not be linked to
contribution by stockholders. The same section defined revenues as income which is derived
by engaging in primary business activities (AASB, 2014).
It is known that Green Apple Ltd is a software firm and primary business activity would be
limited to sale of software and related products & services. The representation of the given
financial items is as shown below.
1) Proceeds from software sale ($ 25 million) – The company derives economic benefit on
the back of the sale as cash would be realised from customers. Hence, the proceeds are
termed as income. Also, this income relates to the primary business activity owing to
which it is categorised as revenue.
2) Proceeds from downloads ($3 million) - The company derives economic benefit on the
back of the sale as cash would be realised from customers. Hence, the proceeds are
termed as income. Also, this income relates to the primary business activity owing to
which it is categorised as revenue.
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3) Proceeds from short term investment ($50,000) – The interest payments tend to provide
economic benefit to the company as these are cash inflows which are not to be paid back.
Thereby they are income. But because this does not relate to the primary business
activities, hence this is not considered revenue
4) Early settlement of liability related discount ($ 2,000) – It is apparent that owing to
discount the extent of liability got reduced and to that extent the company derived
economic benefit which would be termed as income. However, this is not revenue but
rather lower expenses which lead to higher income (Ross et. al., 2015).
5) Proceeds from issue of shares ($ 0.5 million) – This is mere exchange of shares for funds
and this contribution from equity holders does not constitute as income. Considering that
the share sale proceeds are not income, thereby they are not revenue as only income can
be revenue (Arnold, 2015).
PART C
a) The objective is to determine as to which company would be preferred for a six month
loan of $ 6,000. Considering short tenure of the loan, hence current liquidity is of
concern which can be measured using current ratio (Gitman, Juchaou and Flanagan,
2015).
Current Ratio (ABC) = (7200/52800) = 0.14
Current Ratio (XYZ) = (26000/12000) = 2.17
Based on the above computations, loan would be given to XYZ which has comparatively
much lower risk of default since the current ratio is quite healthy.
b) As per the information provided, it is known that the business liabilities present on the
balance sheet would be assumed by the new owner. Thereby, the amount of liabilities
along with capital structure considerations would be pivotal for determination of fair
valuation. Comparing the balance sheets of the two companies, it is apparent that debt as
a % of capital structure is more prominent for ABC in comparison for XYZ. Also, ABC
company has the issue of short term liquidity which raises going concern related issue.
As a result, higher valuation would be given to XYZ company which has lower
outstanding liabilities and does not face liquidity crunch (Ross et. al., 2015).
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c) A major change here is that the liabilities existing on the books of account would be
cleared by the existing owners. This would result in decision change as ABC would be
preferred over XYZ and would command a higher valuation. The primary reason is that
this ensures that the business risk associated with XYZ is significantly reduced. Also, on
a smaller equity base, ABC would report better earnings and would command a higher
valuation in comparison to XYZ (Parrino and Kidwell, 2014).
References
AASB (2014) AASB 118 – Revenue, [Online] Available at
https://www.aasb.gov.au/admin/file/content105/c9/AASB118_07-04_%20COMPapr07_07-
07.pdf [Accessed May 17 2019]
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Arnold, G. (2015) Corporate Financial Management. 3rd ed. Sydney: Financial Times
Management, pp. 154
Gitman, L.J., Juchaou, R., and Flanagan, J. (2015) Principles of Managerial Finance.6th ed.
NSW: Pearson Australia, pp. 176-177
Parrino, R. and Kidwell, D. (2014) ,Fundamentals of Corporate Finance,4th ed., London:
Wiley Publications, pp. 145-147
Ross,S.A., Tryaler,R., Bird, R.,Westerfield, R.W. and Jorden,B.D. (2015) Essentials of
Corporate Finance. 2nd ed. New York City: McGraw-Hill, pp. 201-202
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