Accounting for Business

ACCOUNTING FOR
BUSINESS
STUDENT ID:
[Pick the date]

PART A
a) 1) Current Ratio – This ratio highlights the ability of the firm to honour current liabilities
and hence represents short term liquidity.
2) Quick Ratio: This ratio highlights the short term liquidity for the firm considering only
those current assets which are readily cash convertible.
3) Accounts Receivable Turnover – This is a efficiency related ratio which indicates the
extent of time that may be required for recovering cash payments from credit sales.
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4) Inventory Turnover – Another example of efficiency ratio which highlights the time
required for the inventory to be sold or converted into sales.
b) In relation to liquidity in short term, there is dip in performance as captured by the
declining current ratio from 2018 to 2019. This is despite the minor improvement that is
witnessed in 2019 with regards to quick ratio which is higher than corresponding value in
2018. Despite the performance in this regards being muted, the absolute values of the
current and quick ratio provide comfort that the company does not face any short term
liquidity issues (Brealey, Myers and Allen, 2014).
The comparison of the receivables and inventory turnover with the industry average clearly
reflect that company’s performance is poor. As per the company policy, the credit period
available is 30 days but this is not actually practised since in both 2018 and 2019, the average
time to recover proceeds from receivables is sizably greater than 30 days. The company has
shown improvement in the context of inventory turnover but still the performance of the
company in this regards lags behind the industry standards. The poor performance in
efficiency measures would lead to higher cash cycle and increase the working capital
requirements (Damodaran, 2015).
PART B
The definition of revenue has been offered in AASB 118 which highlights that revenue is
income linked to the primary business activities of the underlying entity. It also defines
income as economic benefits which are realised as inflows, asset enhancement, liabilities
reduction and are not related to equity contributions made by the shareholders (AASB, 2014).
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