This document provides an overview of accounting for business, including discussions on liquidity ratios, efficiency ratios, and income and revenue definitions. It also includes references for further reading.
Contribute Materials
Your contribution can guide someone’s learning journey. Share your
documents today.
ACCOUNTING FOR BUSINESS STUDENT ID: [Pick the date]
Secure Best Marks with AI Grader
Need help grading? Try our AI Grader for instant feedback on your assignments.
PART A a)1) Current Ratio – This ratio pertains to short term liquidity. It hints at the company’s capacity to entertain the current liabilities using the current assets available on the books of the company. 2) Quick Ratio: This ratio pertains to short term liquidity. It hints at the company’s capacity to entertain the current liabilities using the current liquid assets available on the books of the company. 3) Accounts Receivable Turnover – This ratio pertains to operational efficiency. It hints at the company’s ability to collect cash from the outstanding debtors i.e. those who were sold goods on credit. 2
4) InventoryTurnover–Thisratiopertainsto operationalefficiency.Ithintsatthe company’s ability to produce sales based on the inventory available with the company. b)Liquidity Ratios –Taking the above computations into consideration, it is apparent that on one hand there is some improvement witnessed in quick ratio while on the other hand, a sizable decline is witnessed in current ratio. Hence, the overall short term liquidity position for the company in 2019 would be considered as inferior in comparison to the position in 2018. A positive aspect of the company’s corresponding ratios in this regards is that despite the fall, the existing ratios do not indicate any major issue with the short term liquidity position. However, any further drop in the subsequent years may make the company vulnerable to cash crunch (Arnold, 2015). Efficiency ratios – In relation to these ratios, the key positive is the improvement that the company has shown in these ratios over the one year period from 2018 to 2019 when the turnover ratios have undergone sizable improvement. The drop in average collection period and average inventory turnover period augers well for reduction in the overall cash 3
conversion cycle. However, there is significant improvement still required as the inventory turnover days for the company (in 2019) are significantly greater in comparison to the industry average. Further, the average collection period from debtors continue to be high as the company policy provides a maximum credit period of only 30 days against the collection period in 2019 of about 37 days (Berk et. al., 2015). PART B It is essential to consider the definition of income and revenue which has been outlined as per AASB 118. Income primarily refers to any instance of cash inflow or reduction in cash outflow which leaves the reporting entity in an economically better position. Revenue refers totheincomewhichisobtainedbyconductingprimaryormainbusinessactivities considering the nature of business (AASB, 2014). 1)Green apple is a software company and hence selling anti-virus software is one of the primary activities. Thereby, the proceeds of sale from the same would constitute as revenue. Also, as the proceeds provide economic benefit for the company, these would contribute towards income. 2)As discussed, the company sells software and hence would provide updates of the software also which is essentially a primary activity as well. Thereby, the proceeds of sale from downloads of the same would constitute as revenue. Also, as the proceeds provide economic benefit for the company, these would contribute towards income. 3)The company is not an investment company and neither earning money through such activities the main objective of setting up Green Apple. Thus, interest income would not be treated as income. Nevertheless, the company derives economic benefit from interest based cash inflow and hence it would be income for the company. 4)With regards to settling a particular liability which involves cash outflow, the company has been able to get a rebate which lowers the extent of cash outflow which otherwise would have been caused. Thereby, economic benefit is obtained by Green Apple owing to which the transaction leads to income. However, it would not lead to any revenue since it is essentially related to lowering of expenses. 5)In regards to share proceeds, it is essential to understand that no economic benefit is derived by Green Apple as the money has been provided in return for shares and hence it 4
Paraphrase This Document
Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
is an exchange. Thereby no income or revenue would be realised by Green Apple as a result of the given transaction. . PART C a)From the lender perspective, the pivotal aspect is to ascertain the liquidity of the borrower with regards to the time horizon of repayment. In the given case, this time horizon of repayment is six months and thereby short term liquidity ought to be accessed for the two borrowers in fray namely ABC & XYZ. A suitable ratio in this regards is current ratio whose computation is done below (Gitman, Juchaou and Flanagan, 2015). Considering the above liquidity performance of the two potential borrowers, it is evident that as a lender, lower risk of default would be associated with ABC company and hence it is preferred borrower for any lender given the duration. b)In scenario presented, the buyer would have to settle the liabilities and thereby valuation would be significantly impacted by the outstanding liabilities present on the balance sheet of the potential targets.If the current liabilities for the two companies are compared, clearly, the net debt (adjusted for cash on books) is significantly higher for ABC company when compared with the other company i.e. XYZ.Also, the short term liquidity position of ABC is in shambles which indicate acute cash crunch and immediate infusion of capital required to keep the business earning. The higher risk and higher liabilities associated with ABC would imply that buyer would provide higher valuations to XYZ company (Mayer, McGuigan and Kretkow, 2015). c)He decision would change in the new scenario as the existing liabilitiesare the responsibilities of the existing promoters of the company. As a result, the comparison can shift to the comparison of the assets shown in the book particularly the non-current assets. The non-current asset is higher in case of ABC company and also the overall balance sheet size is higher. The liabilities of ABC do not pose a concern anymore. 5
Hence, higher valuation would be paid for ABC when compared with XYZ (Arnold, 2015). 6
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 29 2019] Arnold,G.(2015)CorporateFinancialManagement.3rd ed.Sydney:FinancialTimes Management. Berk, J., DeMarzo, P., Harford, J., Ford, G., Mollica, V. and Finch, N. (2013)Fundamentals of corporate finance. London: Pearson Higher Education AU. Gitman, L.J., Juchaou, R., and Flanagan, J. (2015)Principles of Managerial Finance.6th ed. NSW: Pearson Australia. Mayer, R. C., McGuigan, J. R., and Kretkow, W. J. (2015)Contemporary Financial Management.10th ed. London: South- Western College Publisher. 7