Accounting for Business
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This document provides a financial ratio analysis and evaluation of short-term solvency for a business. It includes information on liquidity ratios, income definition, and debt ratio analysis. The document also discusses the selection of a company for a short-term loan and the decision to purchase a company based on its liabilities and assets.
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Accounting for Business
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Accounting for Business 1
Contents
Part A.........................................................................................................................................2
Part B..........................................................................................................................................3
Part C..........................................................................................................................................4
References..................................................................................................................................7
Contents
Part A.........................................................................................................................................2
Part B..........................................................................................................................................3
Part C..........................................................................................................................................4
References..................................................................................................................................7
Accounting for Business 2
Part A
A
Financial Ratio
Analysis
2019 2018
Current Ratio Current assets 218000 222000
Current
liabilities 105000 2.07 81000 2.74
Quick Ratio Quick assets 88000 72000
Current
liabilities 105000 0.84 81000 0.89
Inventory turnover
ratio
cost of goods
sold 290000 250000
average
inventory 140000 2.07 times 140000 1.79 times
48.76 Days 56.56 Days
Average Receivable
days Receivables 65000 69000
sales /365 630000 0.10 times 490000 0.14 times
1726.0 Days 1342.5 Days
Part A
A
Financial Ratio
Analysis
2019 2018
Current Ratio Current assets 218000 222000
Current
liabilities 105000 2.07 81000 2.74
Quick Ratio Quick assets 88000 72000
Current
liabilities 105000 0.84 81000 0.89
Inventory turnover
ratio
cost of goods
sold 290000 250000
average
inventory 140000 2.07 times 140000 1.79 times
48.76 Days 56.56 Days
Average Receivable
days Receivables 65000 69000
sales /365 630000 0.10 times 490000 0.14 times
1726.0 Days 1342.5 Days
Accounting for Business 3
B.
Short-term solvency defines the ability and capacity of a firm in order to meets its short-term
financial obligation (Business Finance, 2018). As per the liquidity ratio of the organisation, it
is observed that the company has 2.07 liquidity ratios in the year 2017 which is effective and
it is able to pay its obligation in very short period. In the year 2018, the current ratio is
increases by 2.7 which is also good for the organisation in terms of paying obligation. The
quick ratio of the organisation is also effective in both the years such as 0.84 in the year 2017
and 0.89 in 2018. The reason behind the efficiency of the organisation is its high amount of
assets. The company have the large amount of assets as compare to the liabilities due to
which it can easily pay the obligation in a short period of time. The liquidity ratio of the
organisation states that the company can pay its obligation. The average receivable days of
the company are improved in the last years 2018 and 2017 which states that the efficiency is
also improved. The company receive the credit amount in a short period of time which
reflects the high efficiency in terms of stability (Accounting Tools, 2018).
Part B.
As per the complied framework, the increase in economic benefits during the accounting
period in terms of increases the amount of assets or decreases the amount of liabilities.
Increases in asset and decrease the liabilities affects the result in increases in equity other
than those who relates to contribution from equity participants (Australian Accounting
Standards Board, 2016).
As per the case study, it is observed that the organisation earned 2500000 from the sale of
software. The selling the products and services is considered as the economic benefits of the
organisation that is why; the income from sale is defines the definition of income. The
income from the interest is also meeting the definition of income as it also increases the total
B.
Short-term solvency defines the ability and capacity of a firm in order to meets its short-term
financial obligation (Business Finance, 2018). As per the liquidity ratio of the organisation, it
is observed that the company has 2.07 liquidity ratios in the year 2017 which is effective and
it is able to pay its obligation in very short period. In the year 2018, the current ratio is
increases by 2.7 which is also good for the organisation in terms of paying obligation. The
quick ratio of the organisation is also effective in both the years such as 0.84 in the year 2017
and 0.89 in 2018. The reason behind the efficiency of the organisation is its high amount of
assets. The company have the large amount of assets as compare to the liabilities due to
which it can easily pay the obligation in a short period of time. The liquidity ratio of the
organisation states that the company can pay its obligation. The average receivable days of
the company are improved in the last years 2018 and 2017 which states that the efficiency is
also improved. The company receive the credit amount in a short period of time which
reflects the high efficiency in terms of stability (Accounting Tools, 2018).
Part B.
As per the complied framework, the increase in economic benefits during the accounting
period in terms of increases the amount of assets or decreases the amount of liabilities.
Increases in asset and decrease the liabilities affects the result in increases in equity other
than those who relates to contribution from equity participants (Australian Accounting
Standards Board, 2016).
As per the case study, it is observed that the organisation earned 2500000 from the sale of
software. The selling the products and services is considered as the economic benefits of the
organisation that is why; the income from sale is defines the definition of income. The
income from the interest is also meeting the definition of income as it also increases the total
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Accounting for Business 4
revenue of the organisation. The value of equity is also enhancing by issuing share in
exchange for $500000. As per the discussion, the increasing value of equity is considered as
the income of the organisation because it also meets the definition of revenue. The discount
received while paying the debts is also recognising the income of the organisation as the
amount of liabilities is reduces. The part of decreasing the liability is also considered as the
income of the organisation as it meet the definition of income. It is observed that the amount
earns from the update download as it is not the part of income definition.
Revenue is arises from the various activities such as sales, interest, fees, dividend and
royalties (Australian Accounting Standards Board, 2007). In this case, the amount of interest
and sales revenue are considered as the revenue items of the company for the year as it meet
the definition of revenue.
Part C
A.
Financial Ratio
Analysis
ABC XYZ
Current Ratio Current assets 7200 26000
Current
liabilities 52800 0.14 12000 2.17
Debt Ratio Total liabilities 52800 12000
Total Asset 61200 0.86 46200 0.26
revenue of the organisation. The value of equity is also enhancing by issuing share in
exchange for $500000. As per the discussion, the increasing value of equity is considered as
the income of the organisation because it also meets the definition of revenue. The discount
received while paying the debts is also recognising the income of the organisation as the
amount of liabilities is reduces. The part of decreasing the liability is also considered as the
income of the organisation as it meet the definition of income. It is observed that the amount
earns from the update download as it is not the part of income definition.
Revenue is arises from the various activities such as sales, interest, fees, dividend and
royalties (Australian Accounting Standards Board, 2007). In this case, the amount of interest
and sales revenue are considered as the revenue items of the company for the year as it meet
the definition of revenue.
Part C
A.
Financial Ratio
Analysis
ABC XYZ
Current Ratio Current assets 7200 26000
Current
liabilities 52800 0.14 12000 2.17
Debt Ratio Total liabilities 52800 12000
Total Asset 61200 0.86 46200 0.26
Accounting for Business 5
As per the evaluation of the companies, it is observed that the XYZ is more effective for the
short-term loan of $6000. ABC Company is already having the large amount of debt as
compare to its asset due to which it is difficult for it to survive for long time. But XYZ have
the large amount of asset as compare to its liabilities due to which it can easily pay their
debts. Being a banker, I would select XYZ for short term loan as it is capable to pay back.
B.
Being a businessperson, I would pay for the company XYZ because the company have less
amount of liabilities to pay and have large amount of asset. As per the debt ratio, ABC
Company have the large amount of liabilities and less amount of asset due to which the
purchasing company will suffer with the heavy loss. But in the case of XYZ Company, the
liabilities is less as compare to asset amount due to which it is profitable deal for the
businessperson that is why; I would willing to pay the higher price to purchase the XYZ
Company (Greco, Figueira, and Ehrgott, 2016).
C.
If the same companies purchase without the liabilities then I would like to invest in ABC
Company. In this case the owner of the companies ready to pay the liabilities amount that is
why; it is essential to evaluate the amount of asset of both the organisation has been analysed
before taking the decision (Robinson, Henry, Pirie,. and Broihahn, 2015). As per the
evaluation, it is observed that the XYZ Company has the large amount of asset as compare to
its liabilities but as compare to ABC Company it has the less amount of asset. ABC Company
has the large amount of liabilities and asset due to which the business person has a high risk
to purchase it. But it is observed that if the owner of the existing companies pay the amount
of liabilities than it is beneficial for business person to pay the high price for ABC Company.
The amount of asset of both the companies helps to take the decision such as ABC Company
As per the evaluation of the companies, it is observed that the XYZ is more effective for the
short-term loan of $6000. ABC Company is already having the large amount of debt as
compare to its asset due to which it is difficult for it to survive for long time. But XYZ have
the large amount of asset as compare to its liabilities due to which it can easily pay their
debts. Being a banker, I would select XYZ for short term loan as it is capable to pay back.
B.
Being a businessperson, I would pay for the company XYZ because the company have less
amount of liabilities to pay and have large amount of asset. As per the debt ratio, ABC
Company have the large amount of liabilities and less amount of asset due to which the
purchasing company will suffer with the heavy loss. But in the case of XYZ Company, the
liabilities is less as compare to asset amount due to which it is profitable deal for the
businessperson that is why; I would willing to pay the higher price to purchase the XYZ
Company (Greco, Figueira, and Ehrgott, 2016).
C.
If the same companies purchase without the liabilities then I would like to invest in ABC
Company. In this case the owner of the companies ready to pay the liabilities amount that is
why; it is essential to evaluate the amount of asset of both the organisation has been analysed
before taking the decision (Robinson, Henry, Pirie,. and Broihahn, 2015). As per the
evaluation, it is observed that the XYZ Company has the large amount of asset as compare to
its liabilities but as compare to ABC Company it has the less amount of asset. ABC Company
has the large amount of liabilities and asset due to which the business person has a high risk
to purchase it. But it is observed that if the owner of the existing companies pay the amount
of liabilities than it is beneficial for business person to pay the high price for ABC Company.
The amount of asset of both the companies helps to take the decision such as ABC Company
Accounting for Business 6
has the asset of 61200 and the XYZ has 46200 which state that the ABC is more beneficial
for businessperson to pay the high prices.
has the asset of 61200 and the XYZ has 46200 which state that the ABC is more beneficial
for businessperson to pay the high prices.
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Accounting for Business 7
References
Accounting Tools. (2018) Efficiency ratios. [online] Available from:
https://www.accountingtools.com/articles/efficiency-ratios.html [Accessed 16/5/19].
Business Finance. (2018) Short-term Solvency or Liquidity Ratios. [online] Available from:
http://www.zenwealth.com/businessfinanceonline/RA/LiquidityRatios.html [Accessed
16/5/19].
Australian Accounting Standards Board. (2007) Revenue. [online] Available from:
https://www.aasb.gov.au/admin/file/content105/c9/AASB118_07-04_%20COMPapr07_07-
07.pdf [Accessed 16/5/19].
Australian Accounting Standards Board. (2016) Framework for the Preparation and
Presentation of Financial Statements. [online] Available from:
https://www.aasb.gov.au/admin/file/content105/c9/Framework_07-04_COMPjun14_07-
14.pdf [Accessed 16/5/19].
Robinson, T.R., Henry, E., Pirie, W.L. and Broihahn, M.A. (2015) International financial
statement analysis. John Wiley & Sons.
Greco, S., Figueira, J. and Ehrgott, M. (2016) Multiple criteria decision analysis. New York:
Springer.
References
Accounting Tools. (2018) Efficiency ratios. [online] Available from:
https://www.accountingtools.com/articles/efficiency-ratios.html [Accessed 16/5/19].
Business Finance. (2018) Short-term Solvency or Liquidity Ratios. [online] Available from:
http://www.zenwealth.com/businessfinanceonline/RA/LiquidityRatios.html [Accessed
16/5/19].
Australian Accounting Standards Board. (2007) Revenue. [online] Available from:
https://www.aasb.gov.au/admin/file/content105/c9/AASB118_07-04_%20COMPapr07_07-
07.pdf [Accessed 16/5/19].
Australian Accounting Standards Board. (2016) Framework for the Preparation and
Presentation of Financial Statements. [online] Available from:
https://www.aasb.gov.au/admin/file/content105/c9/Framework_07-04_COMPjun14_07-
14.pdf [Accessed 16/5/19].
Robinson, T.R., Henry, E., Pirie, W.L. and Broihahn, M.A. (2015) International financial
statement analysis. John Wiley & Sons.
Greco, S., Figueira, J. and Ehrgott, M. (2016) Multiple criteria decision analysis. New York:
Springer.
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