Cherry Hotels Ltd Trial Balance and Financial Analysis

This document provides an analysis of Cherry Hotels Ltd trial balance and financial position. It includes an income statement and statement of financial position, as well as a discussion on return on capital employed, acid test ratio, and cash operating cycle. The analysis highlights the company's current performance and efficiency in utilizing its capital and assets.

Accounting

Table of Contents
TASK 1............................................................................................................................................3
TASK 2............................................................................................................................................5
References......................................................................................................................................12

TASK 1
Cherry Hotels Ltd, Trial Balance at 30 September 2020
IS/SFP CAT Debit Credit
£'000 £'000
IS REV Revenue 13,400
IS EXP Cost of sales 6,000
IS EXP Administration expenses 1,200
IS EXP Rent 2,600
IS REV
Interest on investments
received 20
IS EXP Interest paid 170
IS EXP Tax 380
SFP NCA Fixture and Fittings (Cost) 22,000
SFP NCA Fixtures and Fittings (Acc Dep) 5,000
SFP CA Inventories 160
SFP CA Trade receivables 1,700
SFP CA Cash 60
SFP CL Trade payables 250
SFP CL Bank overdraft 20
SFP NCL Long-term loan 4,000
SFP CAP Share capital 6,800
SFP CAP Retained profits (b/f) 4,780
34,270 34,270
A)
1. Income statement
Income statement
£'000
Revenue 13,400
Less: Cost of sales 6,000
Gross Profit 7,400
Add: Operating Incomes
Interest received 20

Less: Operating expenses
Administration expenses 965
Electricity 235
Depreciation 2,000
Rent 2,600
Less: Prepaid rent 350 2,250
Interest paid 170
Bad debts 200
Provision for Doubtful debts 30
Net Profit before tax 1,570
Less: Income tax 380
Net Profit after tax 1,190
Add: Depreciation 2,000
Net Profit after Depreciation 3,190
2. Statement of financial position
Financial Position
£'000 £'000
Assets
Non Current Assets
Fixture and Fittings 22,000
Less: Accumulated dep. 7,000 15,000
Current Assets
Inventories 160
Trade receivables 1,700
Less: Bad debts 200
Less: Provision for doubtful debts 30 1,470
Cash 60
Prepaid rent 205 1,895
Total Assets 16,895
Owner's equities and liabilities
Equity:
Share Capital 6,800
Add: Retained Profits 4,780
Add: Net Profit after tax 1,045 12,625

Non-current liabilities
Long-term loan 4,000
Current Liabilities
Bank overdraft 20
Trade payables 250 270
Total equities and liabilities 16,895
B)
Despite of Trade creditors as bad news; it is a future income for the company because cash will
be received by organization in near future. Thus it is considered as current assets and will be
converted into cash within a year. Therefore both Profit and Trade creditor’s takes cash inflow
for the company and both have credit balances.
Goodwill is invisible and non-tangible assets for the company. It should be mention while
showing financial position of the company and auditing purposes. Mostly investors are interested
in seeing goodwill of the company. The calculation of goodwill necessary at the time of merging,
acquisition and sold out of business.
TASK 2
a)
1. Return on capital employed
Return on capital employed 2019 2020
Total assets 2018 2248
Less: Current liabilities 366 521
A. Capital employed 1652 1727
B. Revenue 196 245
ROCE (B/A) 11.86% 14.19%
2. Acid Test
Acid Test Ratio 2019 2020
Current Assets 1378 1598

Less: Inventories 30 20
A. Quick Assets 1348 1578
B. Current Liabilities 366 521
Current Ratio 3.68 3.03
3. Cash operating cycle
Cash Operating cycle 2019 2020
Inventories 30.00 20.00
Cost of sales 80.00 100.00
A. Inventory in days = (Inventory/ cost of
sales) * 365 136.88 73.00
Receivables 150.00 160.00
Revenue 196.00 245.00
B. Receivables in days = (Receivables /
Revenue) * 365 279.34 238.37
Payables 70.00 80.00
Purchases 80.00 100.00
C. Payables in days = (Payables /
Purchases) * 365 319.38 292.00
Cash operating cycle = A + B - C 96.84 19.37
B)
ROCE
Return on capital employed (ROCE) is money related proportion that can be utilized in
evaluating an organization's productivity and capital effectiveness. As such, the proportion can
assist with seeing how well an organization is creating benefits from its capital. The ROCE
proportion is one of a few productivity proportions money related administrators, partners, and
potential financial specialists may utilize while breaking down an organization for speculation.
The Return on capital employed shows what amount working pay is produced for every dollar of
capital contributed. A higher ROCE is in every case greater, as it demonstrates that more benefits
are created per dollar of capital utilized. In any case, likewise with some other money related
proportions, figuring simply the ROCE of an organization isn't sufficient. Other benefit
proportions, for example, return on resources, return on contributed capital, and profit for value

ought to be utilized related to ROCE to decide if an organization is likely a wise speculation or
not.
In the model with Apple Inc., a ROCE of 23% in 2017 implies that for each dollar put resources
into capital, the organization created 23 pennies in working pay. To decide if Apple's ROCE is
acceptable, it is critical to analyze it against its rivals and not across various enterprises.
ROCE is a measurement for dissecting benefit, and conceivably looking at productivity levels
across organizations regarding capital. There are two parts needed to ascertain return on capital
utilized: profit before interest and expense and capital utilized.
EBIT, otherwise called working pay, shows how much an organization procures from its
activities alone regardless of interest or duties. EBIT is determined by taking away the expense
of merchandise sold and working costs from incomes.
Capital utilized is fundamentally the same as contributed capital, which is utilized in the ROIC
estimation. Capital utilized is found by deducting absolute resources from current liabilities,
which at last gives you investors' value in addition to long haul obligations. Rather than utilizing
capital utilized at a discretionary point as expected, a few experts and speculators may decide to
ascertain ROCE dependent on the normal capital utilized, which takes the normal of opening and
shutting capital utilized for the time span under examination.
ROCE can be particularly valuable when contrasting the presentation of organizations in capital-
serious areas, for example, utilities and telecoms. This is on the grounds that dissimilar to
different basics, for example, return on value (ROE), which just dissects benefit identified with
an organization's investors' value, ROCE thinks about obligation and value. This can help kill
money related execution investigation for organizations with huge obligation.
At last, the computation of ROCE discloses to you the measure of benefit an organization is
creating per $1 of capital utilized. Clearly, the more benefit per $1 an organization can create the
better. Subsequently, a higher ROCE demonstrates more grounded productivity across
organization correlations.

For an organization, the ROCE pattern throughout the years can likewise be a significant marker
of execution. By and large, speculators will in general support organizations with steady and
rising ROCE levels over organizations where ROCE is unpredictable or moving lower.
While dissecting benefit proficiency regarding capital, both ROIC and ROCE can be utilized.
The two measurements are comparative in that they give a proportion of benefit for each
absolute capital of the firm. By and large, both the ROIC and ROCE ought to be higher than an
organization's weighted normal expense of capital (WACC) all together for the organization to
be productive over the long haul. ROIC is commonly founded on a similar idea as ROCE, yet its
parts are marginally extraordinary.
The result shows that Return on capital employed has been increased from 11.86% to 14.19%.
This shows improvement in current performance of the business compared to previous years
performance.
Acid Test Ratio
The acid-test ratio utilizes an association's accounting report information as a marker of whether
it has adequate transient resources for cover its momentary liabilities. This measurement is more
helpful in specific circumstances than the current proportion, otherwise called the working
capital proportion, since it disregards resources, for example, stock, which might be hard to
rapidly exchange.
The numerator of the basic analysis proportion can be characterized in different manners, yet the
principle thought ought to increase a practical perspective on the organization's fluid resources.
Money and money counterparts should be incorporated, as should momentary speculations, for
example, attractive protections.
Records receivable are commonly included, yet this isn't suitable for each industry. In the
development business, for instance, records of sales may set aside considerably more effort to
recuperate than is standard practice in different enterprises, so including it could cause a
company's monetary situation to appear to be significantly more secure than it is actually.
Another approach to ascertain the numerator is to take all current resources and deduct illiquid
resources. Above all, stock ought to be deducted, remembering that this will adversely slant the

image for retail organizations in light of the measure of stock they convey. Different components
that show up as resources on an accounting report ought to be deducted on the off chance that
they can't be utilized to cover liabilities temporarily, for example, advances to providers,
prepayments, and conceded charge resources.
The proportion's denominator ought to incorporate every current risk, which are obligations and
commitments that are expected inside one year. Note that time isn't figured into the analysis
proportion. In the event that an organization's records payable are almost due yet its receivables
won't come in for quite a long time, that organization could be on a lot shakier ground than its
proportion would show. The inverse can likewise be valid.
Organizations with an analysis proportion of under 1 need more fluid resources for pay their
present liabilities and ought to be treated with alert. In the event that the analysis proportion is a
lot of lower than the current proportion, it implies that an organization's present resources are
profoundly reliant on stock.
This is definitely not a terrible sign in all cases, notwithstanding, as some plans of action are
naturally subject to stock. Retail locations, for instance, may have low analysis proportions
without fundamentally being in harm's way.
Acid test of both the year are higher than 3; which is much higher than ideal ratio (1:1) and it
shows inefficiency of business to better utilize its current assets into production and return on
ideal cash.
Cash operating cycle
The cash conversion cycle (CCC) is a metric that communicates the time (estimated in days) it
takes for an organization to change over its interests in stock and different assets into incomes
from deals. Likewise called the Net Operating Cycle or basically Cash Cycle, CCC endeavors to
gauge how long each net information dollar is tied up in the creation and deals measure before it
gets changed over into money gotten.

This measurement considers how long the organization needs to sell its stock, how long it
requires to gather receivables, and how long it needs to take care of its bills without bringing
about punishments.
CCC is one of a few quantitative measures that help assess the productivity of an organization's
activities and the board. A pattern of diminishing or consistent CCC qualities over different
periods is a decent sign while rising ones should prompt more examination and investigation
dependent on different components. One should remember that CCC applies just to choose areas
subject to stock administration and related tasks.
An Operating Cycle (OC) alludes to the days needed for a business to get stock, sell the stock,
and gather money from the offer of the stock. This cycle assumes a significant function in
deciding the productivity of a business.
The OC offers a knowledge into an organization's working effectiveness. A more limited cycle is
liked and shows a more effective and fruitful business. A more limited cycle shows that an
organization can recuperate its stock venture rapidly and has enough money to meet
commitments. In the event that an organization's OC is long, it can make income issues.
This pattern of crude material change to money is called working or working capital cycle.
Regarding time, it is the time taken after the acquisition of crude material till its interpretation
into money. The all out of stock holding period and a receivable assortment time of a firm is the
working process duration of that firm. Working cycle and money working cycle are utilized
reciprocally however it's a misinterpretation. They are distinctive just barely however that has a
major effect.
Like working capital, working cycle can likewise be gross working cycle (working cycle) and
net working cycle (money working cycle). Money working cycle is gross working cycle less
leaser's assortment period. It is the time span for which the working capital is required.
Working cycle is critical on the grounds that business is about the running the working cycle
easily. In the event that it is running easily, nearly all that will be smooth. On the off chance that
any portion of the working cycle is trapped, the entire business gets upset. For a director to

viably deal with the business, he ought to have a profound comprehension of his business cycle
and likely dangers and dangers to it. Proactively, he ought to have available resources to alleviate
those dangers and dangers.
Banks accept this as a base for subsidizing their customer. An administrator taking care of
money should zero in on decreasing the money cycle as that will spare him the premium
expense. Diminishing this cycle implies decreasing the stock holding time frame and expanding
the provider's installment time frame. Other than typical methodologies, Japanese strategies
'Without a moment to spare (JIT)' can decrease the stock holding time for all intents and
purposes zero. Greater organizations are attempting to receive JIT with the assistance of devices
like provider framework reconciliation and so on
Cash operating cycle has been declined from year 2019 to 2020; it is bad news for the business
because earlier; firm requires cash after average 97 days but in 2020; it requires cash after 19
days.

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