Financial Ratios and Business Valuation

This assignment examines the financial health and valuation of two companies, ABC and XYZ, using key financial ratios like the debt ratio and current ratio. It analyzes how these ratios influence the perceived value of each company in different scenarios: when existing liabilities are assumed by the buyer or not. Students must calculate relevant values, compare the businesses, and provide recommendations based on their findings.

Running head: ACCOUNTING FOR BUSINESS
Accounting for Business
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

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Table of Contents
Part A:..............................................................................................................................................2
a) Explaining and calculating the following ratios:.........................................................................2
b) Commenting on the short-term solvency, including the efficiency of the business:..................4
Part B:..............................................................................................................................................4
a) Discussing whether the foregoing five financial items could meet the definition of income to
the company during the year:..........................................................................................................4
b) Indicating the item that would meet the definition of revenue to the company for the financial
year:.................................................................................................................................................5
Part C: Comparing the financial performance of both the companies.............................................6
a) Indicating the application that would be selected as being the most favorable:..........................6
b) Indicating which business would be quoted higher price assuming that the existing liabilities
will be taken care by the buyer:.......................................................................................................6
c) Indicating which business would be quoted higher price assuming that the existing liabilities
will be not taken care by the buyer:.................................................................................................7
References and Bibliography:..........................................................................................................8

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Part A:
a) Explaining and calculating the following ratios:
Current ratio:
Current ratio(2019)=(18,000+ 70,000+130,000)
105,000 =2.08
Current ratio(2018)= ( 12,000+60,000+150,000 )
81,000 =2.74
The above calculation provides information about the relevant changes in overall current
ratio of Big Bang Pty Ltd from 2018 to 2019. The calculation has been conducted by dividing the
current assets of the organisation with the its total current liabilities. The overall current ratio of
the company has mainly declined from the previous year, which indicates that the company has
reduced its current assets, while increased the current liabilities during the financial year of 2019.
Quick ratio:
Quick ratio(2019)= ( 18,000+70,000 )
105,000 =0.84
Quick ratio(2018)= ( 12,000+60,000 )
81,000 =0.89
The calculations of quick ratio have mainly helped in detecting the actual financial
condition of Big Bang Pty Ltd from 2018 to 2019. The major current assets of the organisation is
inventory, which is not accommodated in the calculation of quick ratio. Hence, the quick ratio
values declined from the levels of 0.89 in 2018 to 0.84 in 2019. This mainly indicates that the

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company is not adequately maintaining its current assets, which could support the short term
obligations and minimise the negative impact on the overall fixed assets of the organisation
(Kaplan and Atkinson 2015).
Accounts receivables turnover ratio:
A ccounts receivable turnover ratio (2019)= ( 70,000+60,000 )
630,000 × 365=37.66
Accountsreceivable turnover ratio(2018)= ( 60,000+78,000 )
490,000 × 365=51.40
The above calculations provide information about the Accounts reviewable turnover days
of Big Bang Pty Ltd from 2018 to 2019. This has mainly indicated that the receivable days have
mainly declined from the levels of o 51.40 days to 37.66 days in 201. This is a positive sign for
Big Bang Pty Ltd, as the credit sales payments are returned more quickly than previous year.
Inventory turnover ratio:
Inventory turnover ratio(2019)= ( 130,000+150,000 )
290,000 ×365=176.21
Inventory turnover ratio( 2018)= ( 150,000+130,000 )
250,000 ×365=204.40
The calculation of inventory turnover ratio provides information about the efficient
inventory management system that is being maintained by Big Bang Pty Ltd over the period of
two years. The inventory clearing days have mainly declined from 204.40 in 2018 to 176.21 in
2019. This mainly states about the positive financial performance of the organisation, where
inventory is not being stocked for higher amount days in the warehouse (Macve 2015).

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b) Commenting on the short-term solvency, including the efficiency of the business:
The short-term solvent conditions of Big Bang Pty Ltd can be identified from the above
calculation, as both current and quick ratio values are adequately depicted. The current short-
term solvency condition of Big Bang Pty Ltd is not appropriate where the current liabilities of
the company is increasing while the current assets is declining. Therefore, the evaluation of the
short term solvency condition does not include the valuation of inventory, which directly states
that the current solvency conditions of the company cannot be fulfilled with the available current
assets. Hence, improvement in the current assets position of Big Bang Pty Ltd needs to be
conducted for ensuring that its fixed assets are no hindered (Sharma and Kelly 2014).
However, the efficiency conditions of Big Bang Pty Ltd has relevantly improved, where
both the receivables turnover days and inventory turnover days has declined to new levels. This
mainly indicated that the management efficiency has mainly improved, where the overall credit
sale payments are collected earlier in 2019 as compared to 2018. Furthermore, the inventory
maintenance turnover dates have mainly declined, which indicates that the finished goods
provided by the company will take less days in the inventory before leaving the warehouse. This
directly indicates about the rising efficiency of the management in controlling the operations of
the organisation.
Part B:
a) Discussing whether the foregoing five financial items could meet the definition of income
to the company during the year:
Particulars Value

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Revenue
Sale of software 2,50,00,000
Update download 30,00,000
Total income 2,80,00,000
Interest from investing 50,000
Discount received 2,000
Other income 52,000
Cash inflow 28,052,000
The above table provides information about the cash flow that will be generated by the
Green Apple Ltd over the period of time. In addition, the total income that has been generated is
sale of software and updated download. Moreover, the total expenses is from interest from
investing and discount received by Green Apple Ltd. Therefore, the total cash flow of the
company is at the levels of 28,052,000.
b) Indicating the item that would meet the definition of revenue to the company for the
financial year:
Particulars Value
Revenue
Sale of software 2,50,00,000
Update
download 30,00,000
Total income 2,80,00,000
The above table provides information about the overall revenue that has been generated
by Green Apple Ltd. The sale of software and updated download is considered to be as the

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overall direct income of Green Apple Lt. In addition, as per the IFRS 15 revenue is considered to
be the income generated from normal course of business.
Part C: Comparing the financial performance of both the companies
a) Indicating the application that would be selected as being the most favorable:
Particular
s ABC Company XYZ Company
Debt ratio 0.33 5.42
The current ratio can be calculated for detecting the overall capability of the company to
support its short term obligations. Hence, company XYZ will be issued the a short- term loan of
$6000..
b) Indicating which business would be quoted higher price assuming that the existing
liabilities will be taken care by the buyer:
Particulars
ABC
Company XYZ Company
Total value of the business 8400 34200
The value of the total business can be detected by subtracting the overall total assets with
the total liabilities. Hence, from the valuation it can be detected that buying XYZ company
would be more beneficial for a businessperson when all the relevant liabilities need to be paid
before acquiring the organization.

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c) Indicating which business would be quoted higher price assuming that the existing
liabilities will be not taken care by the buyer:
Particulars ABC Company XYZ Company
Total value of the business without liabilities 61200 46200
However, the recommendation for the businessperson will alter, when the previous
owners will be responsible for paying of the debts of the organization. Then buying ABC
Company would be beneficial, as it would allow the businessperson to buy a company with the
highest level of asset exposure (Carenys and Moya 2016).

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References and Bibliography:
Alstadsæter, A., Jacob, M., Kopczuk, W. and Telle, K., 2016. Accounting for business income in
measuring top income shares: Integrated accrual approach using individual and firm data from
Norway (No. w22888). National Bureau of Economic Research.
Appelbaum, D., Kogan, A., Vasarhelyi, M. and Yan, Z., 2017. Impact of business analytics and
enterprise systems on managerial accounting. International Journal of Accounting Information
Systems, 25, pp.29-44.
Carenys, J. and Moya, S., 2016. Digital game-based learning in accounting and business
education. Accounting Education, 25(6), pp.598-651.
Drake, M.S., Guest, N.M. and Twedt, B.J., 2014. The media and mispricing: The role of the
business press in the pricing of accounting information. The Accounting Review, 89(5), pp.1673-
1701.
Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
Macve, R.H., 2015. Fair value vs conservatism? Aspects of the history of accounting, auditing,
business and finance from ancient Mesopotamia to modern China. The British Accounting
Review, 47(2), pp.124-141.
Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues, concepts
and practice. Routledge.

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Sharma, U. and Kelly, M., 2014. Students’ perceptions of education for sustainable development
in the accounting and business curriculum at a business school in New Zealand. Meditari
Accountancy Research, 22(2), pp.130-148.