Accounting for Business

This document provides an overview of accounting for business, including the calculation of financial ratios for assessing short-term solvency. It also discusses the concept of income and its types according to IAS 18. Additionally, it analyzes the assets and liabilities of ABC Ltd. and XYZ Ltd. for decision-making purposes. The document is relevant for students studying accounting or business-related courses.

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Name of the university: Holmes Institute
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Date: 17th May 2019
Word count: 1178

Accounting for Business

Table of Contents
Part A.........................................................................................................................................3
(a)...........................................................................................................................................3
(b)...........................................................................................................................................4
Part B..........................................................................................................................................4
Part C..........................................................................................................................................5

Part A
(a)
Financial Item Jun-19 Jun-18
Net Credit Sales 630000 490000
Cost of Goods Sold 290000 250000
Cash 18000 12000
Account Receivable 70000 60000
Inventory 130000 150000
Current Liability 105000 81000
Statement presenting calculation of current ratio
Current Ratio Total Current Assets/ Total Current Liabilities
Jun-19 Jun-18
Total Current Asset
Cash 18000 12000
Account Receivables 70000 60000
Inventory 130000 150000
Total Current Asset 218000 222000
Total Current Liability 105000 81000
Current Ratio 2.08 2.74
Statement presenting calculation of quick ratio
Quick Ratio Quick Assets / Current Liabilities
Jun-19 Jun-18
Total Quick Asset
Cash 130000 150000
Account Receivables 218000 222000
Total Current Asset 348000 372000
Total Current Liability 105000 81000
Current Ratio 3.31 4.59
Statement presenting amount receivable in times and in days
Account Receivable times and in Days
Jun-19 Jun-18
Net Credit Sales 630000 490000
Account Receivable 70000 60000

Account Receivable Turnover (In Times) 9.00 8.17
Account Receivable Turnover (In Days) 40.56 44.69
Statement presenting inventory turnover in times and in days
Inventory Turnover Ratio in times and in Days
Jun-19 Jun-18
Net Credit Sales 630000 490000
Inventory 130000 150000
Inventory Turnover Ratio (In Times) 4.85 3.27
Inventory Turnover Ratio (In Days) 75.32 111.73
(b)
Short term solvency can be referred as measure to evaluate the capability of an organization
to meet up its short term financial obligation (Sutton, Cordery and van Zijl, 2015). Further,
the ratios relating to short term solvency ascertains the ability of firm to avoid financial
distress. Current ratio and quick are two most important short-term solvency ratios
(PĂUNESCU, 2015). Current ratio is ascertained by dividing current assets by current
liabilities. Further, quick ratio assess the capability of an organization to met up it liabilities
on the basis of more liquid current assets which comprises cash and account receivables (Lim
and etal.2017). Quick ration is calculated by dividing current assets less closing stock by
current liabilities. From above analysis it can be accessed that there is a decreasing trend in
both the ratios. But quick ratio as well as current ratio is more than one which represent that
company is having sufficient funds to meet up its short term obligations.
Part B
Income can be referred as revenue earned from selling its goods and services or receipt of
money by and individual for his services or investment (Fischer, Tayler and Cheng,
2015).IAS 18 specifies the meaning of revenue as ‘gross inflow of economic benefits during
the year from ordinary business activities and it enhances the existing amount of equity other
than contributions made from equity share holders’. Further, revenue is recognised only in
case same has been attained from ordinary business activities. For instance in case an
organization sell plant and equipment at the end of its useful economic life than same will be
accounted as separate line item rather than accounting rather than profit or loss of disposal of
asset (Beams and etal. 2016).

Types of Income
If Income or
Not Justification
Sales of Software
YES
According to IAS 18 Revenue arising out of
Sale of Services is required to be recognized in
Income Statement in case it satisfies the
specified conditions: 1. The amount can be
measured reliably; 2. It is probable that
economic benefits will flow to the seller; 3. Cost
incurred and to be incurred can be measured
reliably. Thus, in present case all the conditions
are satisfied relating to sales of Software is
meeting, thus it should be classified as Income.
Update Downloads
YES
Receipts from Update of Downloads is also
meeting all the conditions as prescribed in IAS
18 for classification of revenues this should be
included in the revenue of the company.
Interest from
Investing in Short
Money
YES
Interest should be recognized as income when it
can be measured reliably and it will flow to the
enterprise (Oyedokun, 2016). Hence in this case
amount of interest can be measured reliably and
it will flow back to the enterprise, So it should
be classifies as Income.
Discount arising out
of the early
settlement of
Liability
NO Since discount couldn't be measured reliably at
the time of Liability and hence this should be
not included in Revenue of the Company.
Issued Shares in
exchange of $500000
cash during the Year
NO
Ordinary share capital represents equity of a
company as required to be accounted as equity
reserves in the balance sheet. In accordance
with provisions specified in IAS 18 capital
receipt cannot be accounted as income in profit
and loss account as it has been specified in
definition of revenue that increase in equity
should be attained by other measure than
contribution by the equity shareholders. This
transaction cannot be included in the revenue of
the company because no profits would arise by
issuing these shares (Uyar, 2016). This
transaction will affect the balance sheet of the
company. Share Capital and Cash Balance of
the company will increase with the respective
amount.
Part C
Statement presenting details relating to assets and liabilities of ABC Ltd. and XYZ Ltd.
Particulars ABC Ltd XYZ Ltd
Current Assets $ 7,200.00 $ 26,000.00

Current Liabilities $ 52,800.00 $ 12,000.00
Current Ratio 0.14 2.17
Owners Equity $ 8,400.00 $ 34,200.00
Total Assets $ 61,200.00 $ 46,200.00
Noncurrent assets $ 54000.00 $ 20200
A: As a Banker XYZ Ltd will be chosen because the Current Ratio is 2.17 in comparison
with 0.14 of ABC Ltd. Current Ratio depicts the short term solvency condition of an
incorporation.XYZ Ltd can pay off their current Liabilities just by recovering their Account
receivables as they have sufficient cushion in their Current Assets. On the Contrary if ABC
Ltd is asked to payoff their current Liabilities then they will have to ask for another Loan.
Thus the company having higher current ratio will be provided short term loan. In present
case as XYZ Ltd is having higher current ratio i.e. 2.17, hence loan will be provided to same.
B: As a Businessperson I would have also purchased business of XYZ Ltd. along with their
all the Liabilities because they have better current Ratio and they also have lesser outside
liabilities in comparison with the ABC Ltd. Debt Equity Ratio of XYZ Ltd is also good in
comparison with the ABC Ltd. All the Liabilities can be met by recovering the Account
receivables of the Concern. Further the higher the current ratio, it is more favourable for an
organization as it could easily accomplish its obligation through selling current assets(Liang
and etal. 2016) . Hence the financial condition and affairs of the XYZ Ltd are in good
condition so I would like to purchase the business of XYZ Ltd.
C: In case all the existing Liabilities are met by the existing owners then business of ABC Ltd
will be purchased. As in the situation ABC Ltd is having higher non-current assets in
comparison with XYZ Ltd and after paying off their liabilities it will show better results.
Further, in case liabilities are not considered than total assets of company ABC Ltd are higher
in comparison to XYZ Ltd, thus higher cash flow will be received from the specified
company.

References
Beams, F.A., Anthony, J.H., Bettinghaus, B. and Smith, K.A., 2016. Advanced accounting.
Pearson Education Limited 2018. Australia.
Fischer, P.M., Tayler, W.J. and Cheng, R.H., 2015. Advanced Accounting. Cengage
Learning. Australia.
Liang, D., Lu, C.C., Tsai, C.F. and Shih, G.A., 2016. Financial ratios and corporate
governance indicators in bankruptcy prediction: A comprehensive study. European Journal
of Operational Research, 252(2), pp.561-572.
Lim, Y., Azmi, A., Devi, S.S. and Mahzan, N., 2017. Implementation Guidance for Standards
and Revenue Trend in Aggressive Reporting. The International Journal of Accounting, 52(4),
pp.342-353.
Oyedokun, G., 2016. Revenue Recognition Paradox: A Review of IAS 18 and IFRS 15.
PĂUNESCU, M., 2015. Revenue Recognition and Measurement. Accounting Principles vs.
Tax Rules for Romanian Entities. Audit Financiar, 13(121).
Sutton, D.B., Cordery, C.J. and van Zijl, T., 2015. The purpose of financial reporting: The
case for coherence in the conceptual framework and standards. Abacus, 51(1), pp.116-141.
Uyar, A. 2016. Evolution of corporate reporting and emerging trends. Journal of Corporate
Accounting & Finance. 27(4), Pp.27-30.