Comparative Financial Analysis of Two Companies

This assignment requires a comprehensive comparison of the financial positions of two companies, XYZ Limited and ABC Limited. The report assesses the current assets and liabilities of each company, evaluates their owner's equity, and provides suggestions for a banker, businessperson, and in case existing owners agree to pay off liabilities. The document is well-structured with three separate sections for each perspective, followed by a conclusion and references section.

ACCOUNTING FOR
BUSINESS

Table of Contents
INTRODUCTION...........................................................................................................................1
PART A...........................................................................................................................................1
a. Explaining and computing the financial ratios .......................................................................1
b. Interpreting the short term solvency and they efficiency of business in accordance with the
resulted ratio. ..............................................................................................................................2
PART-B...........................................................................................................................................3
a. Items that represented as income.............................................................................................3
b. Item that represented as revenue.............................................................................................4
PART-C...........................................................................................................................................4
a. Suggestion as banker ..............................................................................................................4
b. Suggestion as a business person .............................................................................................5
c. Suggestion in case the liabilities are paid off by existing owners...........................................5
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Accounting means recording the business transactions so that financial performance and the
financial position of the business can be evaluated. The results help the users in making the
suitable decisions.
PART A
a. Explaining and computing the financial ratios
Current ratio- It is a type of the liquidity ratio that assess the ability of the company in
paying off current obligations or the dues that are to be paid within a year.
Quick ratio- This ratio relates indicates the liquidity position of the company and helps in
measuring the capability of an entity in meeting its short term liabilities in respect of the assets
that are most liquid (Le and Viviani, 2018).
Accounts Receivable turnover- It is the number of days and the times for which the
enterprise collects its receivables.
Inventory Turnover ratio- This ratio is also called as the efficiency ratio that depicts the
extent of effectiveness for managing the inventory by comparing the COGS to that of average
inventory (Christensen, Nikolaev and Wittenberg‐Moerman, 2016). It measures the number of
times and the days in which the inventory is been turned during a particular period.
Ratio analysis of Big Bang Pvt. Ltd.
Particulars Formula Amount
2018 2019
Current assets 222000 218000
Current liabilities 81000 105000
current ratio
current assets/current
liabilities 2.74 2.08
Current assets 222000 218000
Inventory 150000 130000
Quick assets
Current assets-
Inventory 72000 88000
Current liabilities 81000 105000
Quick ratio Quick assets/current 0.89 0.84
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liabilities
Net credit sales 490000 630000
Average Account
Receivable 108000 95000
Account Receivable
turnover(in times)
Net credit
sales/Average account
receivable 4.54 6.63
Cost of goods sold 490000 630000
Average inventory 205000 215000
Inventory turnover
ratio(in times)
Cost of goods
sold/Average
inventory 2.39 2.93
Inventory 205000 215000
Cost of goods sold 490000 630000
Inventory turnover
ratio (in days)
Inventory/Cost of
goods sold*365 152.7040816 124.5634920635
Average Account
Receivable 108000 95000
Net credit sales 490000 630000
Account Receivable
turnover(in days) 80.4489795918 55.0396825397
b. Interpreting the short term solvency and they efficiency of business in accordance with the
resulted ratio.
The current ratio of Big Bang private limited for the year 2018&19 resulted as 2.74 and
2.08 which reflects the better ratio as it is very close or equates to the ideal ratio that is 2:1. This
means that the company has efficiently managed its current assets over its short term obligations.
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The quick ratio of the company evaluated as 0.89&0.84 for both the years depicted as a good
ratio as it is near to the ideal quick ratio that equates to 1:1 which means that company has well
managed its liquid assets. Thus, the short term solvency of the Big Bang company is been
viewed as better because its liquidity position is ideal which in turn shows that the company is
fully capable of meeting its obligations. The efficiency ratios that includes account receivable
and the inventory turnover ratio which are been assessed in both terms times and days. The
account receivable turnover of the company resulted as 4.53 and 6.63 in times and in days it has
been computed as 80 and 50 days which depicts that the company has efficiently issued the
credit to their customers and collect its funds in the effective manner. The inventory turnover
ratio of the company is low from the ideal ratio which means that the corporate has not well
balanced its stock with its sales. The ratio for the company equates to 2.39 for 2018 and 2.93 for
2019 which is lower than ideal ratio that is 4 to 6 (Kalyani, Mathur and Gupta, 2019). Thus, the
efficiency of the company neither is good nor bad. The receivable efficiency is good but for
attaining the efficiency in inventory the enterprise must focus on improved inventory methods.
PART-B
a. Items that represented as income.
Income is the money that the business earns by exchanging the goods and the services or by
investing the capital.
Items Amount Reasons
Sale of the software $25000000 The sales of the software
meets the definition of the
income for the company as it
generates revenue which is
major source of income for the
company.
Update downloads $3000000 The amount received from the
update downloads is also
considered as an extra income
for the Green Apple limited as
it is a software company and
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for updating the software an
additional revenue is generated
which leads to income.
Interest income $50000 Interest received on the
investment made in the short
term money market
instruments also reflected as
the income because it is a
source of the earning and
added in the other income
segment of the income
statement.
Discount received $2000 Discount received by the
enterprise on the early
settlement of the dues is an
opportunistic income that is
earned by the firm.
Issue of shares $500000 Issuance of shares depicts the
increment in the capital
investments which in turn
generates the income so it is
also a major medium of
income.
b. Item that represented as revenue.
Revenue – The earning gained by the sale of the goods and the services or using the capital
assets that is attached with main operations.
Items Amount Reasons
Sales of software $25000000 This item is considered as the
revenue for Green Apple Ltd
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as the software is one of its
product and according to the
definition sale of the product is
counted as revenue.
PART-C
a. Suggestion as banker
As a banker, I would prefer XYZ company in providing the short term loan as it has the
capability in paying off its short term obligations because the current assets of this company are
doubled over its current liabilities. On the other hand, the liquidity position of the ABC limited is
Not better because the current assets of this firm are much lower than its current liabilities which
in turn clearly states that it is unable to meet its short term debts. Thus, granting the loan to XYZ
limited is the better and the favorable option for me.
b. Suggestion as a business person
As the business person, I will be buying the XYZ limited company with taking over all is
liabilities because the company has sufficient assets to meet its liabilities. The total assets of
XYZ limited resulted as 46200 and the total liabilities evaluated as 12000 which is very low in
proportion to its assets and I could payoff the liabilities with ease. The owner equity of this
company is much better than the ABC limited company which indicates that the market value of
XYZ limited is good in the overall market so buying this company will be a better option for me.
However, the proportion of total liabilities of the ABC limited is close to its total assets and the
owner's equity of the company is also very less than the other company so this option is not
considered as good for buying.
c. Suggestion in case the liabilities are paid off by existing owners.
If in the case, the existing owners of the companies agrees to pay off its liabilities, then I
would choose for purchasing the ABC limited because its total assets are more than the total
assets of the XYZ limited. It means that the asset based value of ABC limited is better than XYZ
limited. Moreover, one of the major benefit I will be enjoying is that, ABC limited has higher
liabilities than XYZ limited which will be paid off by the existing owners. Thus, I will get higher
assets with no any liability by taking over the ABC limited company.
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CONCLUSION
From the above report it can be summarized that accounting is a vital aspect for every
business as it deals with the financial information of the business.
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