Holmes Institute Accounting and Finance Assignment Analysis

This assignment delves into the analysis of financial statements, focusing on key financial ratios and their implications. Part A examines the calculation and interpretation of financial ratios, including the current ratio, quick ratio, accounts receivable turnover, and inventory turnover, to assess a company's short-term solvency and efficiency. Part B explores income and revenue recognition, specifically analyzing the revenue streams of a software company, differentiating between revenue and other financial activities like interest income and share issuance. Part C compares balance sheets to evaluate a company's credibility for lending purposes, highlighting the importance of liquidity and short-term obligations. The analysis considers how these factors influence decisions, such as whether to extend a loan or determine a fair buying price for a company. The assignment concludes by considering how changes in these financial metrics impact decision-making processes. The student demonstrates an understanding of financial statement analysis, ratio interpretation, and their practical application in business decision-making.

Running head: ACCOUNTING AND FINANCE
Accounting and finance
Name of the student
Name of the university
Student ID
Author note

1ACCOUNTING AND FINANCE
Table of Contents
Part A – Financial ratios and financial statement analysis.........................................................2
a. Explanation and calculation of ratio..................................................................................2
b. Short term solvency and efficiency...................................................................................2
Part B – Income and revenue.....................................................................................................3
Part C – Comparing balance sheet............................................................................................3
a. More favourable application for analysing credibility........................................................3
b. Payment of higher price for buying the entity...................................................................4
c. Changes in decision..........................................................................................................4
Reference....................................................................................................................................5

2ACCOUNTING AND FINANCE
Part A – Financial ratios and financial statement analysis
a. Explanation and calculation of ratio
Computation of ratios with detail formula are presented below -
Current ratio – it measures the company’s ability in terms of payment of the short term dues.
It is used by the analysts and investors to measure the liquidity position of the entity that will
help them to take decision regarding whether to invest in the company or lend fund to the
entity (Dalnial et al. 2014).
Quick ratio – current ratio is the stricter version of current ratio where the current assets those
are not readily available in cash or take some time to get converted into cash are not
considered while the ability of meeting the short term liability is assessed (Moghimi and
Anvari 2014).
Accounts receivable turnover – it reveals the time taken by the entity to collect its debts due
from the debtors. It measures the entity’s efficiency in collection the debt. High receivable
turnover ratio indicates that the company has conservative credit policy and the collection
department is aggressive (Dalnial et al. 2014).
Inventory turnover – it reveals the time taken by the entity to sell or replace its entire stock of
inventories during the concerned period. It measures the entity’s efficiency in selling its
inventories during the concerned period. Inventory turnover ratio can be used for comparing
with other companies under the same industry to measure the efficiency as compared to
others (Moghimi and Anvari 2014).
b. Short term solvency and efficiency
Short term solvency –

3ACCOUNTING AND FINANCE
Generally current ratio of 2:1 indicates the ability of the entity to meet the short term
liabilities. Big Bang Pty Ltd’s current ratio for both the years are more than 2 which is
signifying that the organization is able to pay its short term liabilities comfortably. On the other
hand, current ratio of 1:1 indicates the ability of the entity to meet the short term liabilities. Big
Bang Pty Ltd’s quick ratio for both the years are less than 1 which is signifying that the
organization is not able to pay its short term liabilities comfortably with its most liquid assets.
Hence, though the current ratio is satisfactory, quick ratio of the entity is revealing
unsatisfactory position (Faello 2015)
Efficiency –
The receivable turnover times is reduced from 9.69 times to 7.10 times and the days
taken to collect the debts increased from 38 days to 51 days over the years from 2018 to
2018. Both are signifying that the efficiency of the entity in context of debt collection is
reduced. On the other hand, the inventory turnover time is reduced from 2.07 times to 1.79
times and the days taken to sell the inventories increased from 176 days to 204 days over the
years from 2018 to 2018. Both are signifying that the efficiency of the entity in context of
selling of the inventories is reduced. Hence, the efficiency of the entity in terms of both
collecting of debts as well as selling of inventories is deteriorated in 2019 as against 2018 (Yu
et al. 2014).
Part B – Income and revenue
Revenues of Green Apple Limited earned from different activities are as follows –
As per the given information regarding Green Apple Ltd it is identified that the entity is
engaged in dealing with software. It undertook some financial activities during the financial
year closed on 30th June. Software sold by the entity amounting to $ 25,000,000 will be
considered as revenue as the entity’s primary business is selling software and income earned
from selling of software is the major source of its business income. Interest earned from the
investment under short-term money market cannot be classified under income as the amount
is $ 50,000 (Easton and Sommers 2018). This earning is not categorized under revenue or
income as the entity required cash outflow for earning the same. Shares issued by the entity
amounting to $ 500,000 will also not be considered as revenue as the amount received in
exchange of sharing the entity’s profit. Hence, it is considered as the exchange of the fund.
Receipt of money is considered to be categorized as revenue only when the same is received
out of which the profit is generated or which has active association with the business of the
entity. Hence, total income of the entity will be amounted to $28,000,00 and total cash flow
will be amounted to $ 27,498,000 (Cao, Chychyla and Stewart 2015).

4ACCOUNTING AND FINANCE
Part C – Comparing balance sheet
a. More favourable application for analysing credibility
From the given case it is identified that banker is required to analyse the credibility of
ABC Company and XYZ Company in context of providing loan amounting to $ 6000 that is
repayable in period of 6 months. Analysing both entity’s financial statement it can be
observed that the cash position of XYZ is better as compared to ABC hence, the liquidity
position of XYZ is better as against ABC (Maaloul and Zéghal 2015) It is further observed that
even after paying off the short term obligations XYZ Limited will have adequate cash in hand
that can be used for pay off the loan. On the other hand, ABC Limited does not have
adequate current assets to pay off its short term obligations. Hence, to meet even the short
term obligation it needs to sell off the non-current assets. Hence, comparing the liquidity
position of both the entities, the banker shall select the entity with better liquidity position that
is XYZ Limited (Lakshmi, Martin and Venkatesan 2015)
b. Payment of higher price for buying the entity
From the business aspect, the companies with lower amount of short term liabilities will
be paid higher buying price. In the given case, it is observed that XTY Limited has lower short
term obligation as compared to ABC Limited and hence, it will be better off in meeting its
short term obligation. Further, it is found that ABC Limited is already is business distress and
selling the same with lower price will further deteriorate its position (Robinson et al. 2015).
c. Changes in decision
If the existing owner takes the responsibility for their respective liabilities, XYZ Limited will get
preference against ABC Limited as the gearing position and net assets of XYZ limited is
better as compared to ABC Limited.

5ACCOUNTING AND FINANCE
Reference
Cao, M., Chychyla, R. and Stewart, T., 2015. Big Data analytics in financial statement
audits. Accounting Horizons, 29(2), pp.423-429.
Dalnial, H., Kamaluddin, A., Sanusi, Z.M. and Khairuddin, K.S., 2014. Accountability in
financial reporting: detecting fraudulent firms. Procedia-Social and Behavioral Sciences, 145,
pp.61-69.
Easton, M. and Sommers, Z., 2018. Financial Statement Analysis & Valuation, 5e.
Faello, J., 2015. Understanding the limitations of financial ratios. Academy of Accounting and
Financial Studies Journal, 19(3), p.75.
Lakshmi, T.M., Martin, A. and Venkatesan, V.P., 2015. A genetic bankrupt ratio analysis tool
using a genetic algorithm to identify influencing financial ratios. IEEE Transactions on
Evolutionary Computation, 20(1), pp.38-51.
Maaloul, A. and Zéghal, D., 2015. Financial statement informativeness and intellectual capital
disclosure: An empirical analysis. Journal of Financial Reporting and Accounting, 13(1),
pp.66-90.
Moghimi, R. and Anvari, A., 2014. An integrated fuzzy MCDM approach and analysis to
evaluate the financial performance of Iranian cement companies. The International Journal of
Advanced Manufacturing Technology, 71(1-4), pp.685-698.
Robinson, T.R., Henry, E., Pirie, W.L. and Broihahn, M.A., 2015. International financial
statement analysis. John Wiley & Sons.
Yu, Q., Miche, Y., Séverin, E. and Lendasse, A., 2014. Bankruptcy prediction using extreme
learning machine and financial expertise. Neurocomputing, 128, pp.296-302.