Accounting Assessment Solution: Finance, Year 2007 Analysis

This document presents a comprehensive solution to an accounting assessment focused on the financial performance of Super Cheap Auto Group Limited for the year 2007. The solution meticulously analyzes various financial ratios, including the current ratio, quick ratio, inventory turnover ratio, and price-earnings ratio, providing insights into the company's liquidity, solvency, and profitability. The analysis compares the company's performance to industry standards and evaluates its working capital management and debt levels. Furthermore, the solution explores the users of financial statements, differentiating between owners/investors and creditors, and detailing the benefits and limitations of financial information for each group. It also includes the classification of various accounting items as assets, liabilities, equity, expenses, or revenue. The document provides a detailed examination of the company's financial position, offering valuable information for understanding its strengths, weaknesses, and overall financial health.

Accounting Assessment -1
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Table of Contents
Solution 1).......................................................................................................................................3
Solution 2).......................................................................................................................................5
References........................................................................................................................................9
Appendix..........................................................................................................................................9
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Solution 1)
Part (a)
Current ratio is the company’s ability to repay its debt. In Other words, current ratio is the
liquidity ratio that measures the company’s ability to repay its debt in short term generally 12
month. Current ratio is also called working capital ratio.
Current ratio for the year ended 2007 is 1.720 which has decreased from the previous year which
was 2.07. This current ratio of the company states that company is in better position to pay off its
liabilities. But if we see at the industry’s current ratio i.e. 1.760, which is higher than our
company’s current ratio, it indicates that company is not in good condition to repay its liabilities.
Quick ratio is also called acid test ratio, or liquid ratio. It indicates how the company is able to
pay off its short term liabilities. Quick ratio is the indicator of company’s short term liability.
Lower the quick ratio means that company’s liquidity position is not satisfactory, where as
higher the quick ratio better the company's liquidity position. Quick ratio for the year 2007 is
0.198 which has decreased from the previous year from 2.07. This quick ratio states that
company is not in good condition to pay off its short term liabilities as compare to industry
capabilities to pay off its debts as the quick ratio of industry is 0.78. (Baridwan, 2013)
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Part b)
The Super Cheap Auto Group Limited has a combination of both forms of finances that is long
term and short term. From the cash flow statement, it can be noticed that company is regular in
payment of its liabilities. Along with principal amount the company has also paid interest
amount on time. The company has earned sufficient profits, which indicates that company is also
regular in paying the dividends to its shareholders. But at the same time company is not in
condition to pay off its short term debts on time. From the cash flow from operating activity it
can be identified that there is increase in the borrowing cost during the year 2007 which indicates
that the company has made extra borrowings during the year.
Part c)
Inventory turnover ratio is the ratio that shows how many times the company's inventory is sold
and replaced for a period of time. Inventory turnover ratio is calculated as follows-
Inventory turnover ratio = sales/average inventory
Hence, the inventory turnover ratio of Super Cheap Auto Group Limited during the year 2007 is
1.659 which has decreased from the previous year which was 1.66.
Working Capital Management enables to determine that the company is able to continue its
operations and has sufficient cash inflow and outflow to satisfy companies’ requirements. The
Companies receipt has increased in year 2007 as compared to previous year from 581,016 to
689,172. The net working capital of the company is positive, which indicates that company is
able to continue its operations, it represents that short term to current assets are not secured by
long term assets.
Part d)
No, the Super cheap Auto should not borrowed extra fund as the current debt of the company is
high and borrowing the extra fund will create impact over the solvency position of the company.
Also there is increase in interest cost of the company from the previous year and borrowing extra
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fund will create impact over the profitability of the company. The company have enough of
retained earning so can make the use of the same for the purpose of expansion.
Part e)
The Price earnings ratio of Super Cheap Auto Group Limited for the year 2007 was 4.66 which
has increased from the previous year which was 3.44. Although the company has increased its
P/E ratio but is still very much low from the market expectation which is 16.7. The average
dividend yield is 3.7% on the other hand company is paying dividend at the higher rate which is
10.7% in the year 2007 which is better from the industrial standard.
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Solution 2)
Part (a)
The mainUsers of financial statements are stated below-
1) Owners and investors
2) Government
3) Management
4) Creditors
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Part (b)
The two different groups who are the users of financial information-
1) Owners and investors-
Stakeholders or owners of corporations need necessary information about the financial position
of the company, in order to make decisions on what to do or what not to do in respect of the
investments. The limitation which the owner may face with the financial statement is that it can
be manipulated by the management of the company.
Benefits gained by the owners-
1. Investors rely on the financial information in order to gain necessary information like
profits of the business, risks faced by the business, about the financial health, comparison with
the previous year's profits etc. It helps the owners to take necessary decisions.
2. It helps to observe about the value of the business and about the profit margins.
(Bebbington, 2014)
2) Creditors-
Creditors are interested in accounting information because it enables them to assess the credit
worthiness of the company. Lenders lend money only to being satisfied with the credit
worthiness of the company. They are basically interested in the company's liquidity i.e.
company's ability to pay off its short term liabilities. The creditor also faces the issue that the
information in the financial statement is based on the data of the past year which may have
changed over the time.
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Benefits gained by the Creditors
1. Creditors also rely on the financial information in order to gain necessary information
about company's liquidity position, company's policy to pay off its liabilities on time.
2. Creditors review the financial information to assess the cash flow position. (Christensen,
2013)
Part (c)
Following items to be classified as-
1) A loan to another company - Asset
2) Shares issued to the public - Equity
3) Inventory purchased last week - asset
4) Depreciation of equipment - expense
5) Provision for long service leave - liability
6) Excess payment to the tax department - asset
7) Shares owned in another company - asset
8) Accounts payable - liability
9) Prepaid insurance premium - asset
10) Deposit paid by a customer for work yet to be done - liability
11) Credit sales - asset
12) Cash sales - revenue
13) Retained profit – liability
14) Advertising - expense
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15) Bad debts - expense
16) Dividend declared, not yet paid. - Liability
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References
Baridwan, Z. (2013). Accounting Fundamentals And Variations of Stock Price: Methodological
Refinement with Recursive Simultaneous Model. Journal of Indonesian Economy and Business:
JIEB.,28(1), 84.
Bebbington, J., Unerman, J., &O'Dwyer, B. (Eds.). (2014). Sustainability accounting and
accountability. Routledge.
Christensen, T., Cottrell, D., & Baker, R. (2013). Advanced Financial Accounting. McGraw-Hill.
Jack, L. (2015). Book Review: Fair value accounting in historical perspective. Accounting
Review, 90(2), 825-828.
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Appendix
Super Cheap Auto Limited
Particular
2007 ( Amount $ '
000) 2006 ( Amount $ ' 000)
Revenue 625,187 526,236
Market price share 5 5
EPS 21 15.5
NPAT 22,332 16,510
Current Assets 180,742 155,530
Total Assets 314,608 269,476
Current Liabilities 105,064 75,129
Total shareholders’ equity 124,526 112,930
Noncurrent liabilities 85,018 81,417
Receivables 14,591 14,137
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Creditors 62,243 49,443
COGS 376,733 316,860
Quick Assets 20862 20509
Quick Ratio 0.198564684 0.272983801
Current Ratio 1.720303815 2.070172636
Net Profit Margin ratio 0.035720512 0.031373756
Average Account Receivable 21659.5 21432.5
Average creditors 86964.5 505226.5
Inventories 4,168 4,335
Creditors turnover ratio 0.047927603 0.00858031
Receivable turnover Ratio 42.8474402 37.22402207
Average stock turnover of the
company 1.659496248 1.660783942
Solvency Ratio 0.070983573 0.061267052
Assets turnover ratio 1.987193587 1.952812124
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