Holmes Institute: Accounting for Business Assignment, T1 2019

This assignment, prepared for the Holmes Institute's HC1010 Accounting for Business course, provides a comprehensive analysis of financial statements. It begins with an examination of financial ratios, including current ratio, quick ratio, accounts receivable turnover, and inventory turnover, along with short-term solvency and efficiency analyses for Big Bang Private Ltd. The assignment then delves into income and revenue recognition, using Green Apple Ltd as a case study. Finally, it compares balance sheets from ABC Company and XYZ Company from the viewpoint of a banker and a businessman. The assignment demonstrates the application of accounting principles to real-world business scenarios, including the interpretation of financial data for decision-making. References from academic journals are included to support the analysis.

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

1ACCOUNTING FOR BUSINESS
Table of Contents
Part A: Financial Ratios and Financial Statement Analysis.........................................2
Answer to A:..............................................................................................................2
Answer B:..................................................................................................................2
Part B: Income and Revenue.......................................................................................3
Part C: Comparing Balance Sheet...............................................................................4
Answer A:..................................................................................................................4
Answer B:..................................................................................................................4
Answer C:..................................................................................................................4
References:..................................................................................................................5

2ACCOUNTING FOR BUSINESS
Part A: Financial Ratios and Financial Statement Analysis
Answer to A:
Current Ratio: The current ratio is referred as the liquidity ratio which is useful in
examining the ability of the company to meet the obligations relating to short-term
liabilities with the current assets (Schaltegger, Etxeberria and Ortas 2017). The ratio
is useful because it helps the investors and creditors to understand the liquidity
position of company to pay its current liabilities.
Quick Ratio: The quick ratio is useful ratio in evaluating the company’s ability of
paying its current liabilities when it becomes due and can only be met by quick
assets. If the company has quick assets to cover the total current liabilities, the
company will be able to pay its debt without the requirement of selling long term
capital assets.
Accounts Receivable turnover: This ratio is known as efficiency ratio which is
useful in measuring the number of times the business can convert its accounts
receivables in cash throughout the year (Caskey and Laux 2016). As the ratio is
useful in measuring the capability of business to effectively collects its receivables, it
makes sense that higher ratio is considered favourable.
Inventory turnover: The ratio measures the number of times the company sells its
total inventory throughout the year. The ratio represents how effectively the company
is able to control its merchandise and as a result it is effective during the long run.
Below stated is the detailed computation of ratio for Big Bang Private Ltd for the
financial year 2018 and 2018 are as follows;
Answer B:
Short-term solvency analysis:
With respect to the above stated table, despite the fall in the current ratio in
2018 from 2.74 to 2.08 in 2009, the ratio appears to be higher than the standard

3ACCOUNTING FOR BUSINESS
benchmark of 2 and hence it is considered satisfactory. Nevertheless, the more
rigorous is the ratio is less than the thumb rule of 1. In the situation of Big Bang
Private Limited, the ratio has fell down more to 0.84 in the year 2019 from the
previously reported figure of 0.89. This implies less satisfactory position for the
company. In other words, the organization may face difficulty in settling the short-
term debt obligations in short run. Therefore, the overall short-term solvency
situation of Big Bang Private Ltd does not appears to be satisfactory.
Efficiency analysis:
Efficiency in asset management can be identified through the accounts
receivables turnover and inventory turnover as opposed to the policies of company
or the industrial benchmark (Melé, Rosanas and Fontrodona 2017). While for
receivables turnover days, the number appears to be greater in comparison to the
credit period of 30 days permitted by the organisation to its customers. In 2019 there
was a significant improvement because of the fall in the ratio from 51 days for the
year 2018 to 38 days in 2019. While the inventory turnover of Big Bang Pty Ltd is
considerably greater in relation to the industrial benchmark of 101 days, despite the
fact that it has fell down 176 days in the year 2019 which was relatively higher
between 2014 to 2018. As understood the company seems to have made over
investment in inventory that has led to rise in the financing and expenditure
associated to maintaining the stock of inventory. The company has failed to adopt
the sound inventory management system and requires immediate actions. The
higher inventory turnover in terms of days evidently lay down the reason for higher
current ratio and lower quick ratio.
Part B: Income and Revenue
Green Apple Ltd is engaged in the business of selling anti-virus computer
software and specific events related to finance occurred during the year. Sales
proceeds from software should be considered revenue because its central business
activities involve sale of anti-virus software. The main source of revenue is renewal
of anti-software policies and majority of the firm’s revenue through this activity.
Making investment in the short-term money market should be viewed as income and
company has received a sum of $50,000 which should be categorized as revenue.
Therefore, this can be classified as income or revenue and should be categorized as
outflow of cash.
Issue of further shares should be viewed as inflow of cash. However, this
cannot be held as relevant item because the exchange of funds occurs in this case
only. The primary reason for issue of shares is mainly for cash. On classifying the
items of revenue the profit is earned. Hence, these profits are treated as the
operating profit (Kieso, Weygandt and Warfield 2016). The revenue derived from the
operations of Green Apple Ltd is calculated below;

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Part C: Comparing Balance Sheet
Answer A:
From the viewpoint of banker, XYZ Company should be selected to offer the
loan of $6,000 that will be repaid inside six months’ time. Following detailed balance
sheet analysis of both ABC Company and XYZ Company, it should be noted that
XYZ high amount of cash and hence the liquidity position of the company would
appear strong in relation to the other organization. Despite settling its present
obligations, the XYZ Company will have sufficient liquidity assets in hand that may
be used for repaying the loan (Chychyla, Leone and Minutti-Meza 2019). While ABC
liquidity position appears weak and has insufficient fund to meet its short-term
obligations. Due to this, the company might be forced to dispose its long term assets
to satisfy the responsibilities related to debts. From the perspective of banker, XYZ
will be preferred due to its lower risks.
Answer B:
From the viewpoint of businessman, greater price may be paid for XYZ
Company because the company reported low amount of short-term loan as opposed
to ABC and the liquidity position appears to be strong for business. As ABC is facing
crisis and if lower price is paid to the company then the proposal of business survival
may be taken into the account.
Answer C:
If the current owners take the responsibility of taking all the present liabilities,
then ABC Company may be chosen over XYZ Company because of the fact that the
company has greater level of non-current assets and net assets in comparison with
the ABC Company.

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References:
Caskey, J. and Laux, V., 2016. Corporate governance, accounting conservatism,
and manipulation. Management Science, 63(2), pp.424-437.
Chychyla, R., Leone, A.J. and Minutti-Meza, M., 2019. Complexity of financial
reporting standards and accounting expertise. Journal of Accounting and
Economics, 67(1), pp.226-253.
Kieso, D.E., Weygandt, J.J. and Warfield, T.D., 2016. Intermediate Accounting,
Binder Ready Version. John Wiley & Sons.
Melé, D., Rosanas, J.M. and Fontrodona, J., 2017. Ethics in finance and accounting:
Editorial introduction. Journal of Business Ethics, 140(4), pp.609-613.
Schaltegger, S., Etxeberria, I.Á. and Ortas, E., 2017. Innovating corporate
accounting and reporting for sustainability–attributes and challenges. Sustainable
Development, 25(2), pp.113-122.