University Financial Analysis Report: Red Ltd vs Blue Ltd (PSB 2.4)

This report presents a financial analysis of Red Ltd and Blue Ltd, focusing on key financial ratios to assess their performance and investment potential. The analysis includes journal entries, a cash flow statement, and adjusting entries to provide a comprehensive overview of each company's financial position. The report compares the two companies based on liquidity, profitability, and solvency ratios, including current ratio, profit margin, and debt-to-total-assets ratio. The findings suggest that Blue Ltd is a better investment option based on the analyzed ratios. The report concludes with a recommendation for investors, supported by the ratio comparisons and analysis. References to relevant accounting literature are also included.

Financial Analysis
2017

1
By student name
Professor
University
Date: Januray 30 , 2018.
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Contents
Question 1…………………………………………………………………........................................................3
Question 2…………………………………………………………………........................................................5
Question 3…………………………………………………………………........................................................6
Question 4…………………………………………………………………........................................................8
References.....…………………………………………………………….....................................................5
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Question 1
Journal Entries
Date Particulars Debit Credit
1st
April Cash A/C 90000
To Share Capital A/C 90000
(Being cash invested by
shareholders)
4th
April Land A/C 45000
To Cash A/C 45000
(Being land purchased for cash)
8th
April Advertisement Expenses A/C 2700
To Account Expenses A/C 2700
(Being advertisement expense paid on account)
11th
April Salaries Expenses A/C 2550
To Cash A/c 2550
(Being salary paid to employees)
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12th
April No Entry
13th
April Prepaid Insurance A/C 4500
To Cash A/C 4500
(Being prepaid Insurance paid in
cash)
17th
April Dividends A/C 900
To Cash A/c 900
(Being dividend paid in cash)
20th
April Cash A/c 8550
To Admins Revenue 8550
(Being cash received for Admins fee)
25th
April Cash A/C 3750
To Revenue received in Advance 3750
(Being cash received on sale of vehicle)
30th
April Cash A/c 11850
To Admission Revenue 11850
(Being cash received for admission
fee)
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30th
April Account Expenses 1050
To Cash 1050
(Being cash paid on advertisement expenses made on account)
Question 2
Cash Flow Statement
Particulars Amount
Opening Cash Balance 65000
Operating Activities -65000
Investing Activities -414500
Financial Activities 480000
Closing Balance: 65500
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From Operating Activities: Amount
Income Tax payments -75000
cash paid to suppliers -480000
cash received from customers 995000
Depreciation Expense -135000
Interest Expense -95000
Payment to employees -275000
-65000
From Investing Activities: Amount
Proceeds from sale of vehicle 18000
Investment in Buildings -450000
Profit on sale of vehicle 17500
-414500
From Financial Activities: Amount
Proceeds from issue of shares 380000
Payments of dividends to
shareholders -45000
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Dividends from investment in shares 15000
Proceeds from long term debt 130000
480000
3.Adjusting Entries:
1 Advertising 1600
To P/L 1600
2 P/L 1000
To Prepaid Expense A/C 1000
3 Depreciation 60
To Machinery 60
(Being depreciation on machinery charged)
4 P/L 300
To Cash received in advance 300
5 P/L 700
To Services performed 700
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6 Interest 80
To P/L 80
7 Accrued Salaries 1300
To P/L 1300
P/L Account
Particulars Amount Particulars Amount
To advertisement
supplies 900
To Dividends 500 By Service Revenue 10000
To Salaries Expenses 4000 By Prepaid Expenses 500
To Rent Expenses 900
To Depreciation 60
To Interest 80
To Salaries 1300
To services rendered 700
To Profit 2060
8440 10500
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Solution to Additional in class Que-1
Comparison of Red Ltd and Blue Ltd based on different ratios :
Liquidity Ratio [Current Ratio (CA/CL)]
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Current Ratio refers to
the ratio of Current
Asset and Current
Liabilities.
Ratio Higher the better.
Red Ltd Blue Ltd. Result
Ratio given 1.9:1 1.4:1
One should choose
Red Ltd since its
current asset as
compared with current
liability is more than that
of Blue Ltd (Abbott &
Kantor, 2017).
Profitability Ratio [Profit Margin]
It is calculated as a
percentage of Gross
profit over Gross Sales.
Ratio Higher the better.
Red Ltd Blue Ltd. Result
Ratio given 1.1 3.9
One should choose
Blue Ltd over Red Ltd
as it has higher profit
margin.
Solvency Ratio [Debt to total asset]
It shows ratio of total
liability to total asset.
Ratio lower the better
(Chariri, 2017).
Red Ltd Blue Ltd. Result
Ratio given 72.60% 59.20%
One should choose
Blue Ltd over Red Ltd
as it has lower
percentage of debt as
compared with Red Ltd.
CONCLUSION
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Based on the above 3
ratios, one should
choose Blue Ltd over
Red Ltd to make an
investment.
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