Financial Ratio Analysis: Assessing Solvency and Business Performance

This assignment analyzes financial ratios to assess a company's performance and solvency. It examines current, quick, accounts receivable turnover, and inventory turnover ratios for two years, evaluating short-term solvency and comparing these metrics. The assignment explores income and revenue sources, differentiating between recurring and non-recurring income. Furthermore, it compares the balance sheets of two companies to determine the most favorable for a loan application and potential business acquisition, considering liabilities and asset values. The analysis provides a comprehensive understanding of financial statement analysis and its implications for business decisions, using real-world examples and calculations to illustrate key concepts and principles.

Accounting for Business

Contents
Business Law.................................................................................................................................1
Introduction....................................................................................................................................3
Part A financial ratios and financial statement analysis..........................................................4
a)..................................................................................................................................................4
b)..................................................................................................................................................8
Part B Income and revenue.........................................................................................................9
Part C Comparing Balance sheet.............................................................................................10
a)................................................................................................................................................10
b)................................................................................................................................................10
c)................................................................................................................................................10
References...................................................................................................................................11

Introduction
The term finance is considered to be one of the most important term that helps the
business organisation to achieve the objective of maximising the performance of the
company. This is considered to be the important term for the company as this helps
them to analyse the financial performance of the company and through this the
company can compare the standards with the other companies so as to make the
different plans to maximise the performance of the company. The accounting is one of
the process that helps the company to record the transactions in the books of accounts
of the company which helps them to participate and finance the structure so as to
achieve the objective of the disclosure to the users of the same (Alstadsæter, et. al.,
2016). This assignment is based on the ratios of the company and the solvency issue
that the company is facing. Also the different operating activities that the company is
entered into are considered for the purpose. Also for the purpose of achieving the
objective of purchasing the running business the analysis of the balance sheet of both
the companies are done.

Part A financial ratios and financial statement analysis
a)
There are various ratios which has been specified so as to achieve the analysis of
financial performance of the company. Hence for this purpose various ratios are
considered for this purpose.
 Current ratio: In order to pay the short term liabilities of the business enterprise
the current ratio is required by the company. It is seen that the every business
organisation has short term obligations which has to be paid off and this
obligation is termed as current liabilities. This is liquidity ratio that helps the
business to assess the current assets so as to pay off the short term obligations
of the company.
Current ratio = Current Assets/Current Liabilities
Current ratio (2018) = Cash+ Account receivable+ inventory/ current Liabilities
= 12000+60000+150000/81000
= 2.74:1
Current ratio (2019) = Cash+ Account receivable+ inventory/ current Liabilities
= 18000+70000+130000/105000
= 2.08:1

 Quick ratio: this helps in indication about the company’s financial position so as
to pay off the quick liabilities of the company (Brinca, et. al., 2016). This helps in
indicating whether the company is in the position to pay of the non-cash
expenses which are not determined by the quick ratio.
Quick ratio = Quick assets/current liabilities
= Cash+ Accounts receivables/current liabilities
Quick Ratio (2018) = Cash accounts receivables/Current liabilities
= 12000+6000/81000
= 0.8811
Quick Ratio (2019) = Cash accounts receivables/Current liabilities
= 18000+70000/105000
= 88000/105000
= 0.84:1

 Accounts receivables turnover ratio: In order to calculate the efficiency of the
company regarding the collection from the debtors or how frequently the debtors
pay off their debts to the company.
Accounts receivable turnover ratio = Net credit sales/ Average receivable
Accounts receivable T/O ratio (2018) = Net credit sales/ Average receivables
= 490000/69000
= 7.10 times
Average receivables = opening receivable + closing receivable/ 2
= 78000+60000/2
= 69000
In days = 365/7.10 = 51 days
Accounts receivable T/O ratio (2019) = Net credit sales/ Average receivables
= 630000/65000
= 9.69 times
Average receivables = 60000+70000/2
= 65000
In days = 365/9.69 = 38 days

 Inventory turnover ratio: This helps in showing how many times the inventory of
the company changes completely in the year by the way of sales and purchase
of the new inventories (Busco and Quattrone, 2018).
Inventory T/O ratio = Cost of goods sold/Average inventory
Inventory T/O ratio (2018) = Cost of goods sold/ Average inventory
= 250000/140000 = 1.78 times
Average inventory = opening inventory + closing inventory/ 2
= 130000+150000/2 = 140000
In days = 3665/1.78 = 204 days
Inventory T/O ratio (2019) = Cost of goods sold/ Average inventory
= 290000/140000 = 2.07 times
Average inventory = opening inventory + closing inventory/ 2
= 150000+ 130000/2 = 140000
In days = 365/2.07 = 176 days

b)
Short term solvency of the company is considered as the status which helps in
identifying the financial condition of the company. It is seen that the company is not
having a good solvency ratio. It is seen that the company is on the edge line of
becoming the inefficient for this purpose. As in the year 2018 the current ratio of the
company is 2.74:1 which has been decreased to 2.08:1 in the year 2019. This also
shows that the ratio of the current asset in respect of the current liability of the company
is also decreasing. Also this is seen that the quick ratio of the company is very low
(Carenys and Moya, 2016). With respect to the accounts receivable turnover of the
company. The position is far improving as compared to the cost of the year but is still
behind the industrial average of 30 days. The inventory turnover of the company is
considered to be the ratio that helps in managing the industrial average of around 101
days. But the companies in position of improving it from 204 days to around 176 days.

Part B Income and revenue
This is seen that the company green apple ltd. is performing its business in most
efficient and fruitful manner. While the company has various transactions with them
which helped them to achieve the objective of maximising the performance of the
company. Some of the transactions of the company includes sale of the software which
is one of the main source that comes within the heading of revenue of the company
(HASLAM, et. al., 2015). Also the amount received from update downloads are also
considered to be the revenue source for the company. While the amount that is
received from the investing activity is considered to be income for the company as this
is non-recurring income. Also the amount that is received from the discount is
considered as the income for the purpose as this is one time income for the company.
Also the income that is received from the exchange is also included in this heading of
income.

Part C Comparing Balance sheet
a)
Calculation of the current ratio
Current ratio = Current Assets/ Current liabilities
Current ratio (ABC company) = 7200/52800 = 0.13: 1
Current ratio (XYZ company) = 26000/12000 = 2.17: 1
As the companies has applied for the loan hence for this the current ratio of the
company is required to be checked for this purpose. as regard to the application
the for applying for the short term loans of $6000 the XYZ company is considered
more favourable as the current asset of the company is high in this case. Which
is 2.17:1. As this is better than ABC Company.
b)
As this is seen that the company is in the condition of selling the business and hence
the liabilities of the company would be taken for this purpose (Hsieh, Ma and
Novoselov, 2019). hence this is seen that the ABC limited is having more liabilities as
compared to the XYZ Ltd. hence this is better to pay more for the XYZ Ltd.
c)
This is seen that if the agreed liabilities of the company are paid over by the owner itself
than it is considered that one of the most favourable company for which the acceptance
must be given is ABC Ltd. as the asset of the company are more than XYZ ltd.

References
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business income in measuring top income shares: Integrated accrual approach
using individual and firm data from Norway (No. w22888). National Bureau of
Economic Research.
2. Brinca, P., Chari, V.V., Kehoe, P.J. and McGrattan, E., 2016. Accounting for
business cycles. In Handbook of Macroeconomics (Vol. 2, pp. 1013-1063).
Elsevier.
3. Busco, C. and Quattrone, P., 2018. Performing business and social innovation
through accounting inscriptions: An introduction. Accounting, Organizations and
Society, 67, pp.15-19.
4. Carenys, J. and Moya, S., 2016. Digital game-based learning in accounting and
business education. Accounting Education, 25(6), pp.598-651.
5. HASLAM, C., Tsitsianis, N., Andersson, T. and Gleadle, P., 2015. Accounting for
business models: Increasing the visibility of stakeholders. Journal of Business
Models.
6. Hsieh, C.C., Ma, Z. and Novoselov, K.E., 2019. Accounting conservatism,
business strategy, and ambiguity. Accounting, Organizations and Society, 74,
pp.41-55.