HC1010 Accounting for Business: Financial Statement Analysis

This assignment solution focuses on financial statement analysis within the context of business accounting. It begins with a detailed analysis of financial ratios, including current ratio, quick ratio, inventory turnover, and average receivable days, comparing data from 2018 and 2019 to assess liquidity, efficiency, and debt management. Part A includes the evaluation of financial statements and the implications of changes in these ratios. Part B delves into the definition of income and revenue, applying these concepts to a case study involving software sales, equity issuance, and interest/discount income. Part C presents a comparative financial ratio analysis of two companies, XYZ and ABC, assessing their financial stability and providing recommendations from a bank manager and businessperson's perspective on loan approval and investment decisions. The assignment utilizes Australian Accounting Standards and provides relevant references.

Business accounting

Business Accounting 1
Contents
Part A....................................................................................................................................................2
Part B.....................................................................................................................................................4
Part C.....................................................................................................................................................5
References.............................................................................................................................................7

Business Accounting 2
Part A
Financial Ratio
Analysis 2018 2019
Current Ratio Current assets
22200
0
21800
0
Current
liabilities 81000 2.74
10500
0 2.08
Quick Ratio Quick assets
21000
0
20000
0
Current
liabilities 81000 2.59
10500
0 1.90
Inventory turnover
ratio
cost of goods
sold
25000
0
29000
0
average
inventory
14000
0 1.79
14000
0 2.07
time
s
56.5
6
48.7
6 Days
Average Receivable
days Receivables 60000 70000
sales /365
49000
0 0.12
Tim
e
63000
0 0.11
Tim
e
44.6
9
Day
s
40.5
6 Days
As per the evaluation of the financial statement, it is observed that the liquidity ratio of the
company is increases from 2.74 to 2.08 in the year 2018 and 2019 respectively. The liquidity
ratio of the company states that the capabilities of the company in order to pay its all
obligations in exchange of total asset (Accounting Tools, 2018a). In the year 2018, the
current asset of the company is 222000 and it is decreases to 218000. It indicates that the
current ratio is effective in the year 2018 but in 2019 the capability of the paying the

Business Accounting 3
obligations is reduces. The decreasing current asset and increasing the current liabilities cause
the ineffective liquidity ratio. The expenses of the company in order to produce the goods are
increases due to which it borrows the money from the other institutions (Zainudin, and
Hashim, 2016). Liquidity ratio indicates that the company is able to pay its short term
obligations but its efficiency is reduces as compare to 2018.
As per the evaluation, it has been seen that the inventory turnover ratio of the company is
increases to 1.79 to 2.07 which is effective the company. The average amount of inventory is
constant in both the years with the amount of 140000. The cost of goods sold of the company
is increases with the amount of 40000. In the year 2018, the cost of goods sold is 250000 and
in the year 2019, it is 290000. The increasing cost of goods sold is not beneficial as it
increases the amount of expenses. It affects the net profit of the company because increasing
expenses decreases the revenue (Finstanon, 2018). It has been evaluated that the company
sell its inventory in 56.56 days in the year 2018 but it decreases to 48.76 days. The company
can earn the goods amount of revenue by selling the product in the market in fewer days. The
inventory ratio of the company states that the company is able to pay its short term
obligations by selling the inventory in 48.76 days.
Average Receivable Days refers the days in which the company can collects its credit amount
from debtors. Decreasing the days is beneficial for the company as it collect the money from
its debtors quickly and able to pay its liabilities and vice versa (CFI, 2018). As per the
evaluation, it has been seen that the average receivable days is decreases which states that the
company receives its credit amount from its debtors in 40.56 days in the year 2019. In 2018,
it is 44.69 days which is decreases to 40.56 days. It can be said that the decreasing the
collecting days increases the cash amount due to which it can easily pay its all short term
obligations. As per the evaluation and analysis; it is observed that the current financial
condition of the company has the ability and capability to pay its all short-term obligations.

Business Accounting 4
Part B
As per the Australian Accounting Standard Board, the economic benefit is increases during
the accounting period are called the incomes. The increases amount of asset and reducing the
amount of liabilities and the equity amount are considered as the income (Australian
Accounting Standards Board, 2016). As per the case, it has been seen that the organisation
earned 2500000 from the sale of software. As per the definition, profit which is arises from
selling the product is considered as the income of the company. The profit from selling the
product is defining the definition of income. It is observed that the equity value is enhancing
due to issue the shares $500000. The increasing value of equity is also considered as the
income of the company that is why; it can be said that the enhancing the value of equity
defines the income. The discounts and interest is also the part of income as they increase the
value of revenue. The revenue from update download is not defining the definition of income.
Revenue is the gross inflow of economic benefits during the period arising in the course of
ordinary activities of an entity (Australian Accounting Standards Board, 2007). Inflow
activities except the value added taxes do not result in increase in equity that is why; it is
excluded from the definition of revenue. As per the case study, the amount which is arises
from the sales, and interests are contributed in the definition of revenue as it fulfils the all
requirements of revenue.
Part C
Financial Ratio
Analysis

Business Accounting 5
XYZ ABC
Current Ratio Current assets 26000 7200
Current
liabilities 12000
2.1666
7 52800
0.1363
6
Debt Ratio Total liabilities 12000 52800
Total Asset 46200
0.2597
4 61200
0.8627
5
In the above evaluation, it has been seen that the XYZ Company is stable to borrow the
money from the financial institutions as it has the ability pay it’s all liabilities. It has been
seen that the current asset of the company is high as compare to its current liabilities which
indicates that it can easily pay its debts. But in the case of ABC, it is observed that the current
asset of the company is less as compare to its current liabilities as the amount of current asset
is 7200 but the current liabilities is 52800. It is difficult for the company to pay its debts and
survive for long time. Being the bank manager, I will not give the loan to ABC and prefers to
give the loan to XYZ.
B.
It has been seen that the XYZ Company have large amount of asset and less amount of
liabilities that is why; it is beneficial for to pay for the company. But in the case of ABC, the
amount of asset is less and liabilities due to which it does not survive in the market for long
time (Accounting Tools, 2018b). As a businessperson, I am willing to pay for XYZ Company
due to its high amount of asset.

Business Accounting 6
C.
If the same companies is purchased with the liabilities than I would like to pay for ABC
Company as it have the large amount of asset $61200 as compare to XYZ. XYZ has the
fewer amounts of liabilities but its asset amount is less as compare to ABC Company such as
46200. If the person pays its all liabilities then I would like to purchase the ABC Company to
gain the high revenue.

Business Accounting 7
References
Accounting Tools. (2018a) Liquidity ratios. [online] Available from:
https://www.accountingtools.com/articles/2017/5/13/liquidity-ratios [Accessed 27/5/19].
Accounting Tools. (2018b) Efficiency ratios. [online] Available from:
https://www.accountingtools.com/articles/efficiency-ratios.html [Accessed 16/5/19].
Australian Accounting Standards Board. (2007) Revenue. [online] Available from:
https://www.aasb.gov.au/admin/file/content105/c9/AASB118_07-04_%20COMPapr07_07-
07.pdf [Accessed 16/5/19].
Australian Accounting Standards Board. (2016) Framework for the Preparation and
Presentation of Financial Statements. [online] Available from:
https://www.aasb.gov.au/admin/file/content105/c9/Framework_07-04_COMPjun14_07-
14.pdf [Accessed 16/5/19].
CFI. (2018) What is the Accounts Receivable Turnover Ratio?. [online] Available from:
https://corporatefinanceinstitute.com/resources/knowledge/accounting/accounts-receivable-
turnover-ratio/ [Accessed 27/5/19].
Finstanon. (2018) Inventory Turnover (Days). [online] Available from:
https://www.finstanon.com/ratios-dictionary/81-inventory-turnover-days [Accessed 27/5/19].
Zainudin, E.F. and Hashim, H.A. (2016) Detecting fraudulent financial reporting using
financial ratio. Journal of Financial Reporting and Accounting, 14(2), pp.266-278.