You have the following financial statements for two building companies and have been asked to compare them: Income statements for the year to 31st December 2019 Rachel Ltd Ronald Ltd £`000 £`000 Sales 2500 3600 Cost of Sales (450) (600) Gross Profit 2050 3000 Operating expenses (150) (350) Operating Profit 1900 2650 Interest Payable (40) (56) Profit Before Taxation 1860 2594 Taxation (68) (75) Profit After Taxation 1792 2519 Dividends (30) (43) Retained Profits 1762 2476 Statements of financial position as at 31st December 2019 Rachel Ltd Ronald Ltd £`000 £`000 Non-current assets 3056 3868 Current assets Inventories 70 35 Trade receivables 200 260 Cash at bank 56 20 Less: Current liabilities Trade payables (70) (65) Taxation (50) (42) Non-current liabilities Long-term loan (700) (1000) Net assets 2562 3076 Shareholders' funds £1 ordinary shares 800 600 Retained earnings 1762 2476 2562 3076 Additional information: All purchases and sales were on credit” “Calculate the following ratios for each company: Trade receivable (debtor) period in days Current ratio Acid test ratio (Quick ratio)
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
You have the following financial statements for two building companies and have been asked to compare them:
Income statements for the year to 31st December 2019
|
Rachel Ltd |
Ronald Ltd |
|
£`000 |
£`000 |
Sales |
2500 |
3600 |
Cost of Sales |
(450) |
(600) |
Gross Profit |
2050 |
3000 |
Operating expenses |
(150) |
(350) |
Operating Profit |
1900 |
2650 |
Interest Payable |
(40) |
(56) |
Profit Before |
1860 |
2594 |
Taxation |
(68) |
(75) |
Profit After Taxation |
1792 |
2519 |
Dividends |
(30) |
(43) |
Retained Profits |
1762 |
2476 |
|
Rachel Ltd |
Ronald Ltd |
|
£`000 |
£`000 |
Non-current assets |
3056 |
3868 |
|
|
|
Current assets |
|
|
Inventories |
70 |
35 |
Trade receivables |
200 |
260 |
Cash at bank |
56 |
20 |
|
|
|
Less: Current liabilities |
|
|
Trade payables |
(70) |
(65) |
Taxation |
(50) |
(42) |
|
|
|
Non-current liabilities |
|
|
Long-term loan |
(700) |
(1000) |
|
|
|
Net assets |
2562 |
3076 |
|
|
|
Shareholders' funds |
|
|
£1 ordinary shares |
800 |
600 |
|
1762 |
2476 |
|
2562 |
3076 |
Additional information:
- All purchases and sales were on credit”
“Calculate the following ratios for each company:
- Trade receivable (debtor) period in days
Current ratio - Acid test ratio (Quick ratio)
- Gearing ratio (use debt + equity as your denominator)
- Interest cover
- Dividend cover
- Dividend per share (in pence)
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