HC1010 Assignment

HC1010 Assignment

Part A: Financial Ratios and Financial Statement Analysis

Answers: (a)

Big Bang Pty Ltd
S. No.RatioFormula20192018
1Current RatioCurrent Assets / Current Liabilities2.0762.740
Current assets$218,000$222,000
Current liabilities$105000$81,000
2Quick Ratio(Total Current Assets – Inventory – Prepaid Expenses)/ Current liabilities0.8380.889
Current assets$218,000$222,000
Inventories$130,000$150,000
Current liabilities$105,000$81,000
3Accounts receivable turnoverCost of goods sold/ Average accounts receivable4.4613.623
Cost of goods sold$290,000$250,000
Average accounts receivable$65,000$69,000
4Inventory turnoverCost of goods sold / Inventory2.071 times and in 176 days 1.786 times and in 2.4 days
Cost of goods sold$290,000$250,000
Inventory$140,000$140,000

 

(b)

On the basis of the above ratios, it can be said that the short-term solvency of Big Bang Pty Ltd has a good position. It is because the current ratio is 2.08 in 2019 and 2.74 in 2018 that is highly appropriate.

A good quick ratio should generally be more than 1 otherwise it cannot pay back its current liabilities (Ahrendsen and Katchova, 2012). But, in this ratio analysis, the quick ratio is 0.838 and 0.889 in the year 2019 and 2018 respectively, which is not appropriate.

In addition to this, it can also be said that the business does not have a good efficiency where account receivable turnover is only 4.46 in 2019 and 3.62 in the year 2018 that should be approx 10.

As per the given ratio results, it is also obtained that the inventory turnover is 2.071 and 1.786 in the year 2019 and 2018 respectively that is not highly appropriate for operating the business effectively in this industry, it should be reduced up to 101 days.

Part B: Income and Revenue

The income and revenue items of Green Apple Ltd are defined in the below table:

Income and RevenueAmount
Earning form selling of software$25,000,000
Earning form update downloads$3,000,000
Earned interest$50,000
Discount in settlement of a liability$2,000
Issued shares$500,000
Total $28,552,000

 

Answers: (a)

On the basis of given five financial items, it can be said that the company can meet the definition of income. It is because the given financial item includes both cash and non-cash incomes but it would be helpful for the company to make an appropriate decision related to financial transactions.

The main reason behind it is that all financial transactions are increasing the profitability or income of the business (Brigham and Houston, 2012).

(b)

Earning form selling of software and earning form update downloads are the items that would meet the definition of revenue to the company for the year. It is because both the selling of software and update downloads are providing revenue for the current financial year.

It provides the total income of the organization where the costs are also included (Higgins, 2012). However, it can be said that it is the gross income of the business. In concern to the selling of software and update downloads, there are several costs included such as salary of software developers, marketing cost, etc.

Part C: Comparing Balance Sheet

Answers: (a)

The owner of both businesses (ABC Company and XYZ Company) has applied for a short- term loan of $6000 that is repayable in six months. Due to this, it is necessary for an organization that it must have more current assets to timely repay the loan amount.

As per the given information, total current assets of ABC Company are $7,200 and the total current assets of XYZ Company are $ 26,000. However, it can be said that XYZ Company has more capability to repay the loan amount so that the application of XYZ Company would be selected by me. It is because XYZ Company will have less issue to repay the amount of loan.

(b)

It is assumed that both business owners (ABC Company and XYZ Company) have intentions to sell their businesses. Before buying the business, it is necessary to identify and analyze business performance and its market value.

In concern to ABC Company, it is identified that the total assets of the company are $61,200 and total liability is $52,800. In addition, the net assets and Total owners’ equity is $8,400.

On the other hand, the business of XYZ Company has also analyzed which has total assets of $46,200 and total liability with $12,000. Additionally, the net assets and total owners’ equity is calculated with $34,200. However, it can be said that I would be willing to pay the higher price for the business of XYZ Company.

It is because the existing liabilities will be taking over during buy companies. As per the assets and liability analysis, the business of XYZ Company has more value than the business of ABC Company. So, both the companies have a profitable situation for me as a businessperson interested in buying both companies but at different prices.

(c)

If the existing owners agreed to be accountable for all existing liabilities, it would change the buying decision. It is because XYZ Company has selected as a business that would be bought at a higher price.

But if the existing owners agreed to be accountable for all existing liabilities then ABC Company has more total assets then XYZ Company. In this, ABC Company has $61,200 as total assets whereas XYZ Company has only $46,200 as total assets.

However, it can be said that ABC Company has $19,000 more total assets then XYZ Company. It will increase the price of business so that the businessperson will change their buying decision and offer more prices for the business of ABC Company.

Conversely, it can be said that if the existing owners of the businesses are agreed to be accountable for all existing liabilities then the decision would be changed.

References

Ahrendsen, B.L. and Katchova, A.L., 2012. Financial ratio analysis using ARMS data. Agricultural Finance Review72(2), pp.262-272.

Brigham, E.F. and Houston, J.F., 2012. Fundamentals of financial management. Cengage Learning.

Higgins, R.C., 2012. Analysis for financial management. McGraw-Hill/Irwin.

Arnold, G., 2012. Corporate financial management. Pearson Education.

Jiang, F., Zhu, B. and Huang, J., 2013. CEO’s financial experience and earnings management. Journal of Multinational Financial Management23(3), pp.134-145.

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