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ACC00724 Accounting for Managers-Income Tax

Current assets

Cash and cash equivalents $1,645 $2,110

Accounts receivables (all trades)   4,100   3,675

Inventories   7,000  6,930

Total current assets 12,745 12,715

Non-current assets

Property, plant and equipment 17,190 15,330

Total non-current assets 17,190 15,330

Total assets $29,935 $28,045

Current liabilities

Payables $5,780 $5,990

Total current liabilities 5,780 5,990

Non-current liabilities

Interest-bearing liabilities 9,940 9,450

Total non-current liabilities 9,940 9,450

Total liabilities $15,720 $15,440

Equity

Share capital $7,700 $7,700

Retained earnings   6,515   4,905

Total equity $14,215 $12,605

Revenues (net sales) $55,000

Less: cost of sales   35,100

Gross profit   19,900

Less: Expenses

Selling and distribution expenses    7,100

Administrative expenses    4,970

Finance costs    1,560

Total expenses  13,630

Profit before income tax   6,270

Income tax expense   1,908

Share capital

Ordinary (7,200.000 shares)

Balance at start of period $7,200

Balance at end of period 7,200

Preference (250,000 shares)

Balance at start of period 500

Balance at end of period 500

Total share capital $7,700

Retained Earnings

Balance at start of period $4,905

Total income for the period   4,362

Dividends paid – ordinary  (2,702)

Dividends paid – preference       (50)

Balance at end of period $6,515

Additional information:

Payables include $5,620 (2014) and $5,730 (2013) trade accounts payable; the remainder is accrued expenses. Market prices of issued shares at year-end (2014): Ordinary $12; Preference $6.70.

Required:

  1. Calculate the following ratios for 2014. The industry average for similar businesses is shown. 

Industry average

  1. Rate of return on total assets 22%
  2. Rate of return on ordinary equity 20%
  3. Profit margin 4%
  4. Earnings per share 45c
  5. Price-earnings ratio 0
  6. Dividend yield 5%
  7. Dividend payout 70%
  8. Current ratio 5:1
  9. Quick ratio (acid ratio) 3:1
  10. Receivables turnover 13
  11. Inventory turnover 6
  12. Debt ratio 40%
  13. Times interest earned 6
  14. Assets turnover 8
  1. Given the above industry averages, comment on the company’s profitability, liquidity and use of financial gearing.  
  2. A local restaurant is noted for its fine food, as evidenced by the large number of customers.  A customer was heard to remark that the secret of the restaurant’s success was its fine chef.  Would you regard the chef as an asset of the business  If so, would you include the chef on the balance sheet of the business and at what value.
  1. b) Indicate the effect of each of the following transactions on any or all of the three financial statements of a business:
  1. Statement of financial position
  2. Statement of financial performance
  3. Statement of cash flows

Apart from indicating the financial statements (s) involved, use appropriate phrases such as ‘increase total asset’, ‘decrease equity’, ‘increase income’, ‘decrease cash flow’ to describe the transaction concerned.

  1. Purchase equipment for cash.
  2. Provide services to a client, with payment to be received within 40 days.
  3. Pay a liability.
  4. Invest additional cash into the business by the owner.
  5. Collect an account receivable in cash.
  6. Pay wages to employees.
  7. Receive the electricity bill in the mail, to be paid within 30 days.
  8. Sell a piece of equipment for cash.
  9. Withdraw cash by the owner for private use.
  10. Borrow money on a long-term basis from a bank.

Answer:

A.      Net income 4362 4362
B.      Average total assets (29935+28045)/2 28990
A.       Net income available to equity shareholders 4362-50 4312
B.       Shareholder’s Equity 7700+6515 14215
A.      Net income 4362 4362
A.      Profit available after preference dividend 4362-50 4312
A.       Cash dividend per share 2702/7200 0.375
B.       Market value per share 12 12
A.      Quick Assets 12,745-7,000 5,745
B.      Average accounts receivables (4100+3675)/2 3887.5
B.      Average inventory (7000+6930)/2 6965
A.      Earnings before interest and tax (EBIT)  4362+1908+1560 7830
B.      Average Total Assets (28,045+29,935)/2 28,990

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