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ACC00724 Accounting for Managers : Leakage of Confidentiality

Questions:

Question 1
Super Cheap Auto Limited, a public company in Australia which operates two chains of retail shops which sell equipment and accessories for motor cars, boats and camping. Most sales are cash sales to retail consumers.
Using the information provided in these financial statements answer the following questions.
Note that the earnings per share are provided on the income statement. 
Please also note the following data; 
Dividends declared in 2006 were 8 cents per share and in 2007 10.5 cents per share.
a)Calculate the Current ratio and the Quick ratio for 2007. Comment on the liquidity of this company. 
For comparison purposes, other firms in this industry sector have an average Current ratio of 1.76 and an average Quick ratio of 0.78.
b)From the information provided about dividends and earnings and from the Cash flow statement and Balance sheet, comment on long term and short sources of finance that Super Cheap Auto has used to expand the business from 2006 to 2007.
c)Calculate a ratio that will tell you how many times a year Super Cheap Auto turns over its inventory in 2007 (or, calculate the ratio that tells you the number of days it takes to turn over inventory). Comment on this aspect of working capital management.
3 marks
d)Do you think Super Cheap should borrow more money to expand faster?
Why? Explain you reasoning.
e)Assuming a share price of $4.50, calculate a Price Earnings (PE) ratio and a Dividend Yield ratio for Super Cheap Auto. Interpret these ratios and comment on the value of shares in Super Cheap Auto, given that sector average PE is 16.7 and sector average dividend yield is 3.7%. What does this tell us about the market’s expectations about growth in Super Cheap Autos share price?
Question 2
a) List 4 different types (groups) of people who are users of general purpose financial statements.
b) Select 2 different groups from your list in part a) then compare and contrast their financial information needs. Discuss the benefits they would gain by reading and analyzing the financial statements. What limitations might each group find with this source of information?
c) For each of the following items, state whether it is either; Revenue or Expense or Asset or Liability or Equity.
1.A loan to another company
2.Shares issued to the public 
3.Inventory purchased last week
4.Depreciation of equipment
5.Provision for long service leave
6.Excess payment to the tax department
7.Shares owned in another company
8.Accounts payable
9.Prepaid insurance premiums
10.Deposit paid by a customer for work yet to be done
11.Credit sales
12.Cash sales
13.Retained profit
14.Advertising
15.Bad debts
16.Dividend declared, not yet paid

Answers:

Question 1

1 a) Company’s average current ratio is 1.895 and quick ratio is .36. Company is more liquidate position in comparison of other firms in the industry sector. Other firm’s current ratio is 1.76 and quick ratio is .78. Super cheap auto limited is having more current assets over its current liabilities that’s why company current ratio is higher than the other firm in the industry, but quick ratio is lower than the other firm in the industry because maximum part of the current assets are blocked in terms of inventory. (Minnis & Sutherland 2017)

1b) Super cheap is using following sources to improve their long term and short term finance from 2006 to 2007

  • Company improve their earning per share by improving their profit attributable to share holder

Earnings per share of the company have risen from 15.5 to 21 from 2006 to 2007 because company does not distribute any dividend or distribute the less of dividend in the year 2007. In this way the overall financing of the company has improved. The company is financing this from the excess revenue that it has earned in 2007, in comparison to 2006

  • The net borrowing of the company has also increased in 2007, thus that is also a major source of finance of the company.

1c) Company (super cheap auto limited) inventory turnover ratio in 2006 is 1.39; it will increase in 2007 from 1.39 to 1.66 because there is an increase in the cost of goods sold. And current ratio of super cheap auto limited will also reduce because more amounts are blocked in the overall inventory of the company. Hence the company requires more working capital management in 2007 in comparison of 2006.

1 d) Yes, super cheap Auto limited needs more borrowing to expend their business faster because company current ratio is less due to increase in inventory amount and trade payable has also increased. Due to fall in current ratio in the year 2007 company needs working capital to run their business. So for requirement of working capital, company needs to raise short term finance for their business. Hence super cheap auto limited should borrow money to expend their business smoothly (Bonsall & Rennekamp 2017)

1 e) In the given case, the share price of the company is $4.50. The calculated P.E ratio of the company is 0.21, and the P.E ratio of the market sector is 16.7. If the P.E ratio of the company is less than that of the industry it means that the share price of the company will increase. And the dividend yield ratio of the company is 0.23 and that of the industry is 0.037, which indicates that the company is distributing more dividends to its shareholders. The company can distribute more in case it wants the ratio to improve (Fuhrer & Steiner 2017)

Question 2

2a) The major four types of user of general purpose financial statement are

  1. Shareholder
  2. Government
  3. Management
  4. Stakeholder

2b) Shareholder are the main user of financial information, they need financial information because they are the owner of the company, so they have right to know about the company’s financial position and how the board of director run the company. It is important for them to take important financial decisions regarding the current position of the company. They need this information to stimulate more return more returns. As in the above case, the investors can see that there is a growth in the present EPS of the company (Alexander 2016). This shows that the investors are in a comfortable position. And they can invest in the company. The limitation in this case, is that often there are various other factors that affect the earnings of the company that the investors might fail to recognise. And that may ultimately affect the financial position of the investors. There is also fear of leak of important financial information. (Lo & Rogo 2017) 

Apart from shareholder, the government is the user of financial information of the company because government has to check the performance of the company. They have to analyse whether the board of director are running the company properly or not (Filbeck, Zhao & Knoll 2017).

Government needs the financial information of the company to take important decisions in respect of the taxation policies and other laws. The major limitation associated with this is that there is high chances that in case of disclosure of financial statement there might be chance of leakage of confidentiality. (Maynard 2017)

2c)

  1.  Liabilities
  2. Equity
  3.  Assets
  4. Expenses
  5. Liabilities
  6. Assets
  7. Assets
  8. Liabilities
  9. Assets
  10. Revenue
  11. Revenue
  12. Revenue
  13. Revenue
  14. Expenses
  15. Expenses
  16. Liabilities

Refrences

Alexander, FK 2016, 'The Changing Face of Accountability', The Journal of Higher Education, vol 71, no. 4, pp. 411-431.

Bonsall, SB & Rennekamp, K 2017, 'A plain english measure of financial reporting readability', Journal of Accouting and Finance, vol 63, no. 2-3, pp. 329-357.

Filbeck, G, Zhao, X & Knoll, R 2017, 'An analysis of working capital efficiency and shareholder return', Review of Quantative Finance and Accounting, vol 48, no. 1, pp. 265-288.

Fuhrer, LM & Steiner, L 2017, 'The liquidity coverage ratio and security prices', Journal Of Banking and Finance, vol 75, pp. 292-311.

Lo, K & Rogo, R 2017, 'Earnnings management and report readability', Journal Of Accouting and Economics, vol 63, no. 1, pp. 1-25.

Maynard, J 2017, Financial accounting reporting and analysis, 2nd edn, Oxford University Press, United Kingdom.

Minnis, M & Sutherland, A 2017, 'Financial Statements as Monitoring Mechanism: Evidence from small Commercial loans', Journal Of Accounting Research, vol 55, no. 1, pp. 197-233.


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