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:
- Calculate the following ratios for 2014. The industry average for similar businesses is shown.
Industry average
- Rate of return on total assets 22%
- Rate of return on ordinary equity 20%
- Profit margin 4%
- Earnings per share 45c
- Price-earnings ratio 0
- Dividend yield 5%
- Dividend payout 70%
- Current ratio 5:1
- Quick ratio (acid ratio) 3:1
- Receivables turnover 13
- Inventory turnover 6
- Debt ratio 40%
- Times interest earned 6
- Assets turnover 8
- Given the above industry averages, comment on the company’s profitability, liquidity and use of financial gearing.
- 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.
- b) Indicate the effect of each of the following transactions on any or all of the three financial statements of a business:
- Statement of financial position
- Statement of financial performance
- 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.
- Purchase equipment for cash.
- Provide services to a client, with payment to be received within 40 days.
- Pay a liability.
- Invest additional cash into the business by the owner.
- Collect an account receivable in cash.
- Pay wages to employees.
- Receive the electricity bill in the mail, to be paid within 30 days.
- Sell a piece of equipment for cash.
- Withdraw cash by the owner for private use.
- 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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