The purpose of capital and current account

2021-07-15 08:11:18
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Wesleyan University
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Problem solving
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The current account lists the imports and exports of the goods and services together with the unilateral transfers, while the capital account deals with the listing of the transactions of sale and purchase of foreign liabilities and assets in a given year (Unnibhavi, 2005).

The difference between the appropriation statement and the appropriation account.

An appropriation account refers to the account for the government agency which is able to receive a credit. While the appropriation statement refers to the ability of the government agency to offer credit (Bebbington, Gray, & Laughlin 2001).

The partner sharing ratio

Refers to the set-out illustrated in the partnership agreement on how to profit and losses will be shared among partners (Unnibhavi, 2005).

Q 2.

The meaning of income statement.

It refers to the financial statement that reports the performance of the company over a given period of time, by determining the revenue and expenses incurred through the non-operating and operating activities (Unnibhavi, 2005).

Balance sheet

Refers to the financial statement that summarizes the companys liabilities, assets together with the shareholders equity at a given point in time (Bebbington, Gray, & Laughlin 2001).

Cash flow statement

Also referred to as the statement of cash flows, refers to the financial statement that describes the changes in the income and balance sheet account affect the cash and cash equivalents and breaks-down the analysis into investing, operating and financial activities.

The relationship between the income statement and balance sheet

the relation between the two is that, the business profit in the income statement, which is the owner and is illustrated by the movement in the equity between the opening and the closing of the business balance sheet (Bebbington, Gray, & Laughlin 2001).

Relationship between cash flow statement and balance sheet

They both explain how the liabilities and assets were utilized in a particular accounting period.

Relationship between balance sheet and statement of changes

The relationship between the two results from the book keeping or double-entry accounting as well as the accounting equations Asset= Liabilities + Owners Equity.

What are liabilities and provisions?

A provision is perceived to be the liability of uncertain amount or timing. In turn, liability can be the present obligation of the equity that arises from the previous events, the settlement that is projected to lead to an outflow from the unit of resources exemplifying economic resources (Unnibhavi, 2005).

Explain the return on capital employed ratio and the gearing ratio. Discuss the impact of increasing long term loans on the gearing ratio and the return on capital employed.

Return on capital employed (ROCE) Ratio simply refers to the financial ratio that determines the companys efficiency and profitability whereby its capital is used (employed). Gearing ratio concentrated in the capital structure of the business and its liquidity (Berry, 1999).

Q.3

Net Income = (Revenues = Gains) (Expenses + Losses)

Hawthorn Ltd Income statement for the year ended 31 August 2016 Sales 2,945,000

less: cost of goods sold Opening stock 384,000 Add purchases 1,375,000 Less: closing inventory 396,000 1,363,000

Gross profit 1,582,000

Less: Operating expenses Administrative expenses Administrative expenses 217,000 Depreciation on equipment 31,275 Rent 29,500 salary (70%*534000) 373,800 Energy (70%*18100) 12,670 664,245 Distribution expenses Distribution expenses 130,100 Salary (0.3*534000) 160,200 Energy (0.3*18100) 5,430 Depreciation on motor vehicles 19,480 315,210 marketing expenses 279,300 Bad debt expense 6,500 Audit fee 7,000 Total operating expenses 1,272,255

Operating income 309,745

Add other operating income 27,600

Total operating income 337,345

Less debenture interest (6%*225000) 13,500

Earnings before tax 323,845

Less tax 67,544

Net income 256,301

Workings

Rent

Note 7: rent for July and August = 7500*2/3 = 5000

Total rent = 24500+5000 = 29500

Energy costs: note 6

Energy costs for July and August = 2700*2/3 = 18000

Total energy costs = 1800+16300 = 18100

Depreciation on equipment

Deprecation on the old equipment = 10%*307000 = 30700

Depreciation on new equipment = 10%*23000 = 2300

Depreciation on new equipment for July-August = 2300*3/12 = 575

Total depreciation = 30700+575= 31,275

Depreciation on motor vehicles = 20*(235000-137600) = 19,480

Hawthorn Ltd Balance sheet as at 31 August 2016 ASSETS Current assets Bank 354,200 Inventory 396,000 Receivables 436,500 allowance for receivables 40,460 396,040 Prepaid rent (7500/3) 2,500 Prepaid energy costs (2700/3) 900 Total current assets 1,149,640

Non-current assets Plant and equipment (307000+23000) 330,000 Less accumulated depreciation (195000+31275) 226,275 103,725

Motor Vehicles 235,000 Less accumulated depreciation (137600+19480) 157,080 77,920

Non-current investments 12,500

Total assets 1,343,785

LIABILITIES AND OWNERS' EQUITY LIABILITIES Current liabilities payables 298,400 Accrued debenture interest 13,500 Total current liabilities 311,900

Non-current liabilities 6% debentures 225,000

Total liabilities 536,900

Owners' equity Ordinary 1 shares 175,000 Additional paid in capital 56,284 Retained earnings 244,300 Share premium 75,000 Add net income 256,301 Total owner's equity 806,885

Total liabilities and equity 1,343,785

Workings

Allowance for receivables = 4%*436500 = 17460

Total allowance for receivable = 23000+17460 = 40,460

Statement of changes in equity for the year ended 31 August 2016

Beginning balance

Ordinary shares 175000

Share premium 75000

Retained earnings 244300

Total beginning balance 494,300

Add income for the year 256301

Less: Interim dividend paid -17500

Add: revaluation surplus 73,784

Ending balance 806885

Question 4

Calculate the ordinary dividend paid during the year ended 31 December 2016

Beginning retained earnings157478

Ass net income (302365-70470) 231895

Less ending retained earnings 289373

Ordinary dividends paid 100,000

Cash flow statement indirect method

Citron plc.

Cash flow statement for the period ended 31 December 2016

Cash flows from operating activities

Net income 231895

Adjustments to reconcile net income

Depreciation expense 20000

Loss on the sale of equipment 25000

Increase in accounts receivables -79044

Increase in inventories -85252

Increase in payables 96153

Increase in taxation payable 1846

Net cash provided by operating activities 381,102

Cash flows from investing activities

Sale of equipment 55000

Net cash used by investing activities 55000

Cash flows from financing activities

Payment of cash dividend -100000

Issuance of ordinary shares 90000

Net cash from financing activities -10000

Net increase in cash and cash equivalents 426,102

c. Liquidity ratios

Current ratio = current assets/current liabilities

2015: 494618/354780 =1.39

2016: 671762/332427 = 2.02

Acid test ratio = (current assets-inventories)/current liabilities

2015: (494618-299993)/354780 = 0.55

2016: (671762-385245)/332427 = 0.86

d. comment on liquidity of Citron

According to the current ratio, the company is very liquid; it is experiencing an increase in liquidity. The current ratio of the company is greater than one implying that its current assets are able to cover its short-term obligations. For every pound in current liability, Citron has 1.39 in 2015 and 2 in 2016 in current assets. With regards to acid test ratio, the liquidity of the company is on the rise; however, its quick ratio is less than one meaning it has fewer quick assets to pay off its short term obligations. For every pound, it has 0.55 in 2015 and 0.86 in 2016 in quick assets.

On the other hand, it has a Net increase in cash and cash equivalents. This implies that Citron has sufficient cash at hand to meet its financial obligations. In general, Citron is highly liquid and is able to meet its short term obligations using its current assets.

References

Bebbington, J., Gray, R., & Laughlin, R. (2001). Financial accounting: Practice and principles. London: Thomson Learning.

Berry, A. (1999). Financial accounting: An introduction. London: International Thomson Business.

Unnibhavi, B. M. (2005). Financial Accounting. Atlantic Publishers & Dist.

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