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).
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).
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).
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
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
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
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
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
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.
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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