Answer

Assignment 1

QUESTIONS 1

Calculation of ratios and comment on the profitability and efficiency of the business:

1. Profitability ratios
2. Net profit margin =Net Profit/Sales*100

In 2014 net profit margin=$80,000/$3,600,000*100=2.22%

In 2015 net profit margin=$90,000/$3,840,000*100=2.34%

The net profit margin improved from 2.22% in 2014 to 2.34% in 2015. The company was therefore able to relatively retain more of its sales as net income in 2015 (ALRAFADI and MD-YUSUF, 2011).

2. Gross profit margin=gross profit/sales*100

In 2014 Gross profit margin=$1,440,000/$3,600,000*100=40.00%

In 2015 Gross profit margin=$1,590,000/$3,840,000*100=41.41%

The company was able to retain more money in 2015 after paying for its cost of goods to pay for additional expenses such as operating and administrative in 2015 than it did in 2014.

3. ROA

Return on Assets=Annual net income/Average total assets

In 2014 Average total assets=(3,058,000+total assets for 2012)/2=3,058,000

Total assets for 2012 is not given so its value is 0

In 2015 Average total assets = (3,058,000+3,324, 000)/2=3,191,000

In 2014=> ROA=80,000/3,058,000=0.026 or 2.6%

In 2014=> ROA=90,000/3,191,000=0.028 or 2.8%

The company was more efficient in 2015 in utilizing its assets to generate net income than it was in 2014 as shown by the ROA ratios. The company generated more net income per asset held in 2015 than in 2014.

1. B) Efficiency ratios

1) Inventory turnover period

=> (Average inventory/cost of goods)*365

=> Average inventory in2014=400,000

=> Average Inventory in 2015= (400,000+500,000)/2=450,000

In 2014=> Inventory turnover period =(400,000/2,160,000)*365=66 days

In 2015=> Inventory turnover period= (450,000/2,250,000)*365=73 days

The company was able to sell more of inventory in 2014 in terms of days than it did in 2015. It was more efficient in 2014 as it took fewer days to sell its inventory than it did in 2015.

2) Average accounts receivable period

=> (Average accounts receivable/sales)*365

Average accounts receivable in 2014=750,000

Average accounts receivable in 2015=(750,000+960,000)/2=855,000

In 2014=> Average accounts receivable period =(750,000/3,600,000)*365=76 days

In 2015=> Average accounts receivable period=(855,000/3,840,000)*365=81 days

The company was more efficient in collecting accounts receivables in 2014 than in 2015.  It took 76 days in 2014 to collect average receivable which was more efficient than in 2015 as the company took 81 days in 2015 (ADILOGLU and VURAN, 2012).

3) Asset turnover

=> Sales/ Average total assets

Average total assets in 2014=3,058,000

Average total assets in 2015=(3,058,000+3,324,000)/2=3,191,000

In 2014-Asset turnover=3,600,000/3,058,000=1.18

In 2015 –Asset turnover=3,840,000/3,191,000=1.20

The company was more efficient in 2014 than in 2015 in generating sales from its assets (ADILOGLU and VURAN, 2012).

QUESTIONS 2

            Shortcomings in accounting information systems or processes are largely to blame for the recent corporate crashes witnessed in the world.  Some of the shortcomings relates to disclosures of accounting information. Under generally accepted accounting principles and international financial reporting standards, the rules for disclosing related-party transactions are straightforward (SHAH, BUTT and TARIQ, 2011). However, most of the affected companies failed to provide material information that was necessary to facilitate an understanding of the effect or impact of all transactions entered into on the financial statements. Most of these companies had off-balance-sheet transactions that could not be understood by some top-flight accounting professors or the motives for entering them. Some of the companies such as Enron used shares and options of their own stock as their chief hedging instrument, even though their price movements were not directly related to the value of the investments they were hedging (SHAH, BUTT and TARIQ, 2011). Some of the companies such as Lehman Brothers used off-balance sheet transactions to hide trading losses which overstated their revenues and profits. Rampant conflict of interest cases were noted in these companies where senior executives did business with the companies they led. Most of the transactions entered into in such instances were uncompetitive and most transactions were quoted in inflated prices to benefit the executives concerned. Internal controls were weak in all cases of recent corporate crashes. Most of the companies colluded with external auditors to hide material information which would have prevented the crashes. External auditors failed to report accounting beaches either due to fear of loss of business or due to conflict of interest (SHAH, BUTT and TARIQ, 2011).

Question 3

1. A loan to another company-

This is an asset as it will earn interest revenue to the company

1. Shares issued to the public

This is equity as the subscribers will become stockholders and will be paid dividends at the end of the financial year

1. Inventory purchased last week

This is an asset as it is an economic resource to the company. It is also an expense known as purchases

1. Depreciation of equipment

This is an expense as it represents a reduction in value of an asset due to wear and tear

1. Provision for long service leave

This is an expense as it is classified as a staff cost/expense

1. Excess payment to the tax department

This is an asset as it is tax receivable. The tax authority will be required to refund the excess payment

1. Shares owned in another company

This is an asset as the company receives dividend income.

1. Accounts payable

           This is a liability as the creditors should be paid within the current financial year

1. Prepaid insurance premiums

This is an asset as it is an economic resource that will generate economic benefits in future

1. Deposit paid by a customer for work yet to be done

This is revenue to the company

1. Credit sales

This is revenue to the company but it is also an asset known as accounts receivable

1. Cash sales

This is revenue to the company but also as asset known as cash

1. Retained profit

This is equity as it increases shareholders funds in the company

1. Advertising

This is an expense that the company must meet

1. Bad debts

This is an expense as it is expensed in the income statement

1. Dividend declared, not yet paid

This is a liability as it represents amounts owed

1. Singed a contract for a $300,000 building

Assuming the contract will be to purchase the building then it is an asset known building which is an economic resource. However, if the company constructs buildings as its core business it is revenue and an asset know as accounts receivable

1. Undertook basic research for $40,000 on a new product

This is an expense known as research and development costs

1. Delivered goods to a customer related to credit sales contract

This is an asset known as accounts receivable. It also represents revenue

1. Special staff training program related to new regulations cost $10,000

This is an expense under training and development of staff

1. Cash purchase of a new computer for $23,000

This is an asset as it is an economic resource

1. Paid initial payment of $5,000 related to the financial lease of a bus

This is an expense incurred to lease the bus (SHAH, BUTT and TARIQ, 2011).