Accounting Business Reporting for Decision Making

366 Accounting: Business Reporting for Decision Making

Required

a. Calculate the following relationships based on the above data.

Before After

a. ROA ratio

b. ROE ratio

c. Debt to total assets ratio

d. Times interest earned ratio

b. Based on the single period results, will Jo be happy with the investment?

8.21  LO4

Monty Company Ltd had $68 000 of profit and incurred $9500 in net finance costs during the

recently completed period. Monty’s liabilities and owner’s equity total $985 000. Assuming a

30 per cent tax rate, calculate the return on assets.

8.22  LO6

Examine what happens to the current ratio when:

a. an accounts payable is paid with cash

b. inventory is purchased on credit

c. money is received from a debtor.

8.23  LO4

Examine what happens to the gross profit margin when:

a. advertising is incurred

b. selling prices are increased assuming customers buy the same amount

c. all suppliers increase their prices.

8.24  LO7

Examine what happens to the debt ratio when:

a. short-term debt is converted into an equivalent amount of long-term debt

b. a major asset is sold, with part of the proceeds being used to repay debt

c. cash is used for a share buy-back.

8.25  LO4

The reality check ‘Weekly recommendation, target price, earnings forecast changes’ discusses the buy,

hold and sell recommendations by analysts. The article refers to fundamental analysis. Discuss what is

meant by fundamental analysis and the role it plays in determining buy, hold and sell recommendations.

8.26  LO5

If days inventory for Forever30 retail outlet was 38 days and days creditors was 15 days, calculate

what the cash cycle would be if credit sales for a year amounted to $66 000 and the average trade

debtors balance at the end of the year was $25 000.

8.27  LO3

The balance sheet for Compre Ltd is presented below. Perform a horizontal analysis of the change

(in absolute and percentage terms) between the year-end figures. Identify any significant variations

that warrant further investigation and suggest why the variations have occurred.

Compre Ltd

Balance sheet

2017 2016

Current assets

Cash assets

Receivables

Inventories

Other current assets

$ 178

1 356

996

1 305

$2 120

1 700

362

3 354

Total current assets 3 835 7 536

Non-current assets

Receivables

Inventories

55

150

102

158