Accounting Business Reporting for Decision Making

CHAPTER 8 Analysis and interpretation of financial statements 369

MobileNet

Statement of profit or loss for the year ended 30 June 2016

Sales revenue

Cost of sales

$ 45 000

20 000

Gross profit

Operating expenses

25 000

18 000

Profit $7 000

8.31   LO4, 5, 6, 7, 9

Selected information for two companies competing in the catering industry have been presented below.

Roland Big Event

Current assets $ 110 500 $ 167 900

Non-current assets $ 250 000 $ 299 000

Current liabilities $ 58 600 $ 23 500

Non-current liabilities $ 89 700 $ 145 000

Equity $ 212 200 $ 298 400

Profit $ 75 000 $ 53 000

Required

a. Analyse and compare the liquidity, solvency and profitability ratios of the entities.

b. From your calculations in part (a), explain which entity is in a more favourable position.

8.32   LO4, 5, 6, 7, 9

An entity has $330 000 of assets, including current assets of $90 000. The following information

has also been ascertained about the entity:

• The two owners have contributed $75 000 each.


• The entity has always distributed all the profits via a family trust.


• The entity owes $65 000 to trade creditors and other creditors.


• The remainder of the entity’s financing is via a mortgage loan.


• The entity made a profit this year (before tax) of $35 000.


• The profit figure includes $15 000 of interest associated with the loan.

Required

Which of the following statements is correct?

a. The entity’s current ratio is 2:1.

b. The entity uses more debt financing than equity financing.

c. The entity’s net assets are $265 000.

d. The entity’s debt ratio is 55 per cent.

8.33   LO9

The following table reports various financial ratios for Qantas and Virgin for 2015.

a. Given that the companies operate in the same industry, write a report explaining what the ratios

suggest about the companies’ operating, financing and investing activities.

b. If you were contemplating an investment in Qantas Airways Limited or Virgin Australia

Holdings Ltd, identify what other information (non-financial) would assist your investment

decision and why this information is important to you.

Qantas Airways Limited Virgin Australia Holdings Limited

EBIT margin 7.69% 0.94%

ROE 20.45% 0.32%

ROA 5.41% 1.65%

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