Referencing Styles : Harvard You are presented with the following statement of financial position, which is an incorrect version. Assuming the accounts and amounts are correct, prepare the statement of financial position, making the necessary corrections. (2 marks) Current Assets $ $ Cash at bank 9,000 Accounts payable 11,000 Plant and machinery 26,000 _______ Total current assets 46,000 Non-current asset: Inventory 15,000 Asset revaluation increment 20,000 Motor vehicles 18,000 _______ Total Non-current assets 53,000 _______ Total assets 99,000 ======= Current liabilities: Accounts receivable 6,000 Prepayments 1,000 ______ Total Current liabilities 7,000 Non-current liabilities: Bank overdraft 14,000 Land and Building 50,000 Loan 10,000 ______ Total Non-current liabilities 74,000 Owners’ equity: Opening balance 40,000 Less profit 32,000 Plus drawings 10,000 ______ 18,000 _______ Total liabilities and owners’ equity 99,000 ====== And what does this statement tell you about the financial position of the business? (3 marks) Question 2 (5 marks) Southern Cross printing company prepares its income statement on a cash basis: Sales $100,000 Less: inventory purchases 30,000 ________ Gross profit 70,000 Less expenses: Salary and wages 20,000 Rent 15,000 Insurance 2,000 Advertising 3,000 Other 4,000 ______ Total expenses 44,000 _______ Net profit 26,000 ======= On further investigation you have found the following accrual balances: Beginning End Accounts receivable 6,000 1,500 Accounts payable (for inventory) 700 4,100 Inventory 8,400 6,500 Prepaid rent 3,000 1,200 Prepaid insurance 800 1,000 Accrued advertising Nil 600 Furthermore, there should be depreciation of plant and equipment of $2,400 and bad and doubtful debts of $300. Required: Prepare an accrual-based income statement explain the difference between accrual and cash based income statements and why accrual income statement is more useful? Question 3 (10 marks) a) A criticism of ratio analysis is that it provides only part of the financial picture being reviewed. What part of the picture is missing? Explain using some examples to support your statements. (5 marks) b) You are employed as accountant for PMDR P/L and observed an improved gross profit margin, a declining net profit margin, a stable return on assets, an improved return on owner’s equity in 2014. (5 marks) Discuss the possible implications of these ratios in relation to: 1) the selling price of inventory 2) the buying price of inventory 3) operating expenses 4) assets turnover 5) interest costs. Question 4 (10 marks) Attached as Appendix 1 are the financial statements for Super Cheap Auto Limited, a public company in Australia which operates two chains of retail shops which sell equipment and accessories for motor cars, boats and camping. Most sales are cash sales to retail consumers. Using the information provided in these financial statements answer the following questions. Note that the earnings per share are provided on the income statement. Please also note the following data; Dividends declared in 2006 were 8 cents per share and in 2007 10.5 cents per share. a) Calculate the Current ratio and the Quick ratio for 2007. Comment on the liquidity of this company. For comparison purposes, other firms in this industry sector have an average Current ratio of 1.76 and an average Quick ratio of 0.78. 2 marks b) From the information provided about dividends and earnings and from the Cash flow statement and Balance sheet, comment on long term and short sources of finance that Super Cheap Auto has used to expand the business from 2006 to 2007. 2 marks c) Calculate a ratio that will tell you how many times a year Super Cheap Auto turns over its inventory in 2007 (or, calculate the ratio that tells you the number of days it takes to turn over inventory). Comment on this aspect of working capital management. 2 marks d) Do you think Super Cheap should borrow more money to expand faster? Why? Explain you reasoning. 2 marks e) Assuming a share price of $4.50, calculate a Price Earnings (PE) ratio and a Dividend Yield ratio for Super Cheap Auto. Interpret these ratios and comment on the value of shares in Super Cheap Auto, given that sector average PE is 16.7 and sector average dividend yield is 3.7%. What does this tell us about the market’s expectations about growth in Super Cheap Autos share price?