Match Ltd and Box Ltd both began operations on 1 January 2020. For illustrative purposes, assume that at that date their statement of financial positions were identical and that their operations during 2020 were also identical. The only difference between the two companies is that they elected to use different accounting methods as can be seen below: Match Ltd Box Ltd Inventories FIFO Weighted average cost Property, plant and equipment Straight-line depreciation Diminishing-balance depreciation Summary financial information for both companies at the end of 2020 is presented below. Statement of profit or loss for the year ended 31 December 2020 Match Ltd Box Ltd Revenues $260,000 $260,000 Less: Cost of sales 143,520 156,000 Gross profit 116,480 104,000 Other expenses* 44,000 50,000 Profit 72,480 54,000 * Includes finance costs of $8000. Depreciation expense was $10000 for Match Ltd and $20000 for Box Ltd. Assume no income tax. Statement of financial position for the year ended 31 December 2020 Match Ltd Box Ltd Cash $17,000 $17,000 Receivables 48,000 48,000 Inventories 48,000 35,000 Property, plant and equipment (net) 51,000 41,000 $164,000 $141,000 Current liabilities $26,000 $26,000 Non-current liabilities 36,000 36,000 Equity 102,000 79,000 $164,000 $141,000 Calculate the following ratios for each company: (Round answers to 1 decimal place, e.g. 52.7.) Match Ltd Box Ltd 1. Return on assets % % 2. Rate of return on ordinary equity % % 3. Profit margin % % 4. Current ratio : 1 : 1 5. Receivables turnover times times 6. Inventory turnover times times 7. Debt ratio % %
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Match Ltd and Box Ltd both began operations on 1 January 2020. For illustrative purposes, assume that at that date their
| Match Ltd | Box Ltd | |||
| Inventories | FIFO | Weighted average cost | ||
| Property, plant and equipment | Straight-line |
Diminishing-balance depreciation |
Summary financial information for both companies at the end of 2020 is presented below.
| Statement of profit or loss for the year ended 31 December 2020 |
||||
| Match Ltd | Box Ltd | |||
| Revenues | $260,000 | $260,000 | ||
| Less: Cost of sales | 143,520 | 156,000 | ||
| Gross profit | 116,480 | 104,000 | ||
| Other expenses* | 44,000 | 50,000 | ||
| Profit | 72,480 | 54,000 | ||
| * Includes finance costs of $8000. Depreciation expense was $10000 for Match Ltd and $20000 for Box Ltd. Assume no income tax. |
| Statement of financial position for the year ended 31 December 2020 |
||||
| Match Ltd | Box Ltd | |||
| Cash | $17,000 | $17,000 | ||
| Receivables | 48,000 | 48,000 | ||
| Inventories | 48,000 | 35,000 | ||
| Property, plant and equipment (net) | 51,000 | 41,000 | ||
| $164,000 | $141,000 | |||
| Current liabilities | $26,000 | $26,000 | ||
| Non-current liabilities | 36,000 | 36,000 | ||
| Equity | 102,000 | 79,000 | ||
| $164,000 | $141,000 |
Calculate the following ratios for each company: (Round answers to 1 decimal place, e.g. 52.7.)
| Match Ltd | Box Ltd | |||||||
| 1. | Return on assets |
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% |
|
% | |||
| 2. |
|
% |
|
% | ||||
| 3. | Profit margin |
|
% |
|
% | |||
| 4. |
|
: 1 |
|
: 1 | ||||
| 5. | Receivables turnover |
|
times |
|
times | |||
| 6. | Inventory turnover |
|
times |
|
times | |||
| 7. | Debt ratio |
|
% |
|
% |
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