Additional information

  • TASK 1:
    Laura Prebble, the owner-manager of a small business, had carefully monitored her cash
    position over the past financial year, and was pleased to note at the end of the year that the
    cash position was strong, and had shown a healthy 50% increase over the year. When
    presented with the income statement for the year, she was dismayed to note that the profit
    earned in the last year had deteriorated significantly and had become a loss for the current
    period. In her anger, she accuses you of having made errors in the accounting since ‘such a
    silly situation could not possibly exist’.
    Required
    Draft a response to Laura.
    TASK 2:
    ‘A statement of cash flows is of limited use as a business needs to know if it will have
    sufficient cash to support its planned future activities.’
    Required
    Discuss the merit of this statement focusing on both the purpose and limitations of a
    statement of cash flows.
    TASK 3:
    After calculating the current ratio for an entity and finding that the ratio’s value was 5:1, a
    student analyst decided that the company was in a sound position for paying its liquid
    liabilities.
    Required
    Discuss the shortcomings of making such a conclusion
    TASK 4:
    The financial statements for the business of Trinh’s Nail Supplies for the past two years are presented below.
    TRINH’S NAIL SUPPLIES
    Comparative Income Statements
    for the year ended 30 June
    2016 2017
  • images-19-1-24
    Sales $ 400 000 $ 500 000
    Cost of sales 350 000 458 000
    GROSS PROFIT 50 000 42 000
    Interest income 1 000 2 000
    Loss on sale of fixtures — 800
    51 000 43 200
    Office supplies used 10 000 11 000
    Other expenses 29 000 29 000
    39 000 42 000
    Profit $ 12 000 $ 3 200

    TRINH’S NAIL SUPPLIES
    Comparative Statements of Financial Position
    as at 30 June
    2016 2017
    ASSETS
    Cash at bank $ 4 400 —
    Accounts receivable 42 000 60 000
    Inventory 80 000 40 000
    Office supplies 2 000 5 000
    Freehold property 60 000 80 000
    Fixtures 40 000 46 000
    Accumulated depreciation – fixtures (16 000) (20 200)
    Investments 6 000 16 000
    $ 218 400 $ 226 800
    LIABILITIES AND EQUITY
    Bank overdraft — $ 4 000
    Accounts payable $ 26 000 40 000
    Trinh, Capital 192 400 182 800
    $ 218 400 $ 226 800
    Additional information
    a. All purchases and sales of inventories are on credit. All purchases of office supplies are for cash.
    b. The bank overdraft is considered to be part of the entity’s cash management function.
    c. During the year ended 30 June 2017, the owner, Trinh, withdrew $12 800 in cash for personal use.
    d. The entity sold some fixtures for $1200 cash during the current year. These fixtures initially cost
    $4200 and had been written down to a carrying amount at the date of sale of $2000.
    e. Depreciation of fixtures has been included in ‘other expenses’ for the year ended 30 June 2017. All remaining other expenses were paid in cash.
    Required
    1. Prepare the statement of cash flows for Trinh’s Nail Supplies for the year ended 30 June 2017,
    using the direct method.
    2. Comment on the cash flow position of the entity as shown in the statement of cash flows.
    TASK 5:
    Sunrise Ltd completed the following transactions during a given year:
    Transaction Ratio
    1. Sold obsolete inventory at cost
    Profit margin
    2 Redeemed debentures by issuing ordinary shares
    Return on ordinary equity
    3. Issued a share dividend on ordinary shares
    Earnings per share
    4. Declared a cash dividend on ordinary shares
    Dividend payout
    5. Paid the GST owing to the tax office
    Dividend yield
    6. Purchased inventory on credit
    Quick ratio
    7. Sold inventory for cash
    Current ratio
    8. Wrote off a bad debt against Allowance for Doubtful Debts Current ratio
    9. Collected an account receivable
    Receivables turnover
    10. Sold inventory on credit
    Inventory turnover
    11. Issued additional ordinary shares for cash
    Debt ratio
    12. Paid trade accounts payable
    Return on assets

    Required
    State and discuss whether each transaction would cause the ratio listed with the transaction to increase, decrease or remain unchanged.

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NUR1120 Essay Instructions 2016

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