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B205B Calculation part

OUESTION 0l

Consider the following balance sheet, for easy lunchbox. will the company be able to pay cash to
buy an asset with a cost of $200,000 knowing they have $800.000 in retained earnings?
Cash $ 50,000 Accounts payable $ 100,000
200,000 Accruals 100,000
Inventory
Accounts receivable 250,000 Total CL $200,000

Total CA $ 500,000 Debt 200,000

Net fixed assets $900,000 Common stock 200,000

Retained earnings 800,000

Total assets $1,~QQ,QQQ Total L&E $1,400,000

Note that the finn has only $50,000 of cash. It would have to either sell assets or borrow
$ I50,000 to pay cash for the new asset. So, the net earnings figure by itself is not enough for the
cash purchase of new assets at a cost of $200.000.
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OUESTION 02

Halfords Balance Sheet as of30 March 2016

US$ US$
Thousands Thousands

Assets

Non-current assets 442

Current assets 205

Total assets
647
Liabilities

Current liabilities 178

Non-current liabilities 182

Total liabilities 360

N et assets

Total equity

By looking at the above balance sheet answer the following questions:

Define non-current assets (2 mark), current assets (2 mark), current liabilities (2 mark),
non-current liabilities (2 mark), and capital employed (2 Mark).
Calculate the value of net assets & total equity, and capital employed (5 marks),
What can be learned from the company's balance sheet (5 marks)?
Solution

N on-current assets can be defined as (US$ 442,000) the long-term investments made by
the business in property and equipment. Also included are intangible assets that represent
invisible value, for example, reputation or patents.

Current assets (US$ 205,000), reflect the assets which flow through the business as
sales are made. The usual items are stock, debtors and cash.

The current liabilities (US$ l 78,000) are debts that must be paid in less than a year.
These often relate to goods bought on credit.

The non-current liabilities (US$ 182,000) are mainly long-term loans.

Capital employed is a measure of the long-term resources in use by the business.

N et assets are simply the excess of assets over liabilities (US$ 647,000 minus US$
360,000 = US$ 287,000).

This surplus is also called total equity (also US$ 287,000).

Capital employed consists of the total equity plus non-current liabilities (loans).
For the company, this is US$ 287,000 +US$ 182,000 =US$ 469,000.

Careful reading of the company's balance sheet can be highly revealing. The difference
between current assets and current liabilities which is also called net current assets or
working capital indicates the extent to which the business has everyday funding to keep
trading and not to run out of cash. The Balance Sheet relate profit to the value of
resources used in its generation. The total value of resources must 'balance' with the
sources of finance used in obtaining those resources.
.Q,lJESTION 03
Sunder Company Comparative Income Statement
For tbe years Ended December 3 I, 20 I 7, 2016.

Year 31, December 2017 Year 31, December 2016

US$ US$
Revenues
863 870
Cost of sales (390) (385)
Gross profit 473 485
Operating expenses (376) (357)
Operating profit 97 128
N et finance expense (5) (2)
Profit before tax 92 126
Tax (25) (35)

Profit for the year after tax 67 91

The Income Statement, often issued at quarterly intervals, is important to managers in revealing
trends for sales and costs.

By looking at the above income statement evaluate the changes in sales, direct cost,
overhead, and profits occurring between 2016 and 2017 (12 Marks) and,
Explain their importance and indication for business owners (8 Marks).
Solution:

You need to look at the company's Comparative Income Statement between 2016-2017 and
identify the following:

• Sales have fallen by 0.8% (3 marks)

• Direct costs have risen by 1.3% (3 marks)

• Overheads have risen by 5.3% (3 marks)

• These adverse trends have caused a 24.2% fall in operating profit (3 marks)

In the second part you need to explain that the business owners need to know why profitability
had declined. They need to investigate all these changes in depth to make informed judgments.
The Income Statement may also be studied by creditors. Creditors are other firms supplying
goods or lending money. They want to see if the business looks creditworthy.
A downward change in profitability is generally considered to be an issue that requires urgent
investigation and explanation. Repeated over several years, a trend would be established that
might result in stakeholder interests being damaged.

Further analysis would be required to tease out the reasons behind this decrease in gross profit.
OUESTION 04

Brown_ O~ce Supplies recently reported $31,000 of sales, $16,500 of operating costs other than
~epreciation, and $3,500 of depreciation. It had $18,000 of bonds outstanding that cany a 7.0%
mterest rate, and its income tax rate was 40%. How much was the finn's earnings before taxes
(EBT)?
Solution;
Earnings before interest and taxes (EBIT) is an indicator of a company's profitability. EBIT
can be calculated as revenue minus expenses excluding tax and interest. EBIT is also referred to
as operating earnings, operating profit, and profit before interest and taxes
EBIT=Gross profit-operating expenses

Sales $31,000.00
Operating costs excluding depreciation 16,500.00
Depreciation 3,500.00
Operating income (EBIT) $ 11,000.00
Interest charges -1,260.00
EBT = Taxable income $ 9,740

Bonds* Interest rate: $18,000.00 * 7% = 1,260

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