The balance sheet and income statement for the Changlun Company are as follow: Balance Sheet (RM’000) RM Cash 500 Account receivable 2,000 Inventories 1,000 Current assets 3,500 Net fixed assets 4,500 Total assets 8,000 Account payable 1,100 Accrued expenses 600 Shorts-term notes payable 300 Current liabilities 2,000 Long-term debt 2,000 Owners’ equity 4,000 Total liabilities and owner’s equity 8,000 Income Statement (RM’000) RM Net sales (all credit) 8,000 Cost of good sold (3,300) Gross profit 4,700 Operating expenses1 (3,000) Operating income 1,700 Interest expenses (367) Earning before taxes (1,333) Income taxes (40%) (533) Net income 800 1 Includes depreciation expense of RM500 for the year Calculate the following ratios: 1. Current ratio 2. Debt Ratio 3. Time interest earned
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.
QUESTION 1 – Analysis of Financial Statement and Cash Flow
The
Cash
500
Account receivable
2,000
Inventories
1,000
Current assets
3,500
Net fixed assets
4,500
Total assets
8,000
Account payable
1,100
Accrued expenses
600
Shorts-term notes payable
300
Current liabilities
2,000
Long-term debt
2,000
Owners’ equity
4,000
Total liabilities and owner’s equity
8,000
Income Statement (RM’000) RM
Net sales (all credit)
8,000
Cost of good sold
(3,300)
Gross profit
4,700
Operating expenses1
(3,000)
Operating income
1,700
Interest expenses
(367)
Earning before taxes
(1,333)
Income taxes (40%)
(533)
Net income
800
1 Includes
Calculate the following ratios:
1. Current ratio
2. Debt Ratio
3. Time interest earned
4. Average collection period
5. Inventory turnover
6. Fixed assets turnover
7. Total asset turnover
8. Gross profit margin
9. Operating profit margin
10. Return on equity
11. Operating income
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