1 a) Company’s average current ratio is 1.895 and quick ratio is .36. Company is more liquidate position in comparison of other firms in the industry sector. Other firm’s current ratio is 1.76 and quick ratio is .78. Super cheap auto limited is having more current assets over its current liabilities that’s why company current ratio is higher than the other firm in the industry, but quick ratio is lower than the other firm in the industry because maximum part of the current assets are blocked in terms of inventory. (Minnis & Sutherland 2017)
1b) Super cheap is using following sources to improve their long term and short term finance from 2006 to 2007
- Company improve their earning per share by improving their profit attributable to share holder
Earnings per share of the company have risen from 15.5 to 21 from 2006 to 2007 because company does not distribute any dividend or distribute the less of dividend in the year 2007. In this way the overall financing of the company has improved. The company is financing this from the excess revenue that it has earned in 2007, in comparison to 2006
- The net borrowing of the company has also increased in 2007, thus that is also a major source of finance of the company.
1c) Company (super cheap auto limited) inventory turnover ratio in 2006 is 1.39; it will increase in 2007 from 1.39 to 1.66 because there is an increase in the cost of goods sold. And current ratio of super cheap auto limited will also reduce because more amounts are blocked in the overall inventory of the company. Hence the company requires more working capital management in 2007 in comparison of 2006.
1 d) Yes, super cheap Auto limited needs more borrowing to expend their business faster because company current ratio is less due to increase in inventory amount and trade payable has also increased. Due to fall in current ratio in the year 2007 company needs working capital to run their business. So for requirement of working capital, company needs to raise short term finance for their business. Hence super cheap auto limited should borrow money to expend their business smoothly (Bonsall & Rennekamp 2017)
1 e) In the given case, the share price of the company is $4.50. The calculated P.E ratio of the company is 0.21, and the P.E ratio of the market sector is 16.7. If the P.E ratio of the company is less than that of the industry it means that the share price of the company will increase. And the dividend yield ratio of the company is 0.23 and that of the industry is 0.037, which indicates that the company is distributing more dividends to its shareholders. The company can distribute more in case it wants the ratio to improve (Fuhrer & Steiner 2017)
2a) The major four types of user of general purpose financial statement are
2b) Shareholder are the main user of financial information, they need financial information because they are the owner of the company, so they have right to know about the company’s financial position and how the board of director run the company. It is important for them to take important financial decisions regarding the current position of the company. They need this information to stimulate more return more returns. As in the above case, the investors can see that there is a growth in the present EPS of the company (Alexander 2016). This shows that the investors are in a comfortable position. And they can invest in the company. The limitation in this case, is that often there are various other factors that affect the earnings of the company that the investors might fail to recognise. And that may ultimately affect the financial position of the investors. There is also fear of leak of important financial information. (Lo & Rogo 2017)
Apart from shareholder, the government is the user of financial information of the company because government has to check the performance of the company. They have to analyse whether the board of director are running the company properly or not (Filbeck, Zhao & Knoll 2017).
Government needs the financial information of the company to take important decisions in respect of the taxation policies and other laws. The major limitation associated with this is that there is high chances that in case of disclosure of financial statement there might be chance of leakage of confidentiality. (Maynard 2017)
Alexander, FK 2016, 'The Changing Face of Accountability', The Journal of Higher Education, vol 71, no. 4, pp. 411-431.
Bonsall, SB & Rennekamp, K 2017, 'A plain english measure of financial reporting readability', Journal of Accouting and Finance, vol 63, no. 2-3, pp. 329-357.
Filbeck, G, Zhao, X & Knoll, R 2017, 'An analysis of working capital efficiency and shareholder return', Review of Quantative Finance and Accounting, vol 48, no. 1, pp. 265-288.
Fuhrer, LM & Steiner, L 2017, 'The liquidity coverage ratio and security prices', Journal Of Banking and Finance, vol 75, pp. 292-311.
Lo, K & Rogo, R 2017, 'Earnnings management and report readability', Journal Of Accouting and Economics, vol 63, no. 1, pp. 1-25.
Maynard, J 2017, Financial accounting reporting and analysis, 2nd edn, Oxford University Press, United Kingdom.
Minnis, M & Sutherland, A 2017, 'Financial Statements as Monitoring Mechanism: Evidence from small Commercial loans', Journal Of Accounting Research, vol 55, no. 1, pp. 197-233.