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ACC104 Accounting For Decisions Trial Balance And Financial Statements

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  • Course Code: ACC104
  • University: RMIT University
  • Country: Australia

Questions:

1. Prepare the adjusting entries and adjusted trial balance for the year ended 30 June 2016. Use the column worksheet being provided.
 
2. Prepare the income statement, the statement of changes in owner’s equity and balance sheet for the year ended 30 June 2016. Use the templates provided.
 
3. Examine the results and prepare a report of any business problems that the financial statements revealed as at 30 June 2016. Use appropriate ratio analysis to support your arguments.
 
4. Minutes of meetings attended by group members must be kept and detail attendance, work allocations, problems and resolutions to problems (Use template being provided). They must also note when the next meeting is to be held.
 
 

Answer:

Introduction:

After the preparation of the adjusted trial balance and the respective financial statements including the income statement and the balance sheet statement, it is necessary to assess the financial condition of Helen’s Hire Cars for the year 2016. In order to analyse the financial condition of the concerned organisation, the use of ratio analysis is deemed to be vital, as it helps in revealing the business problems of the organisation. This section would identify such problems identified from the financial statements of the organisation after the conduction of appropriate ratio analysis.

Analysis:

For identifying the business problems of Helen’s Hire Cars, the following groups of ratios are used:

Profitability ratios: 

From the above table, it is evident that the net margin of the organisation is significantly lower as 3.91%. This is because it has to incur adequate amount of expenses for conducting its business operations, which could not be offset largely by revenue generation (Islam, 2014). In terms of return on assets, it could be seen that the ratio is obtained as 5.86%. However, as the business deals in hire cars, the ideal ratio needs to be above 8% (Li, 2015). In this case, the ratio is below the ideal standard, which implies that the organisation has not utilised its assets effectively to generate adequate return. Finally, in terms of return on equity, the ratio is computed as 7.87%. This ratio is found to be significantly lower, as the standard margin is minimum 20%. Hence, it is clearly inherent from the profitability viewpoint that Helen’s Hire Cars is struggling to generate adequate income from its business activities.

Liquidity ratios: 

From the above table, it is observed that the current ratio is computed as 1.37, which is well below the ideal margin of 2. On the other hand, quick ratio is computed as 1.32, which has exceeded the ideal standard of 1 (Vogel, 2014). This implies that the organisation has allowed extended credit terms to its customers owing to which a large amount of cash could not be utilised for investment in current business operations. Thus, the adequate working capital of the organisation has been kept idle throughout the year. 

 

Efficiency ratios: 

From the above table, it is clear that although the organisation has managed to settle off its inventory at a faster rate of 1.23 days in 2016 owing to possible rise in market demand. In this case, it is noteworthy to mention that since the organisation has no cost of sales, revenue figure is used for computing all the efficiency ratios. On the other hand, it could be seen that the organisation has been collecting its receivables at a later point, while it has to settle its obligations to the creditors at an earlier period. This implies that the organisation has experienced increase in its overall cash outflows due to the unwillingness of the creditors in extending their payment terms.

Solvency ratio: 

The above table clearly indicates that the debt to equity ratio of the organisation is computed as 0.34. This implies that the organisation funds majority of its assets through equity (Wahlen, Baginski & Bradshaw, 2014). In this aspect, it is to be noted that excessive dependence on equity funding would minimise the decision-making ability of the management of Helen’s Hire Cars.

Conclusion:

Based on the above discussion, it could be stated that Helen’s Hire Cars has not managed to earn sufficient profit from its business operations owing to increased operating expenses. In addition, the idle working capital and settling creditor terms earlier than the debtor terms has resulted in increased cash outflows for the organisation. Finally, excessive reliance on equity funding would minimise the decision-making ability of the management of Helen’s Hire Cars in future. 

 

References:

Islam, M. A. (2014). An analysis of the financial performance of national bank limited using financial ratio. Journal of Behavioural Economics, Finance, Entrepreneurship, Accounting and Transport, 2(5), 121-129.

Li, X. (2015). Accounting conservatism and the cost of capital: An international analysis. Journal of Business Finance & Accounting, 42(5-6), 555-582.

Vogel, H. L. (2014). Entertainment industry economics: A guide for financial analysis. Cambridge University Press.

Wahlen, J., Baginski, S., & Bradshaw, M. (2014). Financial reporting, financial statement analysis and valuation. Nelson Education.

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