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From the given trial balance of Al-Ward Shop, prepare a
From the given trial balance of Al-Ward Shop, prepare a. Income statement for the year 2021 (10 marks) b. Balance sheet for 31" December 2021 (20 marks) Al- Ward Shop Trial Balance 31" December 2020 Account Debit Credit Cash 15,000 33,500 1,000 30,700 200,000 7,700 3,000 17,800 11,700 7,500 18,330 Sale Revenue Inventory Account payable Land Intangible asset Prepaid marketing expense Interest payable Account Receivable Debenture Bond payable Wages payable Owner Drawing Purchase Consultation revenue Salary payable Common Stock Utility expenses Wages expenses Rent Revenue Total 3,300 4,000 12,600 17,500 16,400 101,300 4,330 2,000 15,000 261,330 261,330
Anonymous about 1 hour later Al-Ward Shop Income Statement for the year 2021 Amount Particulars Total Revenue Sale Revenue 33500 Rent Revenue 15000 Consultation revenue 17500 Total revenue (A) 66000 Expenses Purchases Utility expenses Wages Total Expeses (B) 12600 4330 2000 18930 Net Income (A-B) 47070 Statement of Retained Earnings for year ended 2021 Amount Partciulars ($) Opening Retained 0 Earinings Net Income earned during 47070 the year ended 2021 Divdend 0 Closing Retained earnings 47070
Al-Ward Shop Balance Sheet as on 31st Dec 2021 Assets Non Current Assets Land 200000 Intangible Asset 7700 Total Non current assets (A) 207700 Current Assets Inventory Cash Prepaid marketing expenses Accounts Receivable Total Current Assets (B) Total Assets (A+B) 1000 15000 3000 11700 30700 238400 Share Equity and Liabilities Share Equity and capital Common Stock Retained Earnings Owner Drawings Total Share Equity and capital (C) 101300 47070 -4000 144370 18330 7500 25830 Non Current Liabilities Bond Payable Debenture Total Non current liabilities (D) Current Liabilities Account payable Interest payable Wages payable Salary payable Total Current liabilities (E) 30700 17800 3300 16400 68200 Total Share equity and liabilities (C+D+E) 238400
4) Calculate the following ratios from balance sheet statement for any organization (which you can download from any GCC Security Market) for the last annual report (that includes all financial statement) (5 * 5 = 25) Current ratio • Debt ratio • Quick ratio • Equity multiplier • Debt to equity ratio 5) Interpret the results of the ratios and explain what does that mean to the performance of the organization. The answer you provided should be supported by relevant literature review including scientific journal, website and related books. (500 words) (20 marks)
Expert Solution
| Current Ratio | Current Assets/Current Liabilities |
| =30700/68200 | |
| 0.45 | |
| Debt Ratio | Total Debts/ Total assets |
| =(25830+68200)/(207700+30700) | |
| 0.39 | |
| Quick Ratio | Quick Assets/Current liabilities |
| =(Cash + Account Receivables)/Current Liabilities | |
| =(15000+11700)/68200 | |
| 0.39 | |
| Equity Multiplier | Total Assets/Shareholders Fund |
| =238400/144370 | |
| 1.65 | |
| Debt to Equity Ratio | Total liabilities/ Shareholders Fund |
| =(25830+68200)/144370 | |
| 0.65 |
Interpretation
| Current Ratio : It provides a measure of degree to which current assets cover current liabilities. The excess of current assets over current liabilities provides a measure of safety margin available against uncertainty in realisation of current assets and flow of funds. A very high current ratio implies heavy investment in current assets which is not a good sign as it reflects under utilisation or improper utilisation of resources. A low ratio endangers the business and puts it at risk of facing a situation where it will not be able to pay its short-term debt on time. In the given case Current Ratio is low which means Current Assets do not cover Current Liabilities. It means that the business is not well placed to pay its debts. It might be required to raise extra finance or extend the time it takes to pay creditors. |
| Debt Ratio : The debt ratio is a measure of financial leverage. A company that has a debt ratio of more than 50% is known as a "leveraged" company. Its debt ratio is higher than its equity ratio. It means that the business uses more of debt to fuel its funding. In other words, it leverages on outside sources of financing. Leveraged companies are considered riskier since businesses are contractually obliged to pay interests on debts regardless of their operating results. Even if a business incurs operating losses, it still is required to meet fixed interest obligations. In contrast, the payment of dividends to equity holders is not mandatory; it is made only upon the decision of the company’s board. Hence, leveraged companies are more risky. In the given case debt ratio is low so company is less risky |
| Quick Ratio : The ratio provides a measure of the capacity of the business to meet its short-term obligations without any flaw. Normally, it is advocated to be safe to have a ratio of 1:1 as unnecessarily low ratio will be very risky and a high ratio suggests unnecessarily deployment of resources in otherwise less profitable short-term investments. In the given case Quick Ratio is low which means company's liquidity position is not good. |
| Equity Multiplier : The equity multiplier helps us understand how much of the company’s assets are financed by the shareholders’ equity and is a simple ratio of total assets to total equity. If this ratio is higher, then it means financial leverage (total debt to equity) is higher. And if the ratio turns out to be lower, the financial leverage is lower. In the given case multiplier is 1.65 means total assets are financed by 60% of equity 40 % by debt |
| Debt Equity Ratio : This ratio measures the degree of indebtedness of an enterprise and gives an idea to the long-term lender regarding extent of security of the debt. As indicated earlier, a low debt equity ratio reflects more security. A high ratio, on the other hand, is considered risky as it may put the firm into difficulty in meeting its obligations to outsiders.In the given case low Debt Equity Ratio, reflecting more security |
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