Ramsworth Ltd. is a wholesale business and you have recently been employed within the position of a credit-based controller within the company. You have just obtained a summary of Ramsworth Ltd’s most recent draft income statement and statement of financial position as follows: Income statement for the year ended 31 December 2020 £000 Sales Revenue 8,649 Cost of Sales (5,106) Gross Profit 3,543 Other Operating Expenses (998) Operating Profit 2,545 Interest (265) Profit before Taxation 2,280 Taxation (570) Profit for the year 1,710 Statement of Financial Position as at 31 December 2020 £000 Non-current assets at cost 6,284 Accumulated depreciation (2,943) 3,341 Current assets Inventories 2,648 Trade receivables 1,428 4,076 Total assets Equity 7,417 Ordinary share capital 2,100 Revenue reserves 2,384 4,484 Current liabilities Trade payables 1,378 Bank overdraft 1,555 2,933 Total equity and liabilities 7,417 The finance director has expressed serious concerns that the inventory levels are too high and that they should be quickly reduced, and has therefore requested that you investigate these matters further. Alltrade payables relate to cost of sales. Assume a 365-day year. Required: Calculate the average operating cash cycle in days during last year and explain to what usethis measure could be put Calculate both the current ratio and acid-test ratio and discuss whether there is evidence that thebusiness is currently experiencing a liquidity Evaluate the differing type of risks and costs that could possibly be reduced by following thefinance director’s proposed proposal to reduce inventory
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.
Ramsworth Ltd. is a wholesale business and you have recently been employed within the position of a credit-based controller within the company. You have just obtained a summary of Ramsworth Ltd’s most recent draft income statement and
Income statement for the year ended 31 December 2020
|
|
£000 |
|
Sales Revenue |
8,649 |
|
Cost of Sales |
(5,106) |
|
Gross Profit |
3,543 |
|
Other Operating Expenses |
(998) |
|
Operating Profit |
2,545 |
|
Interest |
(265) |
|
Profit before |
2,280 |
|
Taxation |
(570) |
|
Profit for the year |
1,710 |
Statement of Financial Position as at 31 December 2020
|
|
£000 |
|
Non-current assets at cost |
6,284 |
|
|
(2,943) |
|
|
3,341 |
|
Current assets |
|
|
Inventories |
2,648 |
|
Trade receivables |
1,428 |
|
|
4,076 |
|
Total assets
Equity |
7,417 |
|
Ordinary share capital |
2,100 |
|
Revenue reserves |
2,384 |
|
|
4,484 |
|
Current liabilities |
|
|
Trade payables |
1,378 |
|
Bank overdraft |
1,555 |
|
|
2,933 |
|
Total equity and liabilities |
7,417 |
The finance director has expressed serious concerns that the inventory levels are too high and that they should be quickly reduced, and has therefore requested that you investigate these matters further. Alltrade payables relate to cost of sales.
Assume a 365-day year.
Required:
- Calculate the average operating cash cycle in days during last year and explain to what usethis measure could be put
- Calculate both the
current ratio and acid-test ratio and discuss whether there is evidence that thebusiness is currently experiencing a liquidity - Evaluate the differing type of risks and costs that could possibly be reduced by following thefinance director’s proposed proposal to reduce inventory
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