Assignment

Mohammad Labib Khan

1931441630
ACT201.9
 Answer to the question no: 1
A) Consistency: A company must have a
fixed cash flow method to make their
financial statement. It can’t change its cost
flow method every year. The company
must use same method and principle from
one accounting period to another. It’s
called consistency concept.
Example: A company which has used
FIFO for one year can’t use LIFO on the
next year.

B) Going Concern: It is an assumption

which states that a company is financially
established to run its business for probable
future.

Example: A company which believes to

be in business for foreseeable future and
does not have the intention to close down
soon.
C) Periodicity: This assumption states that a
company can divide its activities into
artificial time periods as fiscal year,
calendar year and so on to produce
periodic reports. [ CITATION MyA \l 1033 ]

Example: If a company incurs expenses

during the first quarter of the year but the
cash for these expenses will be paid in the
next quarter. The periodicity assumption
requires the company to disclose these
expenses on the income statement for the
first quarter of the year.

D) Revenue Recognition Principle: This

principle states that revenue is earned and
should be recorded when service is
performed not when revenue is received or
collected.

Example: If a company sells a product on

3rd April and it gets delivered on 10th April
but the company gets its payment on 7th
 April. Then the company should record its
revenue on 10th April because that’s when
the company earned its revenue.

E) Matching Concept: This principle states

that the expenses and related revenues that
are earned during a period should be
recorded at the same time.

Example: If a shop sells a product for

£10,000 which has cost of goods sold
amounting £2,000. According to the
matching concept the company has to
record both revenue and cost of goods
sold.

F) Accrual Basis of Accounting: This

principle states that expenses and revenues
should be recorded in financial statement
when they are occurred not when they are
paid or received.

Example: If a company receives a check

of £1000 it should record it immediately.
 Answer to the question no: 2(A)

Baker Corporation
Statement of Cash flow
For the year ended 2015

$ $
Cash flows from operating activities
Net income 1,06,000
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation expense 30,000
Decrease in Accounts receivable 30,000
Increase in inventory (140,000)
Increase in Accounts payable 70,000 (10,000)
Net cash provided by operating
activities 96,000
 Answer to the question no: 2(B)
Cash flows from investing activities
Current Asset
Current ratio of 2014=
Purchase of equipment Current Liabilities
(40,000)
740000
Net cash used by investing = 430000

activities = 1.72 (40,000)

Cash
Currentflows from
ratio of 2015= financial
Current Asset
Current Liabilities
activities
Long term debt = (30,000)
820000
520000
Notes payable 20,000
=1.57
Payment of dividend (76,000)
Net cash used by financial
Current Asset−Ending inventory
Quick ratio of 2014=
activities Current Liabilities
(86,000)
740000−320000
= in cash
Net decrease 430000 = 0.98 30,000
Answer
Cash to the question
at the beginning no:
of the period 2(B)
70,000
Cash at the end of the period 40,000
Current asset
Current Ratio of 2014= Current Liabilities
740000
= 430000 = 1.72
 Current asset
Current Ratio of 2015= Current Liabilities
820000
= 520000 = 1.57

Current Asset−Ending inventory

Quick ratio of 2014=
Current Liabilities

= 740000−320000
430000 = 0.98

Current Asset−Ending inventory

Quick ratio of 2015=
Current Liabilities

= 820000−460000
520000 = 0.69
Accounts receivable turnover of 2014 =
Net credit sales
Average net accounts receivable

2400000
= 0+ 350000
2
= 13.71 times

Accounts receivable turnover of 2015

Net credit sales
= Average net accounts receivable
2200000
= 320000+350000
2
= 6.567 times
Profit Margin of 2014

=3.2%
Net Income 77000
= Net sales = 2400000

Profit Margin of 2015

Net Income 106000
= Net sales = 2200000 =4.82%

Asset turnover of 2014

2400000
Net sales
= Average total asset = 0+ 1110000
2

= 4.3times

Asset turnover of 2015

2200000
= =
Net sales
1200000+1110000
Average total asset
2

= 1.90 times

Return on asset of 2014

77000
Net income
= Average total asset = 0+ 1110000
2 = 13.87%
Return on asset of 2015
Net income
= Average total asset

106000

= 1200000+1110000
2 = 9.177%

Return on common stockholders’ equity of 2014

= Net income
Average common stockholders equity

77000
= 0+ 100000+ 150000+ 80000
2
= 46.67%

Return on common stockholders’ equity of 2015

= Net income
Average common stockholders equity

106000
= 100000+150000+80000+100000+ 150000+ 110000
2
= 30.72%

Debt to assets ratio of 2014

= Total liabilities
Total assets = 780000
1110000
=70.27 %

Debt to assets ratio of 2015

= Total liabilities
Total assets =
840000
1200000
=70 %

Times interest earned ratio of 2014

EBIT
= Interest expense = 150000
40000 = 3.75 times

Times interest earned ratio of 2015

EBIT 180000
= Interest expense = 29000 = 6.206 times
 Answer to the question no: 2(C)

According to the ratios of Baker Corporation in

2014 their current ratio was 1.72. That means
Baker Corporation had $1.72 of current assets for
every dollar of current liability. But in 2015 the
current ration decreased at $1.57. Which is less
liquid than 2014. That means in 2015 they have
less current assets for every dollar of liabilities. So
it can be said that according to current ratio of
2014-15 the company’s performance is
deteriorating.
Quick ratio measures a company’s immediate
short term liquidity.[ CITATION Jer \l 1033 ] It also tells if a
company can pay all its current liabilities if come
due immediately.[ CITATION Qui \l 1033 ] In 2014 Baker
Company’s quick ratio was 0.98 and in 2015 it
was 0.69. Which is lesser than its previous year. It
means in 2015 Baker company has less ability to
pay its current liability if come due immediately
than it had in 2014. Which is sign of deteriorating
performance of the company.
Accounts receivable turnover measures liquidity
by how quickly a company can convert certain
assets to cash. [ CITATION Jer \l 1033 ] It tells us how many
times a company collects it’s receivables on
average during a period. In 2014 their account
receivable turnover was 13.71. That means Baker
Corporation collected their receivable 13.71 times
in 2014. But in 2015 they collected their
receivable 6.567 times. Which is almost half as
their previous year and it means the company’s
performance is deteriorating.
Profit margin tells us how much net income a
business earns on every $1 of sale. It also tells how
well a company is earning. Baker Corporations
profit margin for 2014 was 3.2% but in 2015 their
earning increased at 4.82%. Baker Corporation
experienced an increase in its profit margin from
year 2014 to 2015. So it can be said that in terms
of profit margin their Baker Corporation is
performing well.
Asset turnover measure how efficiently a company
uses its asset to generate sales.[ CITATION Qui \l 1033 ] It
measures net sales generated for each dollar of
total asset invested.[ CITATION Fin \l 1033 ] In 2014 Baker
Corporations asset turnover was 4.3. That means
they generated sales of $4.3 for each dollar they
invested. But in 2015 the ratio dropped at 1.90.
Which means they are generating $1.9 for each
dollar of sale. Which is still good but compared to
the asset turnover of 2014 their performance is
collapsing in 2015.
Return on asset measures a company’s success in
using assets to earn profit.[ CITATION Qui \l 1033 ] In other
words it measures profitability. The higher the rate
the higher the success. In 2014 Baker Corporations
return on asset was 13.87% but in 2015 the rate is
9.177%. That means their success rate dropped
from 2014 to 2015. So it can be said that the
company isn’t performing well.
Return on common stockholders’ equity measures
profitability from the common stockholders’
viewpoint.[ CITATION Jer1 \l 1033 ] It measures how much net
income is earned for each dollar invested by
common stockholders.[ CITATION Acc \l 1033 ] The higher the
rate the more we are getting return on invested
money. In 2014 Baker Corporation had a return on
common stockholders’ equity rate at 46.67%
which decreased a lot in 2015 and dropped at only
30.72%. The net income earned in 2015 is far
lesser than net income earned in 2014. Which
indicates bad performance of the company.
Debt to asset measures the percentage of total
assets that creditors provide.[ CITATION Fin \l 1033 ] The
higher the percentage the riskier the company is in
because it requires to make payments and tie up
future cash flow. Baker Corporations percentage
of debt to asset in 2014 and 2015 are 70.27% and
70%. Though the percentage decreases a bit from
2014 to 2015 still the company is in great risk. But
compared to the percentage of 2014 the company
performed well in 2105. They have less debt to
pay in 2015.
Times interest earned evaluates a company’s
ability to pay interest expense.[ CITATION Stu1 \l 1033 ] It says
if the company is making enough profit to cover
their interest expense. Baker Corporations times
interest earned rate of 2014 was 3.75 times. That
means in 2014 they could cover their interest
expense 3.75 times but in 2015 their performance
were so well that their ratio increased at 6.206 and
they could cover their interest expense 6.206
times.
After analysing all the ratios it can be said that in
terms of Profit margin, Debt to asset ratio and
Times interest earned the company is performing
well because they are making more profit, they
have less debt to pay and they can cover their
interest expense more times in 2015 than they
could do in 2014. But according to all the other
ratios, the overall performance of Baker
Corporation is deteriorating.
 Answer to the question no: 3(A)
Philips Motel
Worksheet
For the month ended May 31,2009

Adjusted trial Income

Trial Balance Adjustments Balance Statement Balance Sheet
Dr.($) Cr.($) Dr.($) Cr.($) Dr.($) Cr.($) Dr.($) Cr.($) Dr.($) Cr.($)
Account title
Cash 2500 2500 2500
Supplies 1900 b)1000 900 900
Prepaid 2400 a)200 2200 2200
Insurance
Land 15000 15000 15000
Lodge 70000 70000 70000
Furniture 16800 16800 16800
Accounts 5300 5300 5300
Payable
Unearned 3600 f)1500 2100 2100
revenue
Mortgage 35000 35000 35000
loan
Philips’s 60000 60000 60000
Capital
Rent 9200 f)1500 10700 10700
Revenue
Advertise 500 500 500
Expense
Salaries 3000 g)300 3300 3300
Expense
Utilities 1000 1000 1000
Expense
Total 113100 113100

Insurance a)200 200 200

expense
Supplies b)100 1000 1000
expense 0
Depreciation c)300 300 300
expense-
Lodge
Accumulated c)300 300 300
depreciation-
Lodge
Depreciation d)250 250 250
expense-
Furniture
Accumulated d)250 250 250
depreciation-
Furniture
Interest e)350 350 350
expense
Interest e)350 350 350
Payable
Salaries g)300 300 300
Payable
Totals 3900 3900 114300 114300 6900 10700 107400 103600

Net Income 3800 3800

Totals 1070 10700 107400 107400

0
 Answer to the question no: 3(B)

Phillips Motel
Income Statement
For the month ended May 31, 2009

$ $
Revenues:
Service Revenue 10700
Expenses:
Advertisement expense 500
Salaries expense 3300
Utilities expense 1000
Insurance expense 200
Supplies expense 1000
Depreciation expense 550
Interest expense 350
Total expense (6900)
Net Income 3800
Answer to the question no: 3(C)

Phillips Motel
Owner’s Equity Statement
For the month ended May 31, 2009

Phillips Capital, May 1 60000

Net Income 3800
Phillips Capital, May 31 63800
 Answer to the question no: 3(D)

Phillips Motel
Balance Sheet
As at May 31, 2009

$ $ $
Asset
Current asset:
Cash 2500
Supplies 900
Prepaid insurance 2200
Total Current Asset 5600
Noncurrent asset:
Land 15000
Lodge 70000
Accumulated depreciation-
Lodge (3000)
Furniture 16800
Accumulated depreciation-
Furniture (250)
Total noncurrent asset 101250
Total Assets 106850
Liabilities
Current liabilities:
Accounts Payable 5300
Unearned revenue 2100
Interest Payable 350
Salaries Payable 300
Total current liabilities 8050
Noncurrent liabilities
Mortgage loan 35000
Total liabilities 43050
Owner’s Equity
Philips Capital May 31 63800
Total Liabilities and Owner’s Equity 106850
 Answer to the question no: 3(E)

Closing Journal
Date Account Title Dr.($) Cr.($)

2009
May 31 Service Revenue 10700
Income Summary 10700

31 Income Summary 6900

Advertisement expense 500
Salary expense 3300
Utility expense 1000
Insurance expense 200
Supplies expense 1000
Depreciation expense 550
Interest expense 350

31 Income Summary 3800

Phillips Capital 3800
Answer to the question no: 3(F)

Phillips Motel
Post-Closing Trial Balance
May 31, 2009
Account Title Dr.($) Cr.($)

Cash 2500
Supplies 900
Prepaid Insurance 2200
Land 15000
Lodge 70000
Furniture 16800
Account Payable 5300
Unearned Revenue 2100
Mortgage Loan 35000
Accumulated Depreciation-
Lodge 300
Accumulated Depreciation-
Furniture 250
Interest Payable 350
Salaries Payable 300
Phillips Capital 63800

107400 107400
 Answer to the question no: 4(a)

The statement of the chief accountant of

Blackburn is correct. Profit margin measures how
much net income a business earn on every $1 of
sale. It tells how much a business is earning on
every dollar of sale also how much money a
business is keeping. Blackburn Corporations profit
margin ratio is 0.082 it means they are earning
8.2% of every dollar of sale. On the other hand
Delta Corporations rate is 0.054. Which is much
lesser than Blackburns. So it can be said
Blackburn Corporations return is higher than Delta
Corporations.
Asset turnover measures net sales generated for
each dollar of total asset invested.[ CITATION Fin \l 1033 ] In
every one dollar of asset Blackburn Corporation is
generating 0.94 dollar in sales which is higher than
Delta Corporations 0.79. So it is clear that
Blackburn Corporation has higher return than their
opposition.
Earnings per share reports the net income for each
share of company’s common stock.[ CITATION Fin \l 1033 ]
Blackburn Corporations EPS is 3.26 which is
higher than Delta Corporations 1.81. That means
Blackburn has more return than Deltas.
Price earnings ratio is used to compute the ratio of
the market price of each share of common stock to
earning per share.[ CITATION Jer \l 1033 ] Blackburn
Corporations P/E ratio is 10.5 and Deltas is 10.
That means Blackburn has sold each share of their
stock for 10.5 times the amount that the company
earned on each share. Which is higher than Deltas
and it means Blackburn has more return.

Answer to the question no: 4(b)

Asset turnover measures net sales generated for

each dollar of total asset invested. [ CITATION Fin \l 1033 ]It
also measures how efficiently assets are used to
generate sales. [ CITATION Fin \l 1033 ]The more the sales the
more efficient the company is in utilizing asset.
Blackburn Corporations asset turnover ratio is 0.94
and Delta Corporations ratio is 0.79. Blackburn
Corporation is generating more sales than Delta
Corporation. So it can be said that Blackburn
Corporation is more efficient in managing their
assets than Delta Corporation.
Inventory turnover measures the number of times a
company sells its inventory.[ CITATION Ser \l 1033 ] Its
purpose is to measure the liquidity of the
inventory.[ CITATION Fin \l 1033 ] The more inventory
turnover the more liquid. The inventory turnover
ratio of Blackburn Corporation is 5.1 on the other
hand for Delta Corporation it’s 5.7. Blackburn
Corporation has less ratio because they might have
too much inventory or they aren’t managing their
inventory properly. So it can be said that Delta
Corporation is more efficient in managing their
inventory than Blackburn Corporation.
The average payment period is described as the
amount of days that a business requires to pay
back payments with credit. A shorter payment
period gives creditors prompt payments. Though
very short payment period indicates that the
company is not fully utilizing or not taking proper
advantages of the credits allowed by the suppliers.
Blackburn Corporation is taking 76 days to pay
their payable and Delta Corporation is taking 81
days. It indicates that Blackburn Corporation takes
less time to pay their payables and it means they
are managing their payable more efficiently.
Average collecting period says how many days it
takes for a company to collect their average level
of receivables. In general, a significantly lower
collection time is much more favourable than a
higher average collection duration. A low average
collecting time means that payments are received
sooner by the company. Blackburn Corporations
average collection period is 44 days and Delta
Corporations period is 51 days. Delta Company
might selling their product to not credit worthy
customers that’s why it’s taking so many days for
them to collect the receivables. So it can be said
that Blackburn Corporation is more efficient in
managing their receivables than Delta Corporation.
 Answer to the question no: 4(c)

Liquidity measures a company’s short-term ability

to pay its maturing obligation.[ CITATION Bra \l 1033 ]
Liquidity refers how easily assets can be converted
to cash.[ CITATION Inv \l 1033 ] Current ratio is a popular ratio
that measures a company’s current liability paying
ability.[ CITATION Inv \l 1033 ] It is also used to evaluate a
company’s liquidity. The current ratio of
Blackburn Corporation is 2.04 and the current ratio
of Delta Corporation is 2.08. Though the ratios of
both firm is almost same still there are a little
difference in between both ratios. Blackburn
Corporation has a ratio of 2.04 that means for
every dollar of current liabilities Blackburn
Corporation has $2.04 of current asset. In case of
Delta Corporation, for every dollar of current
liability they have $2.08 of current asset. So it is
clear that compared to Blackburn Corporation,
Delta Corporation is more liquid.
Quick ratio measures if a company can pay all of
its current liabilities if come due immediately.
[ CITATION Qui \l 1033 ]That means it tell us the immediate

short term liquidity of a company. The quick ratio

of Blackburn Corporation is 1.32 and the quick
ratio of Delta Corporation is 1.46. Which clearly
indicates that in terms of quick ratio Delta
Corporation is more liquid than Blackburn
Corporation.
Inventory turnover measures the liquidity of the
inventory. It also measures the number of times a
company sells its average inventory.[ CITATION Ser \l 1033 ]
The faster the inventory turnover the better for the
company. The inventory turnover rate of
Blackburn Corporation is 5.1 and for Delta
corporation its 5.7. That means Delta Corporation
sold its inventory 5.7 times in a period which is far
more than Blackburn Corporation. So it tells us
that even in terms of Inventory turnover Delta
corporation is more liquid.
Long-term creditors and stockholders are the one
who are interested in a company’s debt paying
ability.[ CITATION Pau \l 1033 ] Debt ratio and times interest
earned are the ratios which can measure and
provide the information about the debt paying
ability of a company.[ CITATION Fin \l 1033 ] Debt ratio
indicates a company’s degree of leverage. Also it
measures that how much total assets has creditors
provided. So the higher the percentage of liabilities
the higher risk for the company. Because it
requires to make payment and it may tie up the
future cash-flow. In other words the company
might not be able to pay its debt. The debt ratio of
Blackburn Corporation is 0.37 and the debt ratio of
Delta Corporation is 0.44. So it is clear that
creditors have provided more to Delta Corporation
than they have provided to Blackburn Corporation
and it means that Delta Corporation is at higher
risk of not meeting its maturing obligations.
Times interest earned evaluates a company’s
ability to pay its interest expenses when they come
due.[ CITATION Stu \l 1033 ] It also tells if a company is
making enough profit to cover its interest
expenses. Blackburn Corporation can cover its
interest expense 5.6 times when come due on the
other hand Delta Corporation can cover their
interest expense 3.3 times. It clearly indicates that
Blackburn Corporation has higher ability to pay its
interest expense than Delta Corporation.
After analysing both firms ratios it can be said that
in terms of liquidity Delta Corporation is in better
position than Blackburn Corporation but in terms
of leverage (debt) Blackburn Corporation is in far
better position than Delta Corporation.
 Answer to the question no: 4(d)

Owners are interested in evaluating a company’s

earning power-profitability and company’s ability
to pay interest as it comes due and repay the value
of debt at maturity.[ CITATION Bra \l 1033 ] Naturally an owner
would want his company to earn more profit than
others. As Blackburn Corporations profit margin is
0.082 and Delta Corporations profit margin is
0.052, from owners point of view it can be said
that in terms of profit the performance of
Blackburn Corporation is better than Delta
Corporation.
Asset turnover measures how effectively an
enterprise uses its assets to generate sales.[ CITATION Jer1 \l
1033 ] The higher the ratio the better. Blackburn

Corporations asset turnover ratio is 0.94 and Delta

Corporations is 0.79. Blackburn Corporation has a
higher asset turnover ratio than Deltas. Which
means from owners point of view Blackburn
Corporations performance is better.
Earnings per share measures the net income earned
on each share of common stock.[ CITATION Jer1 \l 1033 ]
Blackburn Corporations EPS is at 3.26 which is
higher than Delta Corporations EPS which is
a1.81. So an owner would normally say Blackburn
Corporation is performing well.
Price earnings ratio measures the market price of a
common stock compared to earnings per share.
[ CITATION Jer \l 1033 ]The higher the ratio the higher the

stock price. Blackburn Corporations P/E ratio is

10.5 and Delta Corporations P/E ratio is 10. That
means Blackburn Corporations stock was sold for
10.5 times the amount that the company earned on
each share which is slightly higher than Delta
Corporations. So Blackburn Corporation was
performing well.
Debt ratio measures the percentage of the total
assets that creditors provide.[ CITATION Fin \l 1033 ] From
owners point of view, a low debt ratio is desirable.
Blackburn Corporations debt ratio was 0.37 and
Delta Corporations debt ratio is 0.44. As
Blackburn Corporation has less debt ratio it can be
easily said that from owners point of view
Blackburn Corporation is performing better than
Delta Corporation.
Times interest earned evaluates a business’ ability
to pay its interest expense.[ CITATION Xpl \l 1033 ] It says if
the company is making enough profit to cover its
interest expense. Blackburn Corporation can cover
their interest expense 5.6 times on the other hand
Delta Corporation can cover their interest expense
3.3. So it can be easily said that from owners point
of view Blackburn Corporation is performing
better than Delta Corporation.

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