The balance sheets of Rodington Ltd and Rowton Ltd at 31 May 2009 were as follows:

Notes:
1 The profits of Rodington Limited are expected to continue at £40,000 p.a. The profits of Rowton Limited have averaged £40,000 before debenture interest.
2 Balance sheets at 31 May 2008 for both companies showed broadly similar figures to those for 2009.
a From the balance sheets as at 31 May 2009, calculate the following ratios for both companies, and give a brief explanation of their significance:
(ii) Gearing ratio (ii) Current ratio (iii) Acid test ratio (iv) Return on capital employed.
b Assume that you had been asked for advice by a cautious potential investor who has £20,000 available. Explain which of the two companies appears to represent the better choice of investment on the basis of the evidence provided.
c If the audit report on Rodington 's accounts had stated that the business was not a going concern, how would that affect your views on the company, and in particular the advice given to the potential investor in

(b) above?

Transcribed Image Text:

Rodington 000 Rowton 000 204 (168) (100) 888 | &88 * 8 Non-current assets Current assets: Inventory Trade receivables Cash and cash equivalents Less Current liabilities Net Current Assets (Liabilities) Less Non-current liabilities 6% debentures Total net assets Equity Share capital Reserves Total equity 125 (135) (12)