The summarised statement of profit or loss and other comprehensive income of Hotpot plc for the year ended 31 December 2017 and statement of financial position as at that date are as follows:

Additional Information (1) Cost of sales includes wages and salaries of €480,000. Administrative expenses include wages and salaries of €348,000 and unrecoverable debts of €62,000.

During the year, plant which had originally cost €1,460,000, and on which accumulated depreciation of €712,000 had been provided, was sold for €700,000.

(4) The company made a rights issue of 1 for 20 at €1.50 per share payable in full on 1 January 2017. On 1 April 2017, a bonus issue of 1 for 7 was made.
(5) On 1 January 2017, the company issued a further €2,000,000 mortgage debentures.
Interest was paid on all debentures on 30 June and 31 December 2017.
(6) During the year ended 31 December 2017, €200,000 was debited to equity in respect of dividends.
Requirement Using only the common information provided above:

(a) Calculate for Hotpot plc for 2016 and 2017:
(i) The current ratio and the acid test ratio; and (ii) TWO alternative gearing ratios.

(b) Explain the significance of the gearing ratio in analysing the accounts of a business, and set out your reasons for selecting the methods of calculation you have used in

(a) above.

(c) Draft a brief report for the management of Hotpot plc, commenting on the liquidity and gearing of the company at 31 December 2017 as compared with the previous year

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SUMMARISED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME for the Year Ended 31 December 2017 Notes 000 Revenue 4,020 Cost of sales (1) (2,110) Gross profit 1,910 Distribution costs (320) Administrative expenses (1) (500) Operating profit 1,090 Interest paid (300) Income tax expense Net profit after taxation (360) 430