Question
The financial statements of Thomas Ltd appear below: Statements of Financial Position 2017 and 2018 Assets 2018 2017 Cash .................................................................................................. $ 250,000 $ 400,000 Marketable
The financial statements of Thomas Ltd appear below:
Statements of Financial Position
2017 and 2018
Assets 2018 2017
Cash .................................................................................................. $ 250,000 $ 400,000
Marketable securities ........................................................................ 150,000 600,000
Accounts receivable (net) ................................................................. 500,000 300,000
Inventory ........................................................................................... 1,500,000 1,700,000
Property, plant and equipment (net) ................................................. 1,600,000 2,000,000
Total assets ................................................................................. $4,000,000 $5,000,000
Liabilities and Equity
Accounts payable .............................................................................. $ 200,000 $ 300,000
Short-term (current) notes payable ................................................... 400,000 900,000
Debentures (non-current) payable .................................................... 800,000 2,005,000
Share capital ..................................................................................... 1,700,000 1,045,000
Retained earnings ............................................................................. 900,000 750,000
Total liabilities and equity........................................................... $4,000,000 $5,000,000
Income Statement
For the year ended 31 December 2018
Net sales ............................................................................................ $3,600,000
Cost of sales ...................................................................................... 1,840,000
Gross profit ....................................................................................... 1,760,000
Expenses
Interest expense .......................................................................... $240,000
Selling expenses ......................................................................... 300,000
Administrative expenses ............................................................. 200,000
Total expenses ...................................................................... 740,000
Profit before income tax ................................................................... 1,020,000
Income tax expense .......................................................................... 300,000
Profit after tax ................................................................................... $ 720,000
Additional information:
Assume all sales were on account.
Required:
a) Compute the following ratios for Thomas for 2018 (2 marks):
i. Return on ordinary shareholders equity,
ii. Quick ratio
iii. Debt to total assets
iv. Returns on asset
b) Independent of part (a), if below are some selected ratios for Thomas Ltd for 2019 and 2020, evaluate the entitys liquidity (1 mark).
| 2020 | 2019 |
Current ratio | 1.1:1 | 1.9:1 |
Quick ratio | 0.7:1 | 1.1:1 |
Average collection period | 30 days | 25 days |
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