John Snow

Statement of Cash Flows

For the year ended 30 June 2021
Cash flows from operating activities
Receipts from customers 369,700
Payments to suppliers and employees (291,300)
Interest received 8,960
Interest paid (5,600)
Taxes paid (22,400)
Net cash flow from operating 59,360
activities
Cash flow from investing activities
Proceeds from sale of property, plant 20,000
and equipment
Payments for property, plant and (56,000)
equipment
Net cash flow from investing (36,000)
activities
Cash flows from financing activities
Proceeds from borrowings 33,600
Distributions paid (70,580)
Net cash flow from financing (36,980)
activities
Net decrease in cash (13,620)
Cash at the beginning of the reporting 51,540
period
Cash at the end of the reporting 37,920
period
 RATIOS Current Debt to Debt Ratio Return on Return on
Ratio Equity Ratio Assets Equity
Fine Foods 1.89 times 69.89% 41.14% 27.74% 47.13%
Devine 7.14 times 56.47% 36.09% 11.35% 17.76%

b) When analysing the liquidity ratios both entities are above the benchmark of 1.5 times.
However, Devine has a much higher current ratio (7.14 vs 1.89) which puts them in a more
favourable position in terms of liquidity

When looking at the solvency ratios, Devine scores lower in both Debt ratio and Debt-to-
equity ratio, placing them in a much stronger financial position compared to Fine Foods.

In terms of profitability, Fine Foods scores higher in both return on assets (27.74% vs
11.35%) and return on equity (47.13% vs 17.76%). This means that Fine Foods generates
more profit for every dollar of assets and generates more profit for shareholders for every
dollar of equity.

c) Stakeholders will be interested in the following ratios:

- Profitability:
o Return on assets
o Return on equity
o Profit margin ratios
 These ratios indicate an entity’s ability to generate profit from its day-
to-day operations
- Asset efficiency:
o Asset turnover ratio
o Days inventory
o Days debtors
 These ratios allow users to analyse how efficiently an entity utilises
their assets
- Liquidity
o Current ratio
o Quick (acid-test) ratio
 These ratios allow users to analyse an entity’s ability to meet short-
term obligations, as well as analyse financial flexibility
- Capital structure
o Debt-to-equity ratio
o Debt ratio
o Equity ratio
 These ratios allow users to analyse an entity’s reliance on debt
financing vs equity financing, and analyse long-term solvency
d) The days inventory ratio focuses on the turnover of inventory and its impact on
profitability. The cost of sales reflects the direct cost incurred to produce or acquire the
inventory. On the other hand, the days debtors ratio compares the average accounts
receivable balance with sales revenue to assess the efficiency of collecting receivables. Using
sales revenue instead of cost of sales allows for a more accurate assessment of the
receivables' turnover and the impact on revenue generation.

Averages are used instead of year-end figures because they provide a more representative
and stable measure of performance over a specific period. Year-end figures may not reflect
fluctuations and seasonality in inventory or accounts receivable levels. Averages help
smooth out these variations and provide a more accurate picture of the entity's operational
efficiency and financial health.

e)

- Quality of Financial Reporting:

o The quality of ratios is dependent on the quality of an entity's financial
reporting. Inadequate disclosures, lack of details, and accounting policy
choices can affect the accuracy and reliability of the ratios.
- Availability of Information:
o Some necessary information to calculate ratios may not be available in the
financial statements, requiring the use of alternative financial numbers. This
can impact the comparability and accuracy of ratios.
- Accounting Methods:
o Different entities may adopt different methods of accounting, which can
affect the comparability of ratios. Variances in accounting treatments for
transactions can lead to inconsistencies in the ratios calculated.
Q5

Date Account Name Debit Credit

1/2 Accounts Receivable 2,400
Sales revenue 2,400
Invoiced customer for service
provided
2/2 Wages expense 3,600
Cash 3,600
Paid staff wages
4/2 Accounts payable 250
Cash 250
Paid annual subscription for last
years’ database access
5/2 Cash 6,000
Accounts receivable 6,000
Received payment from client for
January
9/2 Cash 20,000
Capital – M. Massenburg 20,000
Further investment to ensure
continuing operation
12/2 Office equipment 12,500
Accounts payable 12,500
Purchasing of new office
equipment
15/2 Accounts receivable 7,000
Sales revenue 7,000
Invoiced customer for service
provided
21/2 Electricity expense 700
Cash 700
Paid for electricity the day account
was received
23/2 Accounts payable 7,100
Cash 7,100
Paid lawyers for a bill received in
January
25/2 Accounts payable 12,500
Cash 12,500
Paid for office furniture purchased
12/2
28/2 Capital – M. Massenburg 1,200
Cash 1,200
Drawings for personal use
Q6