1 answer

The balance sheet of a sole trader revealed the following position.

Question:

Fixed Assets

Land and buildings

R

9 170

R

Equipment at cost less depreciation 15 570

Goodwill at cost less amounts written off 10 250 34 990

Investment in shares at cost 2 200

Current Assets

R

R

Trading stock

45 840

Sundry debtors less bad debts written off

19 350

Cash at bank

10 920

76 110

113 300

=

A

Less: Current Liabilities

R

Sundry creditors and accruals

77 600

=

L

35 700

Owner's Interest

R

R

Capital

28 400

Profit for the year

7 300

35 700

=

0

Required

Answer the following questions:

(a) Are the assets correctly classified? If not, re-arrange them and give your reasons for doing this.

(b) What is the current ratio? Is it satisfactory?

(c) What is the acid-test ratio? Is it satisfactory?

(d) Is the business solvent? Give your reasons.

(e) Is the business overtrading? Give your reasons.

(f) What is the profitability ratio of the business?


Answers

Sole Trader
Answer a
Classified Balance Sheet
AssetsAmount $
Current Assets
Cash     10,920.00
Account Receivable Net     19,350.00
Trading Stock     45,840.00
Current Assets    76,110.00
Long Term Investments
Investment in shares       2,200.00
Long Term Investments       2,200.00
Property, plant, and equipment
Land and Building       9,170.00
Equipment (net)     15,570.00
Total Property, plant, and equipment    24,740.00
Intangible assets
Goodwill     10,250.00
Intangible assets    10,250.00
Total Assets113,300.00


Liabilities & Owners' Equity
Current Liabilities
Sundry creditors and accruals     77,600.00
Current Liabilities    77,600.00
Long Term Liabilities


Total Long Term Liabilities                   -  
Total Liabilities    77,600.00
Owners' Equity
Capital     28,400.00
Profit for the year       7,300.00
Total Owners' Equity    35,700.00
Total Liabilities & Owners' Equity113,300.00


Quick Assets2019
Current Assets     76,110.00
Less:
Trading Stock     45,840.00
Quick Assets    30,270.00


Ans b
Current Ratio               0.98
Current Assets/Current Liabilities
Current ratio is less than 1 so it is not satisfactory.


Ans c
Quick Ratio               0.39
Quick Assets/Current Liabilities
Quick ratio is less than 1 so it is not satisfactory.


Ans d
Working capital is used to determine if business is overtrading.
Working Capital     (1,490.00)
Current Assets less Current Liabilities
As Working capital is negative so the business is overtrading.


Ans e
Profitability ratio
Profitability margin25.70%
Profit for the year/Capital
So Profitability ratio is 25.70%


.

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