Leaving Cert Accounting Interpretation of Accounts: Interpretation of Accounts
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Question

Interpretation of Accounts
The following figures have been extracted from the final accounts of Doherty Ltd, a service provider in the tourist industry, for the year ended 31/12/2015. The company has an authorised capital of €900,000 made up of 600,000 ordinary shares at €1 each and 300,000 5% preference shares at €1 each. Doherty Ltd has already issued 500,000 ordinary shares and all of the 5% preference shares.

Trading and Profit and Loss Account for year ended 31/12/2015

€
Sales  550,000
Opening stock  55,000
Closing stock  65,000
Costs of goods sold  (752,000)
Operating expenses for year  (145,000)
Interest for year  (3,000)
Net Profit for year  45,000
Dividends paid  (15,000)
Retained profit  30,000
Profit and loss balance 01/01/2015  0
Profit and loss balance 31/12/2015  30,000

Balance Sheet as at 31/12/2015

€
Fixed Assets  856,000
Investments (market value 31/12/2015 €200,000)  150,000

Current Assets (including stock €65,000 and debtors €95,000)  212,000

Less Creditors: amounts falling due within 1 year
Trade creditors  (90,000)
€ 122,000

Financed by:
6% Debentures (2017 Secured)  200,000
Capital and Reserves
Ordinary shares @ €1 each  500,000
5% Preference shares @ €1 each  300,000
Profit and loss balance  128,000  928,000

Market value of one ordinary share on 31/12/2015 is €1.25

You are required to calculate the following for 2015: (where appropriate calculations should be made to two decimal places):

(i)  Cash purchases
(ii)  Dividend yield
(iii)  Price earnings ratio
(iv)  Return on capital employed
(v)  Dividend cover

(b)

Profitability  
Dividend Policy  
Liquidity  
Market Price of a Share  
Gearing  
Sector

All shareholders will be happy with this and I would buy the shares in the company.

(c)
  (i)  Gearing - This is a measure of how a business is financed on a long-term basis. It measures the relationship between the long-term debt (loans) and the shareholders plus preference shareholders equity in the company. When the ratio is low, it indicates the business is lowly geared. Above 50%/100% implies high gearing.

(ii)  Benefits of low gearing - When fixed interest debt is a small proportion of overall capital it has the following benefits:
1.  Improved access to finance as the business can secure lower interest rates.
2.  Greater flexibility when seeking additional financing for expansion as the business maintains healthy ratios.

(iii)  State two ways to reduce the gearing of a company:
1.  Sell more shares.
2.  Restructure debt.
3.  Convert long-term debt to ordinary shares.

Interpretation of Accounts The following figures have been extracted from the final accounts of Doherty Ltd, a service provider in the tourist industry, for the year ended 31/12/2015 - Leaving Cert Accounting - Question 5 - 2016

Worked Solution & Example Answer:Interpretation of Accounts The following figures have been extracted from the final accounts of Doherty Ltd, a service provider in the tourist industry, for the year ended 31/12/2015 - Leaving Cert Accounting - Question 5 - 2016

Cash purchases

Dividend yield

Price earnings ratio

Return on capital employed

Dividend cover

Profitability

Dividend Policy

Liquidity

Market Price of a Share

Gearing

Sector

Gearing - measure

Benefits of low gearing

Ways to reduce the gearing

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