Interpretation of Accounts The following information has been taken from the accounts of O’Brien Ltd - Leaving Cert Accounting - Question 5 - 2006

The period of credit given to Debtors can be calculated using the formula:

Substituting the values:

Return on Capital Employed (ROCE) can be calculated as:

Where:

• Operating Profit = Gross Profit - Expenses = 240,000 - 20,000 = 220,000
• Capital Employed = 940,000

Thus,

The Acid Test Ratio is calculated as:

Where:

• Liquid Assets = 118,000
• Current Liabilities = 72,000

Thus,

8% Debentures are long-term loans with a fixed annual interest rate of 8%. The loan must be repaid in full during the years 2009 to 2011. Typically, assets are pledged to the lender equal to the loan value.

A Preference Dividend is a fixed percentage of profits paid to preference shareholders. These shareholders have priority over ordinary shareholders. The dividend is paid before ordinary shares, and it is only paid if profits allow.

Interest represents the rent (or extra charge) paid for the use of borrowed money. It forms a cost for the company and is essential for operating expenses.

The Rate of Stock Turnover is the number of times stock is sold over a period. Higher figures indicate better stock management. It is calculated by dividing the Cost of Sales by the average Stock.

In 2004, the Current Ratio was 1.81 and the Acid Test Ratio was 1.21. A decline in these ratios in 2005 suggests reduced liquidity. This means that the company may have less ability to meet short-term liabilities with liquid assets.

Business risks involve challenges that may impede the firm from achieving profits. The change in market conditions, expenses, or debt can affect these risks. Observations should focus on financial performance and risk assessments comparing 2004 and 2005.