Interpretation of Accounts The following information has been taken from the accounts of Walsh Ltd. for the year ended 31/12/2007. Trading Profit and Loss Account for year ended 31/12/2007 Credit Sales € 900,000 Less: Cost of Sales: ? Stock 1/1/2007 € 20,000 Purchases (credit) € 620,000 Less: Stock 31/12/2007 € 63,000 Cost of Sales € 610,000 Gross Profit € 290,000 Less Expenses (including Interest paid €24,000) € 160,000 Net Profit for the year € 130,000 Profit and Loss Balance 1/1/2007 € 133,000 Profit and Loss Balance 31/12/2007 € 263,000 Balance Sheet as at 31/12/2007 Fixed Assets € 820,000 Current Assets € 156,000 Less Creditors: amounts falling due within 1 year € 73,000 (including Creditors €35,600) Financed by: Creditors: amounts falling due after more than 1 year € 300,000 8% Debentures (2011/2012) € 340,000 Capital and Reserves Ordinary Shares € 263,000 Profit/Loss account € 603,000 € 903,000 (a) You are required to calculate: (i) The figure for Opening Stock (ii) The period of credit received from Creditors (iii) Return on Capital Employed (iv) The Acid Test ratio (b) Explain the following: (i) 8% Debentures (2011/2012) (ii) Interest paid (iii) Liquid Assets (iv) Shareholders’ funds (c) Why would Walsh Ltd. have fared better if it had sold out and invested its money in a financial institution for the past year? Give reasons for your answer.

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Interpretation of Accounts The following information has been taken from the accounts of Walsh Ltd - Leaving Cert Accounting - Question 5 - 2008

Question 5

Interpretation of Accounts The following information has been taken from the accounts of Walsh Ltd. for the year ended 31/12/2007. Trading Profit and Loss Account f... show full transcript

Worked Solution & Example Answer:Interpretation of Accounts The following information has been taken from the accounts of Walsh Ltd - Leaving Cert Accounting - Question 5 - 2008

Step 1

The figure for Opening Stock

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Answer

To find the opening stock, we rearrange the cost of sales formula:

ext{Cost of Sales} = ext{Opening Stock} + ext{Purchases} - ext{Closing Stock}

Substituting the values:

610,000 = ext{Opening Stock} + 620,000 - 63,000

Simplifying this gives us:

ext{Opening Stock} = 610,000 + 63,000 - 620,000 = 53,000

Therefore, the figure for Opening Stock is €53,000.

Step 2

The period of credit received from Creditors

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To calculate the period of credit received from creditors, use the formula:

ext{Period of credit} = \left( \frac{\text{Creditors} \times 365}{\text{Credit Purchases}} \right)

Substituting the known values:

\text{Period of credit} = \left( \frac{35,600 \times 365}{620,000} \right) \approx 21 \text{ days} \approx 0.7 \text{ months}

Thus, the period of credit received from creditors is approximately 21 days.

Step 3

Return on Capital Employed

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To calculate the Return on Capital Employed (ROCE), we use the formula:

\text{ROCE} = \left( \frac{\text{Operating Profit}}{\text{Capital Employed}} \right) \times 100

From the provided figures:

Operating Profit = €130,000
Capital Employed = €903,000

Now substituting these into the formula:

\text{ROCE} = \left( \frac{130,000}{903,000} \right) \times 100 \approx 17.05\%

Therefore, the Return on Capital Employed is approximately 17.05%.

Step 4

The Acid Test ratio

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Answer

The Acid Test Ratio is calculated using the formula:

\text{Acid Test Ratio} = \frac{\text{Current Assets} - \text{Stock}}{\text{Current Liabilities}}

Given:

Current Assets = €156,000
Closing Stock = €63,000
Current Liabilities = €73,000

Substituting these values:

\text{Acid Test Ratio} = \frac{156,000 - 63,000}{73,000} = \frac{93,000}{73,000} \approx 1.27

Thus, the Acid Test Ratio is approximately 1.27.

Step 5

8% Debentures (2011/2012)

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Answer

8% Debentures are long-term loans issued by the company. They carry a fixed rate of interest of 8%, which is payable to the debenture holders. The loan must be repaid in one lump sum during the years 2011/2012. This means that Walsh Ltd. will have a financial obligation to repay this debt in the future.

Step 6

Interest Paid

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Interest paid refers to the cost incurred by the company for borrowing money. In this context, it is the expense related to the debentures and other loans, calculated as a percentage of the borrowed amount. It reduces the overall profit of the company.

Step 7

Liquid Assets

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Liquid assets are assets that can quickly be converted into cash without significant loss of value. This includes cash in hand, bank deposits, and accounts receivable. Liquid assets provide the company with liquidity to meet short-term obligations.

Step 8

Shareholders’ Funds

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Shareholders' funds represent the equity of the shareholders in the company. It is the sum of the issued capital plus reserves. This figure is crucial for understanding the financial stability of the company and its ability to fund operations without taking on additional debt.

Step 9

Why would Walsh Ltd. have fared better if it had sold out and invested its money in a financial institution for the past year? Give reasons for your answer.

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If Walsh Ltd. had sold out and invested its funds in a financial institution, it is likely to have earned a higher return on investment. Investment opportunities in banks often provide interest rates that exceed those achievable through traditional business operations.

For instance, the company reported a profit of €130,000, which is about 17.05% return on capital employed. However, many financial institutions might offer returns that are higher, and safer, thus providing guaranteed growth.

Moreover, reducing operational risks, such as market fluctuations and business uncertainties, could have contributed to an overall better financial position for shareholders.

Interpretation of Accounts The following information has been taken from the accounts of Walsh Ltd - Leaving Cert Accounting - Question 5 - 2008

Worked Solution & Example Answer:Interpretation of Accounts The following information has been taken from the accounts of Walsh Ltd - Leaving Cert Accounting - Question 5 - 2008

The figure for Opening Stock

The period of credit received from Creditors

Return on Capital Employed

The Acid Test ratio

8% Debentures (2011/2012)

Interest Paid

Liquid Assets

Shareholders’ Funds

Why would Walsh Ltd. have fared better if it had sold out and invested its money in a financial institution for the past year? Give reasons for your answer.

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