5.1 CONCEPTS Provide an accounting concept that best addresses the following analysis questions - NSC Accounting - Question 5 - 2016 - Paper 1

The extent to which the business relies on borrowed funds can be determined by examining the debt equity ratio. This ratio indicates the proportion of borrowed funds relative to shareholders' equity.

Yes, if the business’s current assets surpass its current liabilities, it will be able to pay off its immediate debts. It's crucial to keep a close eye on cash flows and working capital management.

The efficiency in managing expenses can be reflected through the operating margin and net profit margin, which show how much profit is made per unit of sales, after expenses are deducted.

To complete the note, we calculate the cash generated from operations by adjusting net profit before tax for non-cash items such as depreciation and changes in working capital.

The amounts to be calculated include:

• Income tax paid: This would generally be calculated based on the tax payable from the income statement.
• Dividends paid: This is the total interim and final dividends paid during the financial year.
• Fixed assets sold at carrying value: This is the value at which fixed assets were sold, which will reduce the fixed asset balance.

This section captures cash flows from activities involving equity and debt. Include cash inflows from issuing shares and any cash outflows for repurchase of shares or repayment of debt.

To calculate the financial indicators:

• Debt equity ratio: Use the formula ext{Debt Equity Ratio} = rac{ ext{Total Debts}}{ ext{Total Equity}}.
• Net asset value per share: Calculate using ext{Net Asset Value} = rac{ ext{Total Assets} - ext{Total Liabilities}}{ ext{Number of Shares}}.
• Return on shareholders' equity: Use the formula for ROE as ext{ROE} = rac{ ext{Net Income}}{ ext{Shareholders' Equity}} imes 100.

You could refer to financial indicators such as the current ratio, acid test ratio, and the operating cash flow ratio. Each of these should be discussed with relevant figures demonstrating improvement in liquidity.

Shareholders should be satisfied if returns are improving. Use indicators such as dividends per share and earnings per share to support the explanation with quantitative figures.

Justification for acquiring the loan can be assessed through financial indicators like the interest coverage ratio and debt service coverage ratio. A solid analysis should be provided to support whether the loan was a prudent financial decision.