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 is reflected in the debt-to-equity ratio. This ratio establishes how much debt is being used to finance the business relative to shareholders’ equity. A higher ratio indicates a greater reliance on borrowed funds. Additionally, examining the amount of long-term liabilities can shed light on this reliance.

To ascertain if the business can pay off its immediate debts, the current ratio can be analyzed. This ratio is calculated as current assets divided by current liabilities. A current ratio greater than 1 signifies that the business has enough short-term assets to cover its short-term liabilities, implying that it can pay off its immediate debts.

The efficiency of managing or controlling expenses can be evaluated by analyzing the operating expense ratio, which reflects how well the company uses its revenues to cover operational costs. A lower ratio indicates better control over expenses. Additionally, reviewing net profit margins can provide insights into overall operational efficiency.

To complete the note for cash generated from operations, start with the net profit before tax, add back non-cash expenses like depreciation, and account for changes in working capital items such as debtors and creditors. This provides a clearer picture of cash generated from core business activities.

For income tax paid, it can be determined by examining the tax liability at the beginning and end of the period. Dividends paid can be assessed from the declared dividends during the year. For fixed assets sold, it’s necessary to consider the carrying value listed in the balance sheet.

For this section, identify cash inflows and outflows related to financing activities such as issuing shares, repaying loans, and any cash distributions to shareholders. This will provide insight into the cash movements between the company and its owners and creditors.

The debt equity ratio can be calculated using the formula:
ext{Debt Equity Ratio} = rac{ ext{Total Debt}}{ ext{Total Equity}}.
The net asset value per share can be calculated by dividing total net assets by total shares issued.
The return on shareholders' equity is determined using the formula:
ext{Return on Equity} = rac{ ext{Net Income}}{ ext{Shareholders' Equity}} imes 100.

Three financial indicators that suggest improved liquidity are:

1. Current Ratio: An increase from 0.9:1 in 2015 to 1.6:1 in 2016 indicates that the business has more current assets relative to current liabilities.
2. Acid Test Ratio: An increase to 0.9:1 from 0.4:1 signifies better liquidity as it considers only the most liquid assets.
3. Average Debtors Collection Period: A decrease in the collection period from 31 days to 30 days shows that the business is collecting receivables more efficiently.

Shareholders should be satisfied if there’s an increase in dividends and a stable return on equity. In 2016, the dividend per share rose to 55 cents from 40 cents the previous year, and the return on equity remained steady around 11.5%. These indicators reflect consistent performance and commitment to returning value to shareholders.

The directors' justification can be examined through the debt equity ratio, which decreased to 0.3:1, indicating lower reliance on debt. However, the return on loans is lower than the cost of debt, showing that the business should prioritize repaying the loan rather than acquiring more. Analyzing these indicators suggests caution in future borrowings.