In the given case during last fiscal year, though there has been an increase in sales and net income, Spector Company's cash has significantly decreased and the company is finding it difficult to pay its bills by the end of the year.
The reason for the same could be
• Increase in Sales and Net Income could be attributed to :
1. Higher Credit sales
2. Non cash incomes and gains.
• Furthermore the cash crunch experienced by the company may be attributed to :
1. Improper credit policy,
2. Too many discounts,
3. Lack of proper follow up with Debtors for collections.
4. Disproportionate increase in cash expenses in comparison to cash inflows.
5. Cash Drawings by Owners
• Current ratio shows the company ability to repay their short term obligations like accounts payable, salaries payable, dividend payable, etc.
• Users can understand easily company's liquidity by using this current ratio.
• A higher current ratio indicates higher liquidity position of the company, and lower ratio indicates less liquidity position.
• Current ratio will be calculated by using following formula.
Calculate the current ratio:
M's current declined ratio declined from 2008 to 2009. Due to this, we can understand that company's ability to meet the obligations declined.
Calculate Gross profit Ratio:
Net income is the excess of revenues over expenses.
The following is the formula for calculating net income:
Revenue is defined as the amount that an organization actually receives over a period of time in exchange of transactions or rendering its services or by selling goods. For example, when a professional firm renders its services of advising to its clients, the clients gives the firm fees which accounts as revenue for the firm.
Expenses are defined as the amount that the organization spends over a period of time.
For example, the expenses of a professional firm would be salaries, stationery etc.
The following statement shows the calculation of net income of M/s W for the year ended Dec 31, 2013:
Statement of owner's equity is the statement that shows the total amount that an organization owes to its proprietor at the end of the period.
The following statement shows the calculation of equity M/s W for the year ended Dec 31, 2013:
Amounts in $
Amounts in $
Mr. V, capital Jan 1, 2013
Add: net income/(net loss)
Add: owner contribution
Mr. V, capital Dec 31, 2013
A balance sheet reports the financial position of the business on a specific date. It is the result of the transactions that have been entered into during the prior period.
The following is the Balance Sheet of M/s W for the year ended Dec 31, 2013:
Therefore, the inventory turnover ratio is 1.2405.
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