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Last edited: Dec 3, 2020

I

Ito po boss

Answered by Expert Tutors
Statement of Financial Position :

Plus :

1. The Company's cash balance has increased from 166320 to 332640.

2. More than 50% of the company's balance sheet is in cash and hence the company is a cash rick company.

3. The current ratio is given by current asset divided by current liabilities. The current ratio was 3.56 in 200A and is 2.85 in the year

200B. The company has strong liquidity.

4. The company has improved the debtors collection period drastically from 73 days to 24 days.

5. The company is debt free.

Minus

1. The accounts payable balance increased although cost of goods sold remained same in both the years.

2. The payout out of net income is high (85.7%) which implies the scope of further growth is low.

Interesting:

1. Although the revenue has increased from 600000 to 900000, profits increased from 250000 to 550000 and cash increased from 166320 to 332640, the accounts payable increased although cost of goods sold remained same in both the years.

2. The company has a high payout ratio of 85.7%. The company has distributed a sum of 471355 to capital providers.

Income Statement

Plus

1. The net profit is growing at a rate of 120%.

2. The net profit margin increased from 42% to 61%.

Minus

1. The cost of goods sold remained same which implies all costs are fixed cost.

2. If all cost are fixed cost the company has high business risk.

Interesting

1. The revenue increased but the cost of goods sold remained same.

My Decision:

The company must select the statement of financial position to use as a basis on whether they will accept or reject Wendy Services Inc.'s request.

This is due to the fact that the income statement of Wendy Services are very condensed and not very transparent as compared to the Statement of financial position which gives better information about the asset and liability position of the company and hence, provides a view on the liquidity and solvency position of Wendy Services which are most importantly considered by companies providing loans.

Step-by-step explanation
Statement of Financial Position :

Plus :

1. The Company's cash balance has increased from 166320 to 332640.

2. More than 50% of the company's balance sheet is in cash and hence the company is a cash rich company. The total assets of the company is 651990 and the cash balance is 332640. This makes the cash percentage in balance sheet 51.02% ( 332640 / 651990).

3. The current ratio is given by current asset divided by current liabilities. The current ratio was 3.56 in 200A and is 2.85 in the year 200B. The company has strong liquidity.

Particulars 200A 200B

Current Assets 306,845 413,490

Current Liabilities 86240 144840

Current ratio = current assets / current liabilities 3.56 2.85

4. The company has improved the debtors collection period drastically from 73 days to 24 days. The calculation is shown below :

Particulars 200A 200B

Debtors 119350 59675

Sales 600000 900000

Debtors days = Debtors / Sales * 365 72.60 24.20

5. The company is debt free.

Minus

1. The accounts payable balance increased although cost of goods sold remained same in both the years.

2. The payout out of net income is high (85.7%) which implies the scope of further growth is low. We can calculate the same as follows :

Opening capital = 428505

Net Income = 550000

Closing capital = 507150

So, distribution = opening capital + net income - closing capital = 428505 + 550000 - 507150 = 471355.

Payout percentage = Distribution / Net Income = 471355 / 550000 = 85.7%.

So, 85.7% of the profits are distributed.

Interesting:

1. Although the revenue has increased from 600000 to 900000, profits increased from 250000 to 550000 and cash increased from 166320 to 332640, the accounts payable increased although cost of goods sold remained same in both the years.

2. The company has a high payout ratio of 85.7%. The company has distributed a sum of 471355 to capital providers.

Income Statement

Plus

1. The net profit is growing at a rate of 120%.

Net profit in 200B = 550000

Net profit in 200A = 250000

So, growth in net profit = 550000 - 250000 / 250000 = 120%

2. The net profit margin increased from 42% to 61%.

Particulars 200A 200B

Net profit 250000 550000

Sales 600000 900000

Net profit margin = Net profit / Sales * 100 41.67% 61.11%

Minus

1. The cost of goods sold remained same which implies all costs are fixed cost.

2. If all cost are fixed cost the company has high business risk.

Interesting

1. The revenue increased but the cost of goods sold remained same.

My Decision:

The company must select the statement of financial position to use as a basis on whether they will accept or reject Wendy Services Inc.'s request.

This is due to the fact that the income statement of Wendy Services are very condensed and not very transparent as compared to the Statement of financial position which gives better information about the asset and liability position of the company and hence, provides a view on the liquidity and solvency position of Wendy Services which are most importantly considered by companies providing loans.

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