Can someone please correct these answers
1 Discuss the different methods of depreciation and why it is not recommended that the method be changed regularly. Refer to 1 Accounting Principle and 1 Qualitative Characteristic in your answer 6 Marks
The straight line method of depreciation assumes that the asset contributes evenly to revenue over its useful life while the reducing balance method of depreciation assumes that the asset will contribute more to revenue at the start of its useful life and less in the end. It is not recommended to change methods of depreciation as, in reference to the consistency principle, the methods of the accounting reports should be the same each reporting period. This also follows the qualitative characteristic of comparability as if accounting methods are the same, the reports are comparable from one reporting period to another. Therefore, accounting methods should be kept the same throughout the business’s life.
2. Discuss the effect the movement of the debt ratio has on the profitability and liquidity of the business
Debt ratio measures the percentage of the firm’s assets that is funded by an external source. A higher debt ratio means the business is reliant more on external sources to fund its assets which can lead to a negative effect on liquidity as the business has more short term debts, such as interest expense, to meet as they fall due. This also decreases the profitability of the business due to increase in expenses which reduces net profit. However, it has a positive effect on the profitability of the business as it increases the owner’s return on the business as the amount invested by the owner is decreased and as usually funds are borrowed to purchase a non-current asset, the assets may generate additional revenue in the future. Lower amount of debt ratio has a positive effect on the liquidity of the business as they business has less expenses to meet. However the owner get a lower return on his investment which leads to a decline in profitability but many expenses are avoided so net profit can improve. The level of debt ratio should be carefully assessed by the owner as it should be an amount which the business is able to be stable with in the future.
Discuss how Stock Cards follow Accounting Principles (Hint: There are 2 principles to discuss)
4 Marks
The value of stock is written at the value it was bought for, following the historical cost principle as the business has a source document proof for this amount. It also follows the principle of conservatism as the stock is valued at its cost price, not selling price, so that the value of the assets are not overstated and a gain is not recorded until the business is
4. Discuss the limitations of using Financial Indicators to determine performance
Financial indicators use historical figures to calculate the results which assesses the previous performance by the business but does not predict how the future of the business will be. It also does not show the actual reasons behind the changes and the trends. These indicators should not be the only measure of performance for a business as they should also consider non-financial indicators such as customer satisfaction survey to assess the business’s relationship with its customers and the number of sales returns to assess the quality of the stock provided by the business.
5. Discuss the benefits of preparing budgets for business performance
4 Marks
Budgeted reports for a business helps the business predict what is likely to happen in the future. It assists with planning as the owner can use the reports to plan ahead and take any opportunities that are likely to arise and avoid any losses that are predicted. It can also help decision making as the budgeted reports can be compared against the actual to assess the performance of the business over the reporting period. However, budgeting is an estimate and does breech the qualitative characteristic of reliability as it does not contain any source document proof and is not free from bias. However, budgets still should be prepared so that the owner is able to make decisions to reach its business’s goals and also improve the business’s performance by analyzing the estimated future results for the business.
6. Discuss the reasons for Sales Returns and the benefits of offering them to customers
4 Marks
Sales returns is return of stock by a customer to the business. Sales returns can lead to an increase in sales as the customers know that they are able to return the stock if it is damaged, faulty or wrong size or colour. They also are more comfortable as they know they can return the stock due to change of mind. Sales returns also helps the business asses the quality of the stock sold by the business as high sales return amount will mean that the business has low quality stock. However sales returns can lead to misuse, for example, if a business sells clothing, customers may purchase it, use it and return it.
7. Discuss strategies that a business could employ to improve liquidity
4 Marks
Liquidity is the business’s ability to meet its short term debts as they fall due. Liquidity can be improved by capital contribution by the owner as this will increase the amount of current assets on hand which will be available to meet short term debts. The speed of liquidity can also be improved by the business improving its debtors and stock turnover as the faster stock is sold, which can be achieved by the business discarding slow moving lines of stock and obtaining a better mix of stock, and the faster debtors repay the business, achieved by prompt invoicing and the business sending reminders, the faster business will be able to repay its creditors and other short term debts.
8. Discuss strategies that a business could employ to improve profitability
5 Marks
Profitability of a business is the ability of a business to earn profit compared against a factor such as sales, assets and owner’s equity. A business can increase profit by improving its expense control. This can be achieved by reducing expenses such as wages by hiring casuals and having large amount of employees only during peak hours. They can also reduce depreciation expense by disposing of unproductive assets. The business can also increase the mark-up on stock, as long as it does not affect the level of sales, which can lead to an increase in profitability.
9. Discuss why it is necessary to calculate the cash flow cover when analysing liquidity in addition to using Working Capital and Quick Asset Ratios
4 Marks
Cash flow cover measures the amount of times the cash generated from the operating activities, which are the day to day activities of the business, can cover the current liabilities of the business. This is the most important measure of liquidity as it measures the cash that is generated by the business that is available to meet current liabilities of the business. Both the quick asset ratio and the working capital ratio take into account assets such as debtors control which are uncertain of when the cash will be received to repay the short term debts of the business. Therefore, as this ratio takes into account of the actual cash flow of the business, if this is not satisfactory then the business is likely to face liquidity issues in the future.
10. Discuss the importance of calculating debt ratio in addition to analysing Return on Owner's Investment
Debt ratio calculates the percentage of firm’s assets that is funded by an external source while the owner’s investment calculates the owner’s return on his investment into the business. This is important as the return that the owner is getting is the most important for the owner as if this is not satisfactory the owner should consider other investment options such as shares or his previous job rather than running a business. A high level of debt ratio means that the owner has less amount invested into the business which will lead to a high return on his investment. A low debt ratio means that the owner has funded most of the firm’s assets with his contribution which will lead to a lower return. Debt ratio and return on owner’s investment are both related and therefore, debt ratio should be calculated to analyse the return on owner’s investment to judge if the level of risk is equivalent to the level of return.
11. The owner is satisfied with the firm's performance because his Working Capital Ratio is 6:1. Discuss the validity of this statement.
The working capital ratio calculates the amount of current assets available for every dollar of current liabilities. The working capital ratio for this business is higher than the satisfactory amount of one dollar of current assets available for every one dollar of current liabilities. Therefore the owner should be satisfied. However, the working capital ratio can be too high which can mean that the business has too much stock on hand. This can increase stock loss as it can increase theft and damage and it also can increase storage expenses. The business may also have too many debtors on hand which can lead to increase in bad debts. Therefore, this amount can be considered unsatisfactory as well as the current assets may lead to the business incurring more expenses and not being able to meet its short term debts as they fall due.
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