Theory question 105
Interpretation of Accounts5. The following balances were obtained from the books of Dudulabi Limited on June 30, 1995.
Ordinary share capital: N150,000
Retained profits: N28,383
6% Debentures: N45,000
Premium on ordinary shares: N37,500
Freehold premises at cost: N127,500
Plant and machinery at cost: N105,900
Provision for depreciation – plant and machinery: N38,100
Stock: N48,219
Debtors: N31,644
Bank and cash balances: N22,890
Sundry creditors: N34,730
Accrued rent: N2,440
You are required to: (a) prepare the Balance Sheet as at 30th June, 1995 and (b) calculate the following: (i) current ratio; (ii) working capital; (iii) liquid assets; (iv) ordinary shareholders' fund; (v) acid-test ratio
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(a) Balance sheet as at 30th June 1995: freehold premises 127,500; plant 105,900 − 38,100 = 67,800; fixed assets 195,300.
Current assets: stock 48,219; debtors 31,644; bank and cash 22,890 = 102,753. Current liabilities: creditors 34,730; accrued rent 2,440 = 37,170. Working capital 65,583. Total 260,883.
Financed by: ordinary share capital 150,000; share premium 37,500; retained profits 28,383; shareholders' fund 215,883; 6% debentures 45,000; total 260,883.
(b) (i) Current ratio = 102,753 ÷ 37,170 = 2.76 : 1 (about 2.8 : 1).
(ii) Working capital = 102,753 − 37,170 = 65,583.
(iii) Liquid assets = debtors 31,644 + bank and cash 22,890 = 54,534.
(iv) Ordinary shareholders' fund = 150,000 + 37,500 + 28,383 = 215,883.
(v) Acid-test ratio = 54,534 ÷ 37,170 = 1.47 : 1.
Liquid assets are current assets without stock; the acid-test ratio compares them with current liabilities.