Question

Question 3 30 marks Use the following information to answer questions 3.1 and 3.2 Rush & Reddy Pty Ltd The balance sheet taken from the company’s year-end financials is provided below: Assets Dec-31 2015 R Dec-31 2014 R Dec-31 2013 R Current Assets Cash 122,200 108,000 Accounts Receivable 45,000 35,000 37,000 Inventory 17,000 14,000 13,000 Other Current Assets 13,000 11,000 Total Current Assets 197,200 168,000 50,000 Long-term Assets Property, Plant & Equipment, net 1,489,800 50,000 Intangible Assets 422,500 450,000 Total Assets 2,109,500 668,000 Liabilities and Stockholders' Equity Dec-31 2015 R Dec-31 2014 R Dec-31 2013 R Current Liabilities Accounts Payable 11,000 9,000 Interest Payable 1,000 1,000 Current Portion of Long-Term Debt 30,000 0 Income Tax Payable 37,000 46,000 Total Current Liabilities 79,000 56,000 Long-term Liabilities Notes Payable 492,500 30,000 Total Liabilities 571,500 86,000 Stockholders' Equity Common Stock 120,000 70,000 Additional Paid-in Capital 1,308,000 372,000 Retained Earnings 185,000 140,000 Treasury Stock -75,000 0 Total Stockholders' Equity 1,538,000 582,000 575000 Total Liabilities and Stockholders' Equity 2,109,500 668,000 Required: Question 3 3.1 Prepare a common size balance sheet to be used in vertical analysis. 3.2 Calculate the following short-term liquidity ratios for 2015 and 2014: 3.2.1 Current Ratio (2) 3.2.2 Quick Ratio (2) 3.2.3 Cash Ratio (2) 3.2.4 Operating Cash Flow Ratio (2) Cash flows from operations were R151,000 and R101,000. For 2015 and 2014, respectively. Round your answers to two decimal places. Comment on the Company’s short-term liquidity

Answer 1

Answer 3.3.1:

Common size balance sheet to be used in vertical analysis is prepared below:

Answer 3.2.1:

Current Ratio = Current assets / Current liabilities

Current ratio for 2015 = R197,200 / R79,000 = 2.5

Current ratio for 2014 = R168,000 / R56,000 = 3

Answer 3.2.2:

Quick Ratio = (Total current assets - inventory) / Current liabilities

Quick ratio for 2015 = (R197,200 - R17,000) / R79,000 = 2.28

Quick ratio for 2014 = (R168,000 - R14,000) / R56,000 = 2.75

Answer 3.2.3:

Cash ratio = Cash / Current liabilities

Cash ratio for 2015 = R122,200 / R79,000 = 1.55

Cash ratio for 2015 = R108,000 / R56,000 = 1.93

Answer 3.2.4:

Operating Cash Flow Ratio = Cash flows from operations  / Current liabilities

Given: Cash flows from operations were R151,000 for 2015 and R101,000 for 2014 .

Operating Cash Flow Ratio for 2015 = R151,000 / R79,000 = 1.91

Operating Cash Flow Ratio for 2015 = R101,000 / R56,000 = 1.80

Comment on company's short term liquidity:

Short term liquidity can be evaluated through the liquidity ratios which are as below ( as calculated above)

Overall company is maintaining current ratio and quick ratio above 2, which signifies that company is in a sound position in short term liquidity. The major part of current asset is cash (cash ratio is 1.55 and 1.93 for 2015 and 2014 respectfully), which signifies that cash itself, that the company is maintaining, is good enough to meet current liabilities. The company in fact is maintaining excess cash. It may evaluate to invest excess cash in short term treasury bonds which may help earn interest.

In year over year comparison, there is reduction in current ratio, quick ratio and cash ratio in 2015 over respective 2014 ratios which is primarily because of increase in current liability due to "current Portion of Long-Term Debt".