Question

The following information is an extract from the financial statements of Extreme-Experiences Pty Ltd.

	2020	2019
Current Assets	409,500	292,500
Non-current Assets	2,275,000	1,768,000
Current Liabilities	221,000	169,000
Non-current Liabilities	764,400	670,800
Total Revenue	728,000	624,000
Total Expenses	500,500	455,000

Required: Answer the following questions in the spaces provided below:

a)    Calculate the following ratios for both 2019 and 2020.

	2020	2019
Profit Margin (Correct your answer to 0.01%)
Current Ratio (Correct your answer to 0.1)
Debt to Total Assets Ratio (Correct your answer to 0.01%)

b)    Comment on the Liquidity of Extreme-Experiences using the answers in part a).

c) Which ratio measures Solvency? Provide suggestions on how to improve the Solvency of Extreme-Experiences.

Answer 1

Extreme-Experiences Pty Ltd
	2020	2019
Current Assets	409,500	292,500
Non-current Assets	2,275,000	1,768,000
Current Liabilities	221,000	169,000
Non-current Liabilities	764,400	670,800
Total Revenue	728,000	624,000
Total Expenses	500,500	455,000
a) Calculating Ratios
Name	Ratio Formula	Interpretation	Remarks
a) Profit Margin Ratio	Net Profit (Total Reveune - Total Expense) / Total Revenue x 100	It compares net profit to total revenue	Higher the ratio, better it is
b) Current Ratio	Current Asset/Current Liabilities	The ratio tests the financial strength or company's ability to pay its current liability	Ideally the ratio should be as high as possible where 2:1 is considered as Industry standard
c) Debt to Total Assets Ratio	Debt/Total Assets x 100	It measures the proportion of total assets financed with debt	Lower the ratio, better it is
Profitability Ratio	2020	2019
a) Profit Margin Ratio	.=227500/728000 *100	.=169000/624000 *100
	31.25%	27.08%
Working Note
Net Profit for 2020 = 728000 - 500500 = 227500
Net Profit for 2019 = 624000 - 455000 = 169000
Liquidity Ratio	2020	2019
b) Current Ratio	.=409500/221000	.=292500/169000
	1.8	1.7
Solvency Ratio	2020	2019
c) Debt to Total Assets Ratio	.=985400/2684500*100	.=839800/2060500*100
36.71%	40.76%
Working Notes	2020	2019
Debt = Current Liabilities + Non Current Liabilities	985400	839800
Total Assets	2684500	2060500

b) Current Ratio indicates the liquidity of the company. Ideally the ratio should be as high as
possible where 2:1 is considered as Industry standard. In 2019, Current Ratio was 1.7 and
In 2020, Current Ratio increased to 1.8. Still Current Ratio of Extreme-Experiences Pty Ltd
is below the Industry standard of 2:1 therefore company should try to achieve Current Ratio
of 2 to improve its liquidity position

c) Debt to Total Assets ratio indicates the solvency of the company. In 2019, the ratio was 40.76%
but In 2020, the ratio decreased to 36.71%. In order to improve solvency of Extreme-Experiences
Pty Ltd, company should avoid taking any new debt and try to increase owners equity for financing
new assets