Debt to Assets Ratio – Accounting Tools

Question: Discuss about the Debt to Assets Ratio Accounting Tools. Answer: Balance sheet The main purpose of the balance sheet is mainly of reporting the financial position of an entity at particular point of time (it includes total assets, liabilities and also stockholders equity). Usefulness Help to determine whether working capital is enough in order to sustain its operation. Help the creditors as well as other stakeholders to determine entity financial position in order to arrive ate decision of investment To know the Business Net worth Income Statement As the name indicates this statement help to report the accountants primary measure in regard to the performance of an entity during the accounting period by revenue less expenses result. Usefulness It provides snapshots about the companys profitability for the specified period. It act as base for the entity to make decision for future Businesses use this report to know the financial position by looking into profitability growth. Cash Flow Statement As the name indicates, this statement provides the information regarding the cash inflow and the cash outflow from operating, investing and from financing activities Usefulness This statement is helpful for the company in various ways Helps to prevent as well monitor entitys debt Helps to ensure timely investment Helps to ensure timely payment of debt as well as expenses Preventing unnecessary expenditure such late interest, penalties Review of the income statement: The total operating revenues of the company are k 2972 The Cost of goods sold of the company k 2327 The total expenses before taxes of the company are k) 809 The non-operating gains and losses of the company are 0 Comparative Statement is as follows: (Amounts in k in thousands) Particulars 2015 (k) 2014 (k) % increase or -decrease Total operating revenues 2,972 2,604 0.14 Cost of goods sold 2327 1824 0.28 Total expenses (before tax expenses) 809 670 0.21 Any non-operating (or extraordinary) gains and losses 0 0 0.00 On the basis of above table, it is clear that there is increase in operating revenue by 14% on the other hand there is also increase in COGS by 28% which indicates that it is not good sign sin % increase in expenses is more than the % increase in revenue. Moreover, % increase in Expenses is 21% which again is more then % increase in revenue. Hence not a positive sign for the company growth In the nutshell, Increase in revenue may be positive sign if there is decrease in expenses but here, as discussed situation is not as mentioned. In all, it is advisable that revenue should increase expensed must be decrease in order to get higher profit. Review of the balance sheet: The current assets of the company are k 706 The non-current assets of the company are k369 The current liabilities of the company are k 612 The non-current liabilities of the company are k 250 The total stockholders equity of the company are k213 As we are aware that assets on a balance sheet are divided into three main categories i.e. current, capital others. Current assets are both cash assets that are expected to be converted within 12 months. It is normal during the business life that cash balance in a company rises falls based on inflows outflows of operational financing activities. Cash goes down by the amount of payment. Similarly, current liabilities are the debt and obligations that a company must pay within a year. These are short term debt. Comparative Statement is as follows: (Amounts in (k) in thousands) Particulars 2015 2014 % increase or -decrease Total current assets 706.00 490.00 0.44 Total non-current assets 369.00 379.00 -0.03 Total current liabilities 612.00 456.00 0.34 Total non-current liabilities 250 300 -0.17 Total stockholder's equity 213 113 0.88 On the basis of above table, we can see that There is increase in current assets by 44 % on the other hand there is decrease in noncurrent assets Similarly, there is increase in current liabilities by 34 % on the other hand there is decrease in noncurrent liabilities by 17%. Current liabilities are ones the company expects to settle within 12 months of the date on the balance sheet. Here, equity has been increased by 88% there may be two reason for the same increase in the earning i.e. profitability or increases from capital, which is a good sign for the company. Review of the statement of cash flows: The net cash inflow from operating activities of the company are k 94 The net cash inflow from the financing activities of the company are k -90 The net cash inflow from the investing activities of the company are k -95 The net increase in the cash during the year of the company are k -91 Comparative statement is as follows: (Amounts in (k) in thousands) Particulars 2015 2014 % increase or -decrease Net cash inflow from operating activities 94.00 66 0.42 Net cash inflow from financing activities -90 -95 -0.05 Net cash inflow from investing activities -95 -75 0.27 Net increase/decrease in cash during the year -91 -104 -0.13 As we know that Cash flow can be affected by asset and liability changes in the business. Changes in assets liabilities can affect cash flow in both positive negative way. On the basis of above table, positive operating income shows increase by 42 % which is positive sign. One of the reasons may be that receipt from customer is higher than the payment made during the year Cash inflow from financing activities in the Year 2014 was negative during 2015 is also negative but decrease to some extent... This is one of the positive sign The net decrease in the cash during the year 2015 turn to -91 from -104 it indicates that some progress have been made so as to bring the company into track. D Taking into consideration all the facts financial statement cause of concern for banker would be Decrease in profit during 2015 as comparative to 2014. In addition % increase in expenses is higher than the % increase in revue during the year 2015 Increase in current liability as compare to the year 2014 is also the cause of concern which indicates that companys liability has been increased. Similarly there is also increase in Current Assets Negative cash flow is also one of the main reason for concern by banker since it shows that company is not utilizing the cash in a significant manner. Potential consequences of the bank managers concerns Negative Cash Flow- It shows that company is not utilizing the cash in proper manner which may lead to shortage of fund for investment. Example- if net cash flow from operation is negative it means company is spending more cash than it is generating or producing. If it is positive it indicates that company is generating more cash than it its spending during its day to day operation. Decrease In profitability- Profitability as clearly defines the status of the company earning, decrease in the same provides negative impact about the companys financial position. To meet above consequences Steps must be taken for better management of cash or to access cash from other sources. In regard to profitability, steps must be taken to increase the revenue and on the time steps should also be taken to decrease the expenses. Which will lead the company to bring positive sign for its financial statement References: Accountingtools.com, 'Debt to Assets Ratio Accounting tools'. Nap. 2015. Web. 29 May 2015. My Accounting Course, 'Financial Ratio Analysis | Example | My Accounting Course'. Nap. 2015. Web. 29 May 2015. My Accounting Course, 'Return On Equity Ratio | Analysis | Formula | Example'. Nap. 2015. Web. 29 May 2015. My Accounting Course, 'Times Interest Earned Ratio | Analysis | Formula | Example'. Nap. 2015. Web. 29 May 2015. "Income Statement (Profit And Loss Statement) | Explanation | Accountingcoach".AccountingCoach.com. N.p., 2016. Web. 17 Mar. 2016. "Net Income's Effects On Stockholders' Equity".Smallbusiness.chron.com. N.p., 2016. Web. 17 Mar. 2016. "The Four Basic Financial Statements: An Overview".Highered.mheducation.com. N.p., 2016. Web. 17 Mar. 2016. 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