Tutorial Question Week 2
Tutorial Questions: DQ 2.6, 2.10; Problems 2.7, 2.22, 2.27
a. A balance sheet can indicate whether a company is financially sound by a comparison of the amount of finance raised by debt with the amount raised from owners. The higher the proportion raised by the debt, the higher the risk to the creditors. The working capital, i.e. current assets less current liabilities indicates a company’s ability to pay its bills on time. This assumes that the current assets can be readily turned into cash. To declare a dividend a company must have adequate cash (or overdraft facilities) and adequate retained profits. The decision will be influenced by shareholder expectations. The age of equipment can be ascertained by comparing cost of equipment to accumulated depreciation.
b. c. d.
DQ2.10 a. Net profit is part of shareholder’s equity because the increase in resources earned as mentioned above belongs to the owners, who may withdraw it as dividends. Until they do withdraw it, it is part of their ownership interest. b. Net profit could be reported on the balance sheet by just showing that shareholders’ equity has increased since the prior period. The income statement was developed to provide an explanation of the details of the change in owner’s equity and to separate that from any dividends withdrawn by the owners during the period. c. Yes, shareholders have to be kept happy. But keeping them happy involves making an income (so that their ownership income increases) and/or paying them a dividend, which is a payment to them of some of that increase. Including the dividends in the income calculation would confuse the enterprise’s relationships with customers and owners, and would make it less clear whether the enterprise was successful in increasing resources (making income).
Problem 2.7 1 2 3 4 5 6 7 8 9 Assets Increase Increase Increase Decrease Increase Increase Liabilities Increase Assets increased and decreased