Accounting Notes Essay

Submitted By michellelala
Words: 642
Pages: 3

6a. Balance sheet provides information about financial structure. By looking at a balance sheet we can know if it iss financially sound by looking at its debt equity ratio. It refers to the ability to pay debts in short terms. When the ratio is greater than 1, then it means that the company is able to pay debts to creditor. However if the ratio is lesser than 1, then it means that the company is at risk and does not have the ability to pay debt to its creditor, thus it is not financially sound.
b. Balance sheet enables us to know if a company pays its bills on time by looking at the working capital. It is calculated by subtracting current liabilities from current assets. If the working capital is low or negative then it indicates of short tem financial difficulties. Moreover by lookin at solvency and debt equity ratio also enable us to identify if a company can pay its bill on time. Solvency ratio refers to the ability to pay long term whereas debt equity ratio refers to the ability to pay short term debt. If the ration is lesser than 1, then it means that the company is enable to pay its debt on time.
c. Board of director should declare if there is enough of retained profit but if these past earning have been reinvested in inventory, land, equipment which is part of operating assets, and have a liquidity ratio of greater than 1 ( do not have a lot of cash). They will eventually cause cash strain if the retained earning are distributed for dividends.
d. When we calculate profits we subtract the depreciation of equipment as an expense from its original cost. It is use to show how much economic value of assets is estimated to be used so far. Comparing the cost and depreciation value will show the age of the equipment.
10a. Net profit is the profit made by the company which is equal to total revenue minus total expenses. When a company earns a profit, it can either be distributed to shareholders as dividends or kept in the business to grow the business.
b. Income statement is a temporary account and balance sheet is a permanent account. When income statement is closed, the balances are transferred to retained profit account on balance sheet at the end of each accounting period. This retained profit is the link between income statement and balance sheet.
c. Dividends to shareholders are part of the retained profits. They are not an expense thus it is not deducted in calculating net profit for the period.

Problem 2.7
BALANCE SHEET AS AT 30 JUNE 2012 Assets $ | Liabilities $ | Current assetsCash 4 340Inventory 9 800 Account receivable…