5.1 CONCEPTS Provide an accounting concept that best addresses the following analysis questions - NSC Accounting - Question 5 - 2016 - Paper 1

The extent to which a business relies on borrowed funds is quantified by the debt-to-equity ratio. A high ratio indicates a larger reliance on debt, suggesting increased financial risk. This calculation involves comparing the total liabilities to shareholders' equity. A ratio significantly above 1 indicates high leverage.

Immediate debts can be evaluated using the current ratio or quick ratio. The current ratio is calculated as current assets divided by current liabilities. If the ratio is above 1, the business is likely able to settle its short-term obligations. The quick ratio further refines this by excluding inventory from current assets.

Expense management can be determined through various financial metrics, such as the operating margin, which is calculated by dividing operating income by revenue. A higher operating margin indicates better control over expenses relative to revenue. Additionally, comparing expense trends over periods offers insights into cost management strategies.

To complete the note for cash generated from operations, calculate net cash flow from operating activities by adjusting net profit for non-cash items like depreciation and factoring in changes in working capital components such as accounts receivable and payable.

Calculate the income tax paid, dividends paid, and fixed assets sold at carrying value based on the provided financial statements and notes regarding transactions during the financial year. For example, consider prior year balances and any relevant transactions.

In the financing activities section, document changes arising from transactions such as issuing shares, repaying loans, or paying dividends. Each inflow and outflow should be clearly stated to reflect the cash position impacted by financing actions.

For Financial Indicators:

• Debt equity ratio: This is calculated by dividing total debt by total equity.
• Net asset value per share: Total net assets divided by outstanding shares gives this figure.
• Return on shareholders' equity: Calculated as net income divided by shareholders' equity, usually expressed as a percentage.

To determine liquidity improvements, consider indicators such as the current ratio, quick ratio, and cash ratio. An increasing trend in these ratios over the fiscal year suggests that the company has improved its capacity to meet short-term obligations. Specifically, compare current financial ratios against prior year figures.

Assess shareholder satisfaction based on indicators like return on equity (ROE) and earnings per share (EPS). If both indicators show growth compared to the previous year, it is likely that shareholders feel positive about their investments. Present relevant figures to substantiate this.

Evaluate the justification of acquiring a loan by analyzing the debt-to-equity ratio and the interest coverage ratio. If both ratios indicate manageable debt levels and sufficient earnings to cover interest payments, then the decision to take the additional loan is justified. Use calculated figures from financial statements to support this conclusion.