AT2 Financial Ratio Analysis and Report.pdf - STAGE 1...

STAGE 1 ACCOUNTING
ASSESSMENT TYPE 2: UNDERSTANDING FINANCIAL SUSTAINABILITY
RATIO REPORT
Jeff owns and manages The Pie Palace, a pie manufacturer. He is considering buying a second oven to
increase production.
Jeff calculates that the new oven will cost $65,000 and will cost $5,000 to install. It is estimated that an extra
$12,000 of natural gas will be used annually.
In addition to the business bank account, Jeff has $15,000 of his own that he could invest in the business if
required. He is considering his borrowing options.
As an Accountant you have been asked by Jeff to complete the following tasks:-
1. W rite a report in which you:
a. Use ratio analysis to discuss the significance of each ratio and the results for the two
years.
b. Identify any concerns and suggest strategies for improvement.
c. Provide information and Recommendations regarding the expansion.
 Outline the advantages and disadvantages of using the different Internal and External sources of
finance options available to Jeff.
 Discuss whether or not it is advisable for Jeff to buy the new oven.
 Make recommendations to Jeff on how he could fund and achieve this expansion if he chose to
proceed.
You are provided with following information for analysis and interpretation:

The Pie Palace
Balance Sheet as at 30 June 2020
The Pie Palace
Balance Sheet as at 30 June 2021
Current Assets Current Liabilities
Bank $ 22,000 Creditors $ 28,000
Debtors 18,000
Inventory 55,000 $ 95,000 Non -current Liabilities
Bank Loan 170,000
Total Liabilities $ 198,000
Non-current Assets
Pastry Machines 44,000
Owner's Equity
Computer 5,000 Capital 412,000
Pie Oven 45,000 less Drawings (83,000)
Building 380,000 474,000 Net Profit 42,000 371,000
Total Assets $ 569,000 Total Equities $ 569,000
Other information
 Total Assets at 30 th June 2019 were $517,800
 Interest expense was $8,000 in 2019/2020
 Interest expense was $11,000 in 2020/2021
Current Assets Current Liabilities
Bank $ 20,000 Creditors $ 17,000
Debtors 15,000
Inventory 35,000 $ 70,000 Non -current Liabilities
Bank Loan 150,000
Total Liabilities $ 167,000
Non-current Assets
Pastry Machines 24,000 Owner's Equity
Computer 5,000 Capital 366,000
Pie Oven 45,000 less Drawings (55,000)
Building 380,000 454,000 Net Profit 46,000 357,000
Total Assets $ 524,000 Total Equities $ 524,000

Liquidity Calculations 2021 2020
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=
70000 − 35000
17000
= 2.058
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