Required: Evaluate the performance of Big Rock Paving Company using the below ratios. Define each ratio, perform the calculation, and provide an explanation of the result. a. Return on equity b. Total assets turnover c. Return on assets d. Current ratio e. Receivables turnover
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Big Rock Paving Company
Assets Liabilities
Current Assets: Current Liabilities:
Cash 500,000 Accounts Payable 700,000
Accounts Receivable 300,000 Notes Payable 500,000
Inventory 800,000
Total Current Assets 1,300,000 Total Current Liabilities 1,200,000
Fixed Assets: Owners’ Equity:
Property, Plant & Equipment 2,200,000 Common Stock ($1 Par) 600,000
Less:
Net Fixed Assets 1,600,000
Total Assets 2,900,000 Total Owners’ Equity 800,000
Total Liabilities and Owners’ Equity 2,900,000
Big Rock Paving Company Income Statement for Year Ending December 31, 2021
Sales 3,400,000
Less: Cost of Goods Sold 2,700,000
Less: Administrative Expenses 700,000
Less Depreciation 682,000
Earnings Before Interest and Taxes (682,000)
Less: Interest Expense 120,000
Taxable Income (802,000)
Less: Taxes (280,000)
Net Income (522,000)
Dividends 0
Addition to Retained Earnings (522,000)
Required: Evaluate the performance of Big Rock Paving Company using the below
ratios. Define each ratio, perform the calculation, and provide an explanation of the
result.
a. Return on equity
b. Total assets turnover
c. Return on assets
d.
e. Receivables turnover
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