This accounting problem is solved step by step below, with detailed explanations to help you understand the method and arrive at the correct answer.
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2.1.1 Calculate the gearing ratio of the farm. Step 1: State the formula for the gearing ratio. The gearing ratio measures the proportion of a business's operations that are financed by debt versus equity. Gearing Ratio = Total DebtTotal Equity Step 2: Calculate the total equity. Total Equity is the difference between Total Assets and Total Debt. Given: Total Assets = R600 000 Total Debt = R150 000 Total Equity = Total Assets - Total Debt Total Equity = R600\,000 - R150\,000 = R450\,000 Step 3: Substitute the values into the formula and calculate the gearing ratio. Gearing Ratio = (R150\,000)/(R450\,000) Gearing Ratio = 0.3333... ≈ 0.33:1 Step 4: Explain what this means to the farmer and bank manager. To the farmer: A gearing ratio of 0.33:1 means that for every R1 of equity, the farm has R0.33 of debt. This indicates a relatively low reliance on borrowed funds*, suggesting financial stability and lower risk. The farm is largely financed by its owners' capital. To the bank manager: This low gearing ratio signifies that the farm has a strong equity base relative to its debt. This makes the farm a less risky borrower* and more attractive for future lending, as there is a substantial buffer of owner's capital to absorb potential losses before creditors are affected. 2.1.2 Calculate the current ratio of the undertaking. Step 1: State the formula for the current ratio. The current ratio measures a business's ability to meet its short-term obligations with its short-term assets. Current Ratio = Current AssetsCurrent Liabilities Step 2: Substitute the given values into the formula and calculate the current ratio. Given: Current Assets = R120 000 Current Liabilities = R45 000 Current Ratio = (R120\,000)/(R45\,000) Current Ratio = 2.666... ≈ 2.67:1 Step 3: Explain what the answer means to the farmer. A current ratio of 2.67:1 means that the farm has R2.67 in current assets for every R1 in current liabilities. This indicates strong liquidity, meaning the farm is in a very good position to meet its short-term financial obligations as they fall due. A ratio above 2:1 is generally considered healthy. 2.2 Calculate the acid-test ratio for 2022. Step 1: State the formula for the acid-test ratio (also known as the quick ratio). The acid-test ratio measures a business's ability to meet its short-term obligations with its most liquid assets, excluding inventory. Acid-Test Ratio = Current Assets - StockCurrent Liabilities Step 2: Identify the relevant values for 2022 from the provided table. For 2022: Current Assets = R150 000 Stock and supplies included under current asset = R40 000 Current Liabilities = R75 000 Step 3: Substitute the values into the formula and calculate the acid-test ratio. Acid-Test Ratio = (R150\,000 - R40\,000)/(R75\,000) Acid-Test Ratio = (R110\,000)/(R75\,000) Acid-Test Ratio = 1.466... ≈ 1.47:1 That's 2 down. 3 left today — send the next one.