Topic list Syllabus reference

Total assets $1,870,630 $1,664,425
= 51% =60%
In this case, the debt ratio is quite high, mainly because of the large amount of current liabilities. However, the debt ratio has fallen from 60% to 51% between 20X7 and 20X8, and so the company appears to be improving its debt position. Specifically, in the case of Furlong, the trade payables (including accruals and deferred income) have decreased from 57% of cost of sales to 29% of cost of sales (trade payables + accruals and deferred income/cost of sales). This suggests that although the cost of sales has increased (as has revenue), Furlong is better managing its payments to suppliers. It may also be affected by a change of supplier or even a new revenue stream (more regular and reliable cash flow will help a company pay liabilities on time).
Interestingly, the income tax has increased from $37k to $108k year on year, which can partially be explained by the increased in profit for the period, however, looking at the tax charge for each year suggests that there is an unexplained reason for the increase in tax liability. This would require further investigation, it could be that the company has been faced with an additional charge during the year or has failed to pay the previous year's tax charge (a possible dispute).
In the exam, it is important to look at the reasons for the changes which are specific to the information given in the question and to consider the logic of whether an increase in one element is justified by a reason in another.

3. 
   Gearing/leverage
   

Gearing or leverage is concerned with a company’s long-term capital structure. We can think of a company as consisting of non-current assets and net current assets (ie working capital, which is current assets minus current liabilities). These assets must be financed by long-term capital of the company, which is one of two things:

1. 
   Issued share capital which can be divided into:
   

1. 
   Ordinary shares plus other equity (eg reserves)
   
2. 
   Non-redeemable preference shares (unusual)
   

2. 
   Long-term debt including redeemable preference shares
   

Preference share capital is normally classified as a non-current liability in accordance with IAS 32 (IAS 32: AG35), and preference dividends (paid or accrued) are included in finance costs in profit or loss.