Question

Q No. 7 Illinois Paper Products Balance Sheet As at 31-Dec-01 Assets Cash Receivables Inventory Liabilities & Equity Current Liabilities Long Term Debt Total Debt Common Equity Total Claims $ 700,000 Plant Total Assets Total debt to Net Worth Total Asset Turnover Inventory Turnover days Average Collection Period Current Ratio Quick Ratio

please solve step by step in full detail of solution steps. for my understanding.

Answer 1

Compute the net worth of the company, using the equation as shown below:

Net worth = Total debts/ Total debt to net worth ratio

                 = $700,000/ 1.4

                 = $500,000

Hence, the net worth is $500,000.

Compute the total assets of the company, using the equation as shown below:

Total assets = Total debts + Net worth

                    = $700,000 + $500,000

                    = $1,200,000

Hence, the total assets are $1,200,000.

Compute the net sales, using the equation as shown below:

Net sales = Asset turnover ratio*Total assets

                = 3*$1,200,000

                = $3,600,000

Hence, net sales are $3,600,000.

Compute the inventory balance, using the equation as shown below:

Inventory = COGS or Sales/ Inventory turnover ratio

                = $3,600,000/ 9

                = $400,000

Hence, the inventory balance is $400,000.     

Compute the accounts receivables, using the equation as shown below:

Accounts receivables = Collection period*Net credit sales/ 365

                                   = 20 days*$3,600,000/ 360 days

                                   = $200,000

Hence, the accounts receivables is $200,000.

Note:

It is assumed that the company used 360 days as working days.

Compute the current liabilities, using the equation as shown below:

Current liabilities = Current assets/ Current ratio

                             = Current assets/ 3.3

Compute the current assets, using the equation as shown below:

                 Quick ratio = (Current assets – Inventory)/ Current liabilities

  1.3*Current liabilities = Current assets – Inventory

1.3* Current assets/ 3.3 = Current assets - $400,000

1.3* Current assets = 3.3*Current assets - $1,320,000

Rearrange the above equation to determine the current assets as follows:

3.3* Current assets - 1.3* Current assets = $1,320,000

                                          Current assets = $1,320,000/ 2

                                                                  = $660,000

Hence, the current assets is $660,000.

Compute the current liabilities, using the equation as shown below:

Current liabilities = Current assets/ Current ratio

                             = $660,000/ 3.3

                             = $200,000

Hence, the current liabilities are $200,000.

Compute the plant balance, using the equation as shown below:

Plant = Total assets – Current assets

         = $1,200,000 - $660,000

         = $540,000

Hence, the plant balance is $540,000.

Compute the cash balance, using the equation as shown below:

Cash balance = Total current assets – Inventory – Accounts receivables

                    = $660,000 - $400,000 - $200,000

                    = $60,000

Hence, the cash balance is $60,000.  

Compute the long-term debt, using the equation as shown below:

Long-term debt = Total debts – Current liabilities

                          = $700,000 - $200,000

                           = $500,000

Hence, the long-term debts is $500,000.

Prepare the balance sheet of the company, using MS-excel as shown below:

в с D E Balance Sheet 4 Assets Amount Liabilities and Equity Amount 5 Cash 60000 Current liabilities 200000 6 Accounts receivables 200000 Long-term debts 500000 7 Inventory 400000 Total debts =SUM(E5:56 8 Plant 540000 Common equity 500000 9 Total assets =SUM(C5:C8) Total liabilites and equity =SUM(E7:E8)

The result of the above excel table is as follows:

E - Bc D Balance Sheet 4 Assets Amount Liabilities and Equity Amount 5 Cash $ 60,000 Current liabilities $ 200,000 6 Accounts receivables $ 200,000 Long-term debts $ 500.000 7 Inventory $ 400,000 Total debts $ 700,000 8 Plant $ 540,000 Common equity $ 500.000 9 Total assets $ 1,200,000 Total liabilites and equity $ 1,200,000

Hence, the total of the balance sheet is $1,200,000.