Question

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Asset Cash securities Account Receivable Inventory Liabilities/Pasiva 1,300,000 Account Payable 4,375,000 Notes payable 6,250,000 Bank Payable 8.875,000 Long-term liabilities 2.425,000 2,750,000 3,375,000 18,000,000 40.250,000 10,000,000 share capital 15,000,000 Fix Asset Accumulated Depreciaton Fixed Assets Turn Over 30,250,000 Retained earnings 9,500,000 Calculate the current ratio, cash ratio, quick ratio, debt to assets and debt to equity and explain how the condition of the company?

Answer 1

(1) Current ratio =

current asssets current liabilities

=

20,800,000 8,550,000

= 2.43

Theoretically, a high current ratio is a sign that the company is sufficiently liquid and can easily pay off its current liabilities using its current assets.

      Current assets = Cash + Securities + Accounts receivable + Inventory

                           = 1,300,000 +4,375,000+ 6,250,000 + 8,875,000

                           = $20,800,000

       Current liabilities =   Accounts payable + notes payable + Bank payable

                                =    2,425,000 +2,750,000 +3,375,000

                               =     $8,550,000

(2) Cash Ratio =

Cash & Cash equivalents current liabilities

=

5.675,000 8.550,000

= 0.66

If the ratio is less than 1,, then this is the right situation to be in, in terms of the firm’s perspective. Because this means the firm has utilized its assets well to earn profits.

Cash & Cash equivalents = Cash + securities

                                           = 1,300,000 + 4,375,000

                                          = $ 5,675,000

Current liabilities = $8,550,000

(3) Quick ratio

= Quick assets current liabilities

=   

11.925,000 8.550,000

= 1.39

The ratio of 1 or more indicates that the company can pay off its current liabilities with the help of Quick Assets, and without needing to the sale of its long-term assets and has sound financial health.

Quick Assets = Cash + Securities + Accounts receivable

                           = 1,300,000 +4,375,000+ 6,250,000

                           = $11,925,000

Current liabilities = $8,550,000

(4) Debt to assets ratio =   

Total Debt Total Assets

=

26.550,000 51,050,000

= 0.52

In normal situations, as lower as this ratio can be, better it is in terms of investment and solvency. So company is good in solvency.

Total Debt =   Accounts payable + notes payable + Bank payable + long-term liabilities

                                =    2,425,000 +2,750,000 +3,375,000 + 18,000,000

                                =   $26,550,000

Total Assets = Cash + Securities + Accounts receivable + Inventory + Net Fixed assets

                           = 1,300,000 +4,375,000+ 6,250,000 + 8,875,000 + 30,250,000

                           = $51,050,000

(5) Debt to equity ratio =   

Total Debt Total equity

=

26.550,000 24.500,000

= 1.08

The optimal debt-to-equity ratio will tend to vary widely by industry, but the general consensus is that it should not be above a level of 2.0. Higher leverage ratios tend to indicate a company or stock with higher risk to shareholders.

Total Debt =   $26,550,000

Total Equity = Share capital + Retained earnings

                     = 15,000,000 + 9,500,000

                        = $24,500,000

Answer 2

Following is the balance sheet of Perez Company for Year 3:
 

PEREZ COMPANY Balance sheet
Assets
Cash	$	15,450
Marketable securities		7,860
Accounts receivable		13,280
Inventory		10,700
Property and equipment		173,500
Accumulated depreciation		(12,800	)
Total assets	$	207,990
Liabilities and Stockholders’ Equity
Accounts payable	$	8,810
Current notes payable		3,040
Mortgage payable		4,750
Bonds payable		21,120
Common stock		113,600
Retained earnings		56,670
Total liabilities and stockholders’ equity	$	207,990

 
The average number of common stock shares outstanding during Year 3 was 860 shares. Net income for the year was $14,300.
 
Required