Question

Three years of balance sheets for a very profitable manufacturer of cleaning equipment at its seasonal low point of accounts receivable and inventory are as follows: 20Y3 20Y1 20Y2 Cash S 600 S 0 Accounts receivable 1,440 2,158 2,454 Inventory 2,500 3,168 3,480 Other current assets 702 420 640 Total current assets 5,242 5,746 6,574 Net fixed assets 1,470 1,542 2,030 Other noncurrent assets 68 68 176 Patents and goodwill 360 352 464 Total assets $7,140 $7,708 $9,244 $ 0 Notes payable S 420 604 Current portion LTD 400 400 400 Accounts payable 890 1,026 1,672 Accrued expenses 468 522 718 Other current liabilities 152 32 60 Total current liabilities 1,910 2,400 3,454 2,500 2.104 Long-term debt 2.892 4,900 Total liabilities 4,802 5,558 2.338 2.808 Owners equity 3.686 Total liabilities and equity 7,140 $7,708 $9,244 Total liabilities to Tangible net worth 2.4 2.0 1.7 Which of the following most accurately describes the company's capital structure? OThe company's leverage is decreasing, indicating that most if not all borrowing should be short-term OLeverage has increased, and long- and short-term borrowings are properly distributed since the company is at its seasonal low point. Leverage is decreasing steadily and the distribution of long- and short-term debt looks more appropriate in 20Y3 than in 20Y1 and 20Y2. OLeverage is improving steadily and the distribution of long- and short-term debt looks most appropriate in 20Y1

Answer 1

Leverage in 2011 = Total Debt / Equity  = 4802/2338 = 2.05

Leverage in 2012 = 4900/2808 = 1.74

Leverage in 2013 = 5558/3686 = 1.50

As seen from above , the leverage is decreasing steadily. Most of the borrowing should be short term than long term and the distribution looks more appropriate in earlier years than later years.