Question

The current asset section of the Excalibur Tire Company's balance sheet consists of cash, marketable securities, accounts receivable and inventories. The December 31, 2018, balance sheet revealed the following:

 

Answer 1

Ans: Here we have to calculate different amounts by using formulas & substituting values in them.

So let’s start with Current Ratio & Acid Test ratio

Given that Current ratio = 2.2 and Acid test ratio = 1.20

Current ratio =    Current assets   & Acid Test Ratio = (Current Assets-Inventory)
                              Current Liability                                             Current Liability

Inventory is given as $ 1,000,000, substituting it in formula, we get,

Acid Test Ratio = (Current Assets-Inventory) = CA – 1000000 = 1.20
                                        Current Liability                     C.L.

= CA – 1000000 = 1.20 CL

= CA = 1.20 C.L + 1000000 ----------------- (1)

Now substituting value of CA in formula of Current ratio

Current Ratio = (Current Assets) = 2.20
                              Current Liability            

= 1.20 CL + 1000000 = 2.20 CL

= 1 CL = 1000000, So Value of Current Liabilities = $ 1,000,000

So now we can calculate some values as follows:-

Current Liabilities = $ 1,000,000

Current Assets = $ 2,200,000

Total Assets = $ 3,500,000

Inventory = $ 1,000,000

Long term Assets = Total assets – Current assets = $3,500,000 - $ 2,200,000 = $ 1,300,000.

Now using the information of next ratio, Debt to Equity Ratio,

Debt to Equity ratio =________Total Debts______     = 1.50
                                      Shareholder’s Fund/Net Worth
Now using analytical skills, we will solve it further.

This ratio means that for every $ 1.50 of debt, we have $ 1 of Shareholder’s fund &

We know that, Total Liabilities + Shareholder’s fund = Total Assets

Let Total Debts = 1.50x , Shareholder’s fund = 1x

Now we have the value of Total assets, i.e $ 3,500,000,

Substituting values in formula of total assets we get,

= 1.50x + 1x = 3,500,000

= 2.50x = 3,500,000

X = 3500000   = $ 1,400,000
           2.50

X = Shareholder’s fund = $ 1,400,000
& Total Debts = 1.50x = 1.50*1400000 = $ 2,100,000

So the values required are as follows :-

1. Current Assets = $ 2,200,000
2. Shareholder’s fund = $ 1,400,000
3. Long term Assets = $ 1,300,000
4. Long term Liabilities = Total Debt – Current Liabilities = $ 2,100,000 - $ 1,000,000
                                        = $ 1,100,000.