Question

Before approving credit the office manager calls the bank reference provided by Nocturnal, and learns that the company currently has a cash balance of $200. When she asks Nocturnal about the $11,800 discrepancy Nocturnal explains that the financial information includes the anticipated (but as yet unrealized) profit of $11,800 on a job under bid. Nocturnal`s accountant explains that the company keeps its books according to Contingent Reality Accounting Principles.

The office manager reviews financial statements for the company and adjusts them to GAAP:

Cash 200                          Short-term Liabilities   2,000

Total Assets 3,700             Total Liabilities     5,000

1) What is Nocturnal’s ratio of cash to short-term liabilities?

2) What is its Debt to Assets ratio?

3) What is Nocturnal’s stockholders’ equity?

4) Do lenders or owners appear to have a great interest in the assets of Nocturnal? Explain.

Answer 1

Answer 1 to What is Nocturnal’s ratio of cash to short-term liabilities?

Cash to Short term liabilities = $200/$2000 = 0.10

Answer 2 to What is debt to Assets ratio ?

Debt to Assets ratio = $5000/$3700 = 1.35

Answer to What is Nocturnal's Stockholders' equity?

Equity = Total Assets - Total Liabilities = $3700-$5000 = -$1300

Stockholder have negative equity

Answer 4 to Do lenders or owners appear to have a great interest in the assets of Nocturnal? Explain

Lenders have great interest in the assets of Nocturnal as Total liabilities are $5000 and Assets $3700 and ratio of debt to assets shows how many times are the debt of assets, which shows all of the assets of the Nocturnal are financed from lenders money, even stockholder's equity is negative -$1300 it shows that stockholders' have nearly no interest in assets of business even they have lost their money. so it can easily be concluded that lenders have great interest in assets of Nocturnal assets

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