Question

In: Finance

Analyze S&J Plumbing, Inc.'s balance sheet below: Assets Liabilities Cash $100 Notes Payable-bank $200 Net Account...

Analyze S&J Plumbing, Inc.'s balance sheet below:

Assets

Liabilities

Cash

$100

Notes Payable-bank

$200

Net Account Receivable

$400

Account Payable

$300

Inventory

$200

Accrued Expenses

$100

Total Current Assets

$700

Total Current Liabilities

$600

Calculate the following:

  • Current ratio
  • Quick ratio
  • Net working capital

Write a report of 2-3 pages that discusses the liquidity of S & J Plumbing Incorporated.

Solutions

Expert Solution

Current ratio and quick ratio is calculated to analyse the liquidity capacity of the corporate . S&J Plumbing, Inc's has short term and long term obligations. These ratio are calculate to measure the ability of firm to meet the short term financial obligations.

Current ratio = Current assets / Current liability

= $700 / $600

= 1.1667

The current ratio shows that company has a ability to pay its debt as its short term obligations are fully covered with the current assets.

Quick Ratio = ( Cash + Net account receivable ) / Current liability

= $500 / $600

= 0.8333

Quick ratio is also called as acid test ratio. This ratio is calculate to measure the company ability to meet its current debt obligations with its highly liquid assets. The reason for exclusion of inventory is that it will not turn into cash quickly. Company has quick ratio less than 1 which shows company does not have enough liquidity to settle immediate debt obligations.

Net Working capital :- Current Assets - Current Liability

= $700 - $600

= $100

Working capital is the amount which is used in the business for day to day operation activity. It should be in proper proportion. Because excess capital leads to higher interest payments and lower capital leads to interruption of production.

S & J Plumbing Incorporated has enough liquidity to meet its daily operations and to meets its short term obligations when they become due. However its liquidity capacity to discharge all its debt obligations immediately is less.

jeff jeffy answered 7 months ago
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